Secured or unsecured business lines of credit help maintain capital flow
A business line of credit is a revolving credit facility that allows you to draw funds as you need them. It’s an account with a set amount of funds available — the amount is determined by your lender based on your business profile and lender criteria.
When your business needs an influx of cash for payroll or inventory purchases, for example, you can draw money from the account, spend it as needed, and pay back the money on a set schedule, generally monthly. Businesses draw as much or as little cash as they need, up to the credit limit, and re-payment depends on the amount taken in a given time period.
The flexibility these accounts offer can help businesses with cash flow issues during seasonal ebbs and flows.
Revolving credit facility
1 to 21 days based on line type
Not required, but can be used
There are three types of business lines of credit — secured, traditional unsecured and nontraditional unsecured. Which business line of credit to choose depends on your small business credit report and the amount of collateral that can be placed against the loan.
With secured business lines of credit, businesses place collateral against the line, typically in the form of short-term assets such as invoices or inventory. Options include secured lines from private institutions or federal CAPLine lines of credit. Secured lines are ideal for financially reliable companies willing to place collateral against a loan or for fledgling companies that qualify for specific CAPLines programs.
Traditional unsecured business lines of credit have no collateral requirement. Consequently, they carry more rigorous qualification conditions and annual reviews. Traditional unsecured lines are ideal for well-capitalized companies that can afford the time and cost of application.
Nontraditional unsecured lines typically take the form of a business credit card. Although they are relatively easy to obtain, interest rates can be high, depending on the creditworthiness and liquidity of the business. Nontraditional unsecured lines are ideal for businesses with little time in business and no established credit.
Compare the requirements and fees to know which business line of credit fits your needs.
Discuss the features of different business lines of credit with your lender to identify the best option for your company.
Small businesses that have not yet built enough credit to qualify for traditional business lines of credit may be eligible for nontraditional unsecured lines — business credit cards. These cards often also come with zero percent annual percentage rate for an introductory period.
Although the owner bears ultimate financial responsibility for the line should the company default, a nontraditional unsecured line allows a new business to build credit separately from the owner. If payments are responsibly managed and interest does not accrue, it can be a stepping stone toward establishing the credit and liquidity to obtain larger lines.
The U.S. Small Business Administration’s CAPLine family of loans allows lenders to extend as much as $5 million to new and growing businesses through four programs:
CAPLines are secured and easier to qualify for than traditional secured lines.