Table of Contents
- What Is a Secured Business Line of Credit?
- How Do Secured Business Lines of Credit Work?
- Pros and Cons of Secured Business Lines of Credit
- Unsecured vs Secured Business Lines of Credit
- What Can Be Used to Secure a Business Line of Credit?
- Alternatives to Secured Business Lines of Credit
- Secured Business Line of Credit Application
- FAQ
If you need more working capital to grow your business, a secured business line of credit could be a good solution. Because it’s backed by collateral, such as real estate or business equipment, it can be easier to qualify for and may offer better rates and terms than other, unsecured forms of business financing.
Here’s a closer look at how secured business lines of credit work, their pros and cons, how they compare to unsecured business lines of credit, and how to go about getting one.
Key Points
• A secured business line of credit can provide flexible financing that allows businesses to borrow up to a predefined limit and pay interest only on the amount they’ve withdrawn.
• Businesses can use collateral such as real estate, equipment, intellectual property, inventory, or accounts receivable to back secured lines of credit.
• Securing a business line of credit may result in a business being offered more favorable interest rates and terms, but defaulting on payments can mean losing the pledged asset.
• Traditional banks, credit unions, online lenders, and the Small Business Administration offer businesses secured lines of credit with varying rates and terms, so it’s generally worth comparing your options.
What Is a Secured Business Line of Credit?
Whether a business line of credit is secured or unsecured, it’s a flexible financing option that allows a business to borrow money when it needs it (up to a certain limit) and only pay interest on the amount it withdraws. Once it pays back the funds it has taken out, the full amount becomes available again.
The difference is that, unlike an unsecured credit line, a secured business line of credit requires the borrower to put up collateral. This is an asset of value (such as equipment, real estate, or intellectual property) that, should the business become unable to repay the loan, the lender could seize and sell to recoup its losses.
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How Do Secured Business Lines of Credit Work?
Secured or unsecured, a business line of credit works in a similar way to a business credit card. You get a credit limit and your business can tap into funds up to that amount whenever you want or need the money. You pay interest only on the funds you draw, and once you repay them, your line of credit is renewed to its original limit. However, a business line of credit is not available forever. Typically, you have to renew the credit line annually to get it extended.
For a secured business line of credit, you must put a business asset on the line. Because this lowers the risk for the lender, a secured line of credit often comes with favorable rates and terms than an unsecured one. However, with a secured business line of credit, you risk losing the asset you put up if you default on your payments.
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Pros and Cons of Secured Business Lines of Credit
A secured business line of credit has several advantages, but there are some disadvantages as well. Here’s a rundown.
| Pros | Cons |
|---|---|
|
Only pay interest on your outstanding balance (what you have withdrawn) |
Could lose your collateral if you can’t repay what you borrow |
|
Can serve as an emergency fund |
Potential for high fees if you pay late or exceed your credit limit |
| Typically lower interest rate due to the collateral |
Since a line of credit provides cash on demand, it can be misused |
Unsecured vs Secured Business Lines of Credit
While unsecured and secured business lines of credit function in very similar ways, there are some key differences.
| Kind of business line of credit | Unsecured | Secured |
|---|---|---|
| Risk to lender |
Higher |
Lower |
| Collateral required? |
No |
Yes |
| Credit limits |
Typically lower |
Typically higher |
| Interest rates |
Typically higher |
Typically lower |
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What Can Be Used to Secure a Business Line of Credit?
There are several types of assets you can use as collateral to secure a business line of credit. All these items can reassure the lender that they will be repaid in some fashion, even if you default.
Real Estate
Real estate is one of the most common types of collateral used to secure a business line of credit. This is because property tends to be valuable and hold its value over time.
You can use any type of real estate that you or your business owns. However, you may want to think twice before using your primary residence as collateral for a business line of credit. Should you run into trouble repaying the debt, you could lose your home.
Cash
Cash savings in a bank account is a liquid asset, meaning it’s readily available. If you put cash up as collateral, a lender may feel confident that they won’t experience significant loss should you end up defaulting.
Equipment
Equipment or machinery owned by your business can also be used to secure a business line of credit, since these assets are often high in value. However, they also tend to lose value over time due to wear and tear. As a result, you may not be able to get a high line of credit with equipment as your collateral.
Intellectual Property
Intellectual property, like trademarks, patents, or copyrights, can have significant value. A lender will often accept this type of intangible asset as collateral for a business line of credit.
Inventory
You may be able to use your company’s inventory as collateral for a secured business line of credit. However, this may require an appraisal in order for the lender to accept it.
Accounts Receivable
Accounts receivable refers to the money that your customers owe you — but have not paid you — for the goods and services you have provided for them. Since the monetary value of your accounts receivable is relatively simple to determine and has a definite monetary value, lenders may be willing to let you use accounts receivable to secure a business line of credit. They may take into account how long the debts have been outstanding and how reliable those customers are in paying their bills.
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Alternatives to Secured Business Lines of Credit
A secured business line of credit can be a great way to even out gaps in your cash flow or buoy your finances. However, a credit line isn’t necessarily your only business financing option. Others include:
Business Loans
Unlike a business line of credit, a business loan provides you with a lump sum of capital that you pay back (plus interest) in regular installments. (One exception is a delayed draw term loan, which allows you to withdraw predefined amounts of a total preapproved loan amount.)
Business loans can be secured or unsecured and may require a down payment. A loan can be a good choice when you need financing for a specific project or major acquisition or investment that will help grow your business. If your business is new, a startup business loan may be easier for you to qualify for.
A business loan calculator can help you estimate what your monthly payment might be as well as the total costs of the loan. If you are considering applying for a Small Business Administration (SBA) loan, an SBA loan calculator can also factor in some fees associated with those loans to give you more customized estimates.
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Merchant Cash Advances
With a merchant cash advance (MCA), a lender gives you an upfront sum of cash that you repay using a percentage of your debit and credit card sales, plus a fee. An MCA can come in handy if you’re in a pinch and need capital to cover a cash-flow shortage or short-term expense. However, MCAs tend to be significantly more expensive than other types of business financing.
Invoice Financing
In invoice financing, a lender gives you a cash advance on your outstanding customer invoices. Also known as accounts receivable financing, it uses your invoices as collateral. Invoice financing can be easier to get than a traditional business loan or business line of credit, but tends to come with higher interest rates and fees.
Business Credit Cards
LIke a personal credit card, a business credit card allows you to use money when you need it, up to your credit limit, and then pay it back with interest to the lender. Business credit cards may also earn perks and, used responsibly, can help build your businesses credit history. However, they may come with higher interest rates than personal credit cards or business loans.
Equipment Financing
If your business requires substantial equipment, machinery, or technology to operate, you might consider equipment financing. With this kind of financing, you may be able to get a loan or a line of credit, but either way it will be secured by the equipment asset you are purchasing. Having this backing may mean lower interest rates than you’d pay for an unsecured loan.
Secured Business Line of Credit Application
When you apply for a business line of credit, you’ll have to determine how much credit you need. You’ll also want to check your eligibility, research and compare lenders, and gather the necessary documentation.
Where to Find a Secured Business Line of Credit
Secured business lines of credit are offered by traditional banks, credit unions, alternative online lenders, and the U.S. Small Business Administration (SBA). Rates and terms can vary widely from one lender to another, so it may be a good idea to shop around and compare offers.
Credit Requirements
Although collateralizing can mean that requirements will be lower than for unsecured financing, you generally need to have an adequate credit profile for your personal and/or business credit scores to qualify for a secured business line of credit. Many lenders look for a personal credit score of at least 600. If your credit score doesn’t pass muster, you may have a harder time receiving approval. It’s a good idea to check your personal and business credit scores before applying.
Other Documents
When you submit your application for a secured business line of credit, you may be asked to submit a number of additional documents, which might include:
• Business name, address, phone number, and email address
• Business plan
• Annual sales and/or revenue
• Business and personal tax returns
• Financial statements (such as your balance sheet and income statement)
• Recent bank statements (business and personal)
• Proof of ownership of collateral
• A photo of your driver’s license
• Articles of incorporations (if applicable)
• Appraisal of collateral or other proof of its value (if applicable)
The Takeaway
A secured business line of credit can provide your startup or small business with flexible financing and, because collateral lowers the lender’s risk, may be easier to qualify for than other types of small business financing.
Bear in mind, however, that using a business asset (such as real estate or equipment) as collateral poses some risk to you as a borrower. Should you become unable to make payments on the credit line, you could lose that asset.
If you’re seeking financing for your business, SoFi is here to support you. On SoFi’s marketplace, you can shop and compare financing options for your business in minutes.
FAQ
Do you have to use collateral for a business line of credit?
No. An unsecured business line of credit does not require putting up any assets as collateral.
Can you get a secured business line of credit with a lower credit score?
It may be possible to get a secured business line of credit with a relatively low credit score. However, you may receive a lower line of credit and pay higher rates than a borrower with excellent credit.
What are the advantages of unsecured business lines of credit?
The major advantage of an unsecured business line of credit over a secured one is that you don’t need to provide collateral. When you compare business lines of credit to business loans, the main advantage is flexibility. Rather than getting one lump sum of capital upfront, a line of credit allows you to take some money out now and more at a later time, while paying interest only on the amount you are using.
What types of collateral are most commonly accepted?
There are a variety of assets commonly used as collateral to secure a business line of credit. Real estate is a popular choice, as are cash and equipment.
Is a secured business line of credit better for startups?
If a startup has little or no credit history but does have a substantial asset that it can use for collateral, a secured business line of credit might be a good choice. While it can be difficult for a new business to get financing, offering security may help and could even result in more favorable terms. However, if the startup defaults, it could lose the asset.
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