A secure line of credit is a loan that is backed by one or multiple assets, such as real estate, vehicles, investment products, and so on. In return for pledging these items as collateral, borrowers typically get a lower total cost of borrowing vs. an unsecured line of credit, which as the name suggests is not backed by assets. Also, borrowers may get access to a higher line of credit.
If you’re considering a secure line of credit to manage your business’s capital and cash flow needs, then here are 3 tips to help you maximize value and minimize cost:
Don’t use a secure line of credit to consolidate your debt.
Banks and credit unions love selling a secure line of credit as a way to consolidate debt and pay off (for example) commercial credit cards or business car loans. But if you know that you definitely need a set amount to consolidate debt — say, $30,000 — then you’re typically much better off getting a secured business loan, and if necessary a smaller secure line of credit.
Know your options when it comes to pledging collateral.
If the thought of securing your line of credit with assets like buildings or vehicles sends chills up and down your spine, then relax: you have options. For example, if your goal is to use funds to procure inventory (including raw materials that are manufactured into saleable products), or to procure equipment, then you may be able to use these assets — which don’t even technically exist yet — as collateral. This can significantly lower your risk (and your blood pressure!).
There are also invoice-backed lines of credit, in which you essentially sell your accounts receivables to a lender for a percentage of the amounts owing. As an added benefit, the lender assumes all risk and responsibility for collecting the debt. If a customer delays or disappears, you’re not on the hook — the lender is.
Treat your secure line of credit as stand-by funds.
The best — and cheapest — way to use a secure line of credit, is to use it as a source of immediate, on-demand funds to cover unanticipated expenses or seize emerging opportunities. It’s not a good idea to get into the habit of using it in place of a commercial credit card. As noted above, even if the interest rate is significantly lower, you’re likely better off obtaining a short or long-term business loan for known expenses or investments, and keeping your secure line of credit at-the-ready for when it’s required.
At National Business Capital, we offer several secured lines of credit, including equipment-backed, inventory-backed and invoice-backed solutions. It’s also fine if you have impaired or bad credit (we’re more interested in the future than the past), and we can augment your secure line of credit with a short or long-term business loan so that you get the most value and flexibility — for minimum cost.
To learn more about business opportunities and why a secured line of credit can help you be prepared, check out our free eBook “7 Profitable Opportunities That You Could Miss Without More Business Funding”: