Before we look at when it makes sense to get an unsecured line of credit, it may be helpful to take a step back and unravel one of biggest sources of confusion on the business funding landscape: what “unsecured” really means.
When connecting it to our personal lives, the term “unsecured” has a somewhat worrisome ring to it. After all, when we think of an unsecured home, an unsecured car, or an unsecured website, we immediately think of risks like thefts or breaches.
Because of this perception, some business owners think that an unsecured line of credit – compared to a secured line of credit – puts them at risk (again, like having an unsecure house or car), and so they don’t apply for one. Actually, the opposite is the case: an unsecured line of credit is less risky for them than an unsecured line of credit, because it’s the lender – and not the borrower – who takes on the extra risk.
Why? Because in the context of business financing, the terms “secured” and “unsecured” refer to collateral. With a secured line of credit, you must pledge assets that become property of the lender if you default on loan payments. With an unsecured line of credit, you don’t have to pledge anything, and so your assets are safe in the event of a default.
Now that we’ve cleared this up, let’s look at four scenarios where you may find it necessary or beneficial to get an unsecured line of credit vs. a secured line of credit:
1. If you don’t have enough collateral.
The simplest reason why an unsecured line of credit may be suitable for you, is if you don’t have enough collateral to satisfy a lender. By definition, a secure line of credit requires collateral so without enough assets to get approved, an unsecured line of credit is a great option to get the funding you need.
2. If you don’t want to pledge your personal and/or business assets.
For a variety of valid reasons, you may not want to pledge your personal and/or business assets – which means that an unsecured line of credit is your better option.
3. You don’t want to have your assets undervalued by a lender.
Banks that offer secured lines of credit (as well as secured business loans) are notorious for undervaluing collateral. For example, industrial equipment that may be worth $50,000 in the marketplace might be valued at $40,000 or even $30,000. Banks do this to reduce their risk threshold even further. For borrowers, however, it means that they need to pledge more assets than they should – which adds to their risk.
4. You want a line of credit quickly.
Last but certainly not least: a secured line of credit can take months to materialize, since the application has to snake its way through multiple loan officers and managers – plus there’s the time consuming collateral evaluation process that we just discussed. An unsecured line of credit application is a much simpler to process, and on approval the funds can be available to you right away.
At National Business Capital, we have provided unsecured lines of credit to thousands of business owners nationwide, so they can safely, smartly and strategically take their organization forward. If you’re looking to apply for a line of credit, check out our two-minute application and take the first step towards finding funding.
If you have more questions about the application process or about loan types, contact our team today for your free, no risk and no obligation consultation. We’re here to help!