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 secured business lines of credit, and how to go about getting one.
What Is a Secured Business Line of Credit?
A secured business line of credit is 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 they withdraw. Once you pay back the funds you’ve taken out, the full amount becomes available again.
Unlike an unsecured business line of credit, a secured credit line requires putting up collateral. This is an asset of value (such as equipment, real estate, or intellectual property) that, should you become unable to repay the loan, the lender can seize and sell to recoup its losses.
How Do Secured Business Lines of Credit Work?
A secured business line of credit works in a similar way to a credit card. You get a credit limit for your business to tap into whenever you want or need the money. You only pay interest on the funds you draw, and once you repay them, your line of credit gets renewed to its original amount.
A secured business line of credit is not available forever, however. Typically, you have to renew the credit line semi-annually or annually to get it extended.
With a secured business line of credit, you must put a business asset on the line. Because this lowers the risk for the lender, it often comes with favorable rates and terms. However, if you default on the loan, you risk losing that asset.
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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.
| Pros | Cons |
|---|---|
| Only pay interest on your daily balance | Can lose your collateral if you cannot repay what you borrow |
| Can serve as an emergency fund | If you pay late or exceed your credit limit, you can get hit with high fees |
| Lower interest rate due to the collateral | By offering cash on demand, there is the potential for misuse |
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.
| 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 give reassurance to 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. The reason is that property tends to have a lot of value 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 will 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 tend to be 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, it may require an appraisal in order to be accepted by the lender.
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 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 pre-approved 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.
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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 come with much higher interest rates than other types of business financing.
Invoice Financing
Invoice financing is when 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.
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 can be a good idea to shop around and compare offers.
Credit Requirements
You generally need to have a good credit profile for your personal and/or business credit score to qualify for a secured business line of credit. If your credit score is low, you may have a harder time receiving approval. It’s a good idea to check your personal and business credit score 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, including:
• Business name, address, phone number and email address
• 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)
• Tax returns (personal and business)
• Proof of collateral
• A photo of your driver’s license
• Articles of incorporations (is applicable)
• Resume
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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.
Using a business asset (such as real estate or equipment) as collateral, however, poses some risk to you as a borrower. Should you become unable to make payments on the credit line, you could lose a valuable 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 business secured line of credit with a 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 advantage of an unsecured business line of credit over a secured one is that you don’t need to provide collateral. When comparing business lines of credit to business loans, the main advantage is flexibility. Rather than getting one lump sum of capital up front, a line of credit allows you to take some money out now and more at a later time, while only paying interest on the amount you are using.
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