You may have seen that your lender can offer you an unsecured business line of credit. If you are like many business owners, you don’t know exactly what this is and how it differs from other types of credit. Understanding the characteristics of this type of loan and how you can use it can enable you to better finance your small business.
What Is an Unsecured Business Line of Credit?
An unsecured line of credit is a revolving credit account. It is similar in some ways to a credit card. You have a limit that you can borrow up to. When you borrow, you make payments and you accrue interest on your balance.
Unlike a credit card, you draw directly from your line of credit to your bank account. There is no card that you make purchases with. This isn’t the same as a cash advance on a credit card either, the line of credit is supposed to be used this way so there are no fees for drawing money out.
Additionally, it is unsecured meaning that you are borrowing against your credit. There is no collateral that the lender will take if you don’t pay. This is advantageous in some ways. However, you also typically can’t borrow as much and will have higher rates than a secured line of credit.
Uses for Lines of Credit
You can use your line of credit for pretty much any business need. These are a few examples:
- Buying inventory or supplies
- Making payroll
- Covering operating expenses
- Expanding your office
In short, there is a wide range of possible uses. Provided that you are spending the money on business needs, a line of credit can work. Most business owners use their lines of credit to pay for expenses that will ultimately lead to a return.
A line of credit is not supposed to be used as a term loan. It is a revolving credit account, so the intention is to take money out and pay it back regularly. If you withdraw every cent on day one and only make minimum payments, you may get a phone call from your lender.
Getting a Line of Credit
You can apply for unsecured business lines of credit with most lenders. All you need to do is submit an application and provide some financial statements. Depending on the amount you are looking for, the process can be very simple and fast.