Secured Business Line of Credit: How Does It Work and What Are My Options?

Business Expansion

Jacques Famy Jr
Review By Todd Millman

What Is a Secured Business Line of Credit, and How Does a Secured Small Business Credit Line Work?

secured business line of credit is an open revolving line (like a credit card) secured by business assets such as equipment, intellectual property, real estate, or other assets, if applicable. This type of financing allows small business owners to draw funds when needed, like a revolving credit card, on-demand, or make purchases. A business line of credit charges a principal & interest rate on the amount used up to a credit limit that cannot be exceeded without approval and are not open-ended forever. It requires renewal either semi-annually or annually to be extended.

Unlike term loans, you do not need to use the full limit at inception when you take a lump sum upfront. This type of financing is used mainly for small purchases and working capital.

Why Would a Business Want a Business Line of Credit Over Loans?

A business line of credit is popular because they are open, revolving, and have more flexibility than a term loan, which offers a fixed amount of money over a fixed term. A business line of credit is an excellent option for companies looking for the lowest rates due to the collateral protecting from loan default. They also can prove useful for companies that lack significant history or a proven track record needed to qualify for an unsecured business loan or line of credit.

Secured Business Line of Credit

Secured Business Lines of Credit Product Overview: How Business Lines of Credit Work

Rates: Prime rate + 1.00% or starting at 3.75% up to 1.5 % per month simple interest . Interest only payments may be available.

Annual Fee: $0 to $500 fee

Terms: Revolving line of credit

Minimum Credit Score: credit requires 620 minimum credit score

Paperwork: 1-Page application and bank account statements

Processing Times: 1 business day

Personal Guarantee: Yes

Benefits of a Small Business Line of Credit: Why Do Businesses Use Secured Business Line of Credit?

  • Cash on-demand 24/7

  • Only pay interest on daily balance (interest rate discount)

  • Flexible payments

  • Funds for expenses

  • Emergency financing needs

  • Controls fluctuation in daily flows of cash to cover low revenue periods·

    • Purchase equipment or goods

    • Unlimited use of funds

  • Products and services

Secured vs. Unsecured Business Line of Credit

Why Would You Want to Secured Business Line of Credit Instead of Unsecured Lines of Credit?

When assets guarantee a loan or line of credit, those assets are considered collateral. This collateral offers financial institutions a lien on liquid or sizable assets by the lender in the event of a default to recoup losses. Because of this extra protection for the lender, a secured business line of credit can come with higher credit limits and significantly lower interest rates than an unsecured business line of credit.

Unsecured business credit lines are harder to get because the risk is more significant to the financial institution since none of the owner’s personal assets are at risk. There is no personal collateral required with business lines of credit, so the borrower’s assets are not available for seizure upon any default. Companies that get unsecured credit lines are either well established, highly desirable for financing, or the business is willing to pay a higher cost or smaller limit to avoid required collateral.

 

Secured Business Line EXCELCAP BUSINESS LINE OF CREDIT GRAPHIC IMAGES 1

Source: Sterling Rowe Financial Group LLC

Secured Business Line of Credit Requirements

As with most financing options, with secured credit lines, you will need to provide basic personal information about you as the business owner and your organization information on an application.

The application will typically consist of:

  • Company name

  • Company address

  • Start date/formation date

  • Company FEIN number

  • Nature of your business activities

    • Business checking account information

    • Annual and average monthly gross sales

    • Profit and loss (if applicable)

  • Owner(s) name

  • Owner(s) address

  • Owner(s) social security # and DOB

  • Any and all collateral (if applicable)

Use of Funds of Secured Lines to borrow money

  • Manage Cash Flow

  • Business Expenses

  • Supplement cash flow delays in accounts receivable

  • Build Business Credit

  • Emergency access funds

  • Financial Protection

  • Refinance Loan

What can be used as collateral?

  • Equipment

  • Business assets

  • Business intellectual property

  • Business physical infrastructure

  • Real estate (if applicable)

Credit Requirements

Credit requirements will vary greatly depending on the lender, but the business owner’s credit plays a major role in the approval decision. What is true is that the better the credit, the better the terms you will be offered. There is funding available for excellent, good, fair, and even subprime credit depending on the lender, but make no mistake about it. Your terms and rates will be offered according to personal credit.

How Do I Get a Business Line of Credit, Who Offers Secured Business Line of Credit, and What Are the Terms and Interest Rates?

Traditional Banks

Traditional national banks like Wells Fargo, Bank of America, Citi Bank, Chase, and PNC Bank offer secured lines of credit and business loans and will have the best rates available. However, they have the industry’s strictest standards because they have bank depositors to protect from defaults. Expect high personal and business credit history standards, high annual revenue requirements, at least three years in business, and multiple years’ tax returns that show profit. Many also restrict from lending to specific industries as well with rights reserved. Considered the best business lines but most difficult to get approved for. We have no relationship with any of the above mentioned banks including PNC Bank.

Small Business Line Terms

Line Amount: No maximum to specific limits. Higher credit limit than online lenders lines of credit.

Interest Rate: Prime rate + 1.00% or starting at 3.75%. Interest only payments may be available.

Repayment: Semi-annual to annual renewal

Annual Fee/Origination fees: 0% up 1% fee

Draws: Unlimited

Personal Credit Score: Good to excellent credit scores

Minimum Annual Revenue: $750,000

Credit Approval Level of Difficulty: Difficult. Only will approve successful, established businesses

Community Banks

Regional banks also have some of the best rates for secured business lines of credit. These lenders can have high personal and business credit standards, annual revenue requirements, at least three years in business, and multiple years’ tax returns that show business profit. Regional banks due take a more personal approach to underwriting and do seem to be more friendly to small businesses. Still, credit line or business loans, in general, are not easy to get approved for.

Small Business Line Terms

Line Amount: No maximum to specific limits

Interest Rate: Competitive interest rates-Prime rate + 1.00% or starting at 3.75%

Annual Fee/Origination fees: 0% up 1% fee

Repayment: Semi-annual to annual renewal

Draws: Unlimited

Credit: Good to excellent

Minimum Annual Revenue: $750,000

Credit Approval Level: Difficult. Only will approve successful, established businesses

Require Collateral: Personal and business property

Credit Unions (CUs)

Credit Unions are a mixed bag in terms of secured business lines of credit. They have great rates and terms, but many CUs stay out of business lending altogether as they are risk-averse for their member.

If your organization is a member of a credit union, you will have to check with them to see if they participate. Expect the same strict standards and requirements as you would find at national banks regarding loans.

Terms

Line Amount: No maximum to CU’s specific limits

Interest Rate: Prime rate + 1.00% or starting at 3.75%

Repayment: Semi-annual to annual renewal

Loan Administration fees: 0% to 1% annually

Draws: Unlimited, cash advance fees apply

Credit Score: Good to excellent

 

Online Lenders

Online lenders, also known as FinTech (Financial Technology), is a relatively new industry that has come on to the scene around the 2008 financial crisis to step into the underserved market of small businesses. An online lender generally has more lenient credit, financial health, time in the industry, and other requirements compared to banks or Credit Union’s.

Business Lines of Credit Terms

Maximum Business lines of Credit: Up to $250,000 committed line amount

Interest Rate: Interest rates starting at 4.66% up to 12-18%

Repayment: Semi-annual to annual renewal

Draws: Unlimited, cash advance fees apply

Credit Score: Excellent, good, fair, and even poor or bad credit scores

Benefits and Tradeoffs of Online (FinTech) Lenders

  • Faster processing times – Funds in as little as one day with online banking

  • Lower credit standards than alternatives

  • Limited paperwork – Usually, the only requirements are a one-page application and business bank statement or online banking link.

  • No financial statements required (amounts under 100k) – No tax returns, profit & loss, or balance sheets needed. Only business checking account statements are required.

  • Lower asset or cash flow requirements

  • Higher approval rates than alternatives

  • Typically higher rates than alternatives

The U.S. Small Business Administration (SBA)

The U.S. Small Business Administration Offers an array of SBA loans and small business lines of credit intended to help businesses expand their services and grow. The SBA provides programs, guidelines, and loan guarantees. The Small Business Administration (SBA) is not a lender. The SBA offers a guarantee that gives the approved lender ability to take on the risk of business lending under SBA terms, rights reserved, that they would not ordinarily do so on their own. You must have a good to excellent credit score to qualify.

SBA CapLines

Description: Working capital

Maximum Line Amount: $5 million

Use of Proceeds: Finance seasonal and/or short-term cash flow needs; cost to perform; construction costs; advances against existing inventory and receivable; consolidation of short term debts.

Maturity: Up to 10 years, except Builders CapLine, which is 5 years

Maximum Interest Rate: $0-$25,000 Prime +4.25%, $25,001-$50,000 Prime +3.75%, over $50,000 Prime +2.75%

Fees: Fee charged on guarantied portion of loan only.$150,000 or less =2.0% $150,001-$700,000=3.0% above $700,000= 3.5% up to 1st million; plus 3.75% on guaranty portion over $1 million, 12 months or less .25% Ongoing of 0.55%. (The SBA guaranty fee on loans of $150,000 or less will be .6667% with an ongoing fee of 0% if a business is located in a rural area or HUBZone during FY 2019)

Frequently Ask Questions

Is it hard to get a business line of credit that is secured?

There are more opportunities than ever before for small businesses to secure a line of credit.

Is a secured line of credit a good idea vs. unsecured business lines?

A business line of credit is the most popular business financing option available to small businesses. Its flexibility and terms are very appealing to most small businesses to satisfy their financing needs.

Is an unsecured business credit line a better option?

Unsecured credit lines have their advantages, but you will pay for that luxury with higher costs and less favorable terms.

What are the rates for a secured line of credit?

Interest rates on a credit line will depend on your qualifications and the lender you choose and range from 3.75% up to 18% and higher. An unsecured line of credit has higher rate ranges.

Do business lines of credit require a personal guarantee?

Yes, a line of credit that is secured often comes with a guarantee, but so do credit cards!

Which bank is best for a business lines?

Where you do your business banking is the best shot at getting funding in this form.

Is a business credit card the same as business lines?

Business credit cards are a form of revolving credit very similar to a line of credit and not considered in the term loans category of business lending.

The Bottom Line

Small businesses should always start the business funding search by asking the following questions: what are the use of loan proceeds and the purpose of the money? Do you know your qualifications or shortcomings regarding what product and lender you are choosing when applying for a secured business line of credit?

Always check all financing options and resources available in the business financing online marketplace. It is also important to do a cost versus benefit analysis when choosing the best funding option. Contact one of our advancepoint lending specialists to compare, choose, and save.

*California Loans are not California Finance Lender Loans and are arranged through federally chartered banks or a wholly owned subsidiary. advancepoint is not affiliated with Wells Fargo, Bank of America, Citi Bank, Chase, or PNC Bank.

Jacques Famy Jr
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Jacques Famy Jr

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