A 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. One enticing feature for many businesses of the line of credit is the draw money on demand, which a term loan does not have. Secured lines of credit offer lower rates due to the collateral mitigating default risk, it also provides competitive interest rates and reasonable repayment terms. This is especially attractive to companies lacking substantial history or a proven track record—requirements often needed for qualifying for an unsecured business loan or line of credit. Additionally, owners can regulate their expenditures effectively while reaping the benefits of business line rewards.
Secured Business Line of Credit
Quick overview on Secured Business Lines of Credit and how they work:
Rates: Prime rate + 1.00% or starting at 8.75% 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
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
Why To Choose 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.
- 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 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 criteria include the applicant business owner's personal details and specifics about the business itself, such as its nature and financial performance. Eligibility hinges on key parameters such as profitability and documented annual and average monthly gross sales figures.
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 H3: Utilizing Funds from Secured Lines to Finance and Handle Invoices
- Manage Cash Flow: Implement effective strategies to maintain stable financial operations in your organization.
- Business Expenses: Ensure crucial business expenditures are taken care of without depleting your reserves.
- Supplement cash flow delays in accounts receivable: Use invoices as a strategy to assuage cash flow delays with due payments.
- Build Business Credit: Boost your financial credibility and equity by consistently repaying borrowed funds.
- Emergency access funds: Allow swift access to capital in urgent situations.
- Financial Protection: Create a safety net for your enterprise by reserving funds for dire straits.
- Refinance Loan: Explore the option of refinancing to potentially lower your loan payments or access more capital.
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. In this context, a key measure that often comes into play is the FICO score.
To be eligible for a business line of credit, for example:
- Applicants usually must have a minimum personal FICO score of at least 600 at the time of application.
- Creditworthiness, a crucial aspect evaluated by issuers, significantly influences the interest rates and terms offered.
- There is funding available for not only excellent but also good, fair, and even subprime credit depending on the lender. But make no mistake about it, your terms and rates will be determined by your personal credit, with an emphasis on your FICO score.
How Do I Get a Secured Business Line of Credit?
A secured business line of credit can provide small business owners with flexible and convenient access to the necessary funds to manage cash flow, purchase inventory, and invest in growth opportunities. However, securing a secured business line of credit requires careful planning and preparation.
1. 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. Your trusted banker at these establishments can guide you through the process. However, as nationwide leaders in business financing with a responsibility to protect bank depositors from defaults, they have the industry’s strictest standards.
Expect high personal and business credit history standards, high annual revenue requirements, and at least three years in business. Knowledge of the loan's dollar amount, its type, borrowing purpose, and if applicable, collateral information is crucial. Line amount and origination fee details must be clear. Plus, multiple years’ tax returns that show profit are often mandatory. Many also restrict from lending to specific industries, all 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 performing as a business banker with 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 8.75%. 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
2. Community Banks
Regional banks also have some of the best rates for secured business lines of credit. These lenders often come with the bonus of having high personal and business credit standards, annual revenue requirements, and the need for at least three years in business.
To apply for such credit lines, prerequisite includes checking or savings account and multiple years' tax returns that show business profit. Regional banks do take a more personalized approach to underwriting, creating a friendly atmosphere for small businesses. Still, credit line or business loans, in general, are not easy to secure, but the possible savings account benefits may offer some consolation.
Small Business Line Terms
Line Amount: No maximum to specific limits
Interest Rate: Competitive interest rates-Prime rate + 1.00% or starting at 8.75%
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
3. Credit Unions (CUs)
Credit Unions are a mixed bag in terms of secured business lines of credit. They can indeed be perfect for securing your business' financial needs with their great rates and terms, but many CUs hesitate to enter business lending. They tend to be risk-averse for their membership, which partly stems from their pursuit to approve only the most creditworthy or credit pros.
If your business is a member of a credit union, you would need to check with them to confirm their participation in this realm. In case they do, expect similar strict standards and prerequisites akin to what prevalent national banks would demand for such loans.
Terms
Line Amount: No maximum to CU’s specific limits
Interest Rate: Prime rate + 1.00% or starting at 8.75%
Repayment: Semi-annual to annual renewal
Loan Administration fees: 0% to 1% annually
Draws: Unlimited, cash advance fees apply
Credit Score: Good to excellent
4. 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%, even higher with credit issues
Repayment: 6, 12, 18, 24, up to 36 month amortization
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.
- In many cases, 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
5. The U.S. Small Business Administration (SBA)
The U. S. Small Business Administration is a valuable resource for startup businesses, offering an array of SBA loans and small business lines of credit specifically designed to help businesses expand their services and grow. Providing programs, guidelines, and loan guarantees through approved lenders, the SBA gives emerging businesses a lifeline.
Please note though: The Small Business Administration (SBA) is not a lender but rather offers a guarantee, subject to terms and rights reserved, that gives the approved lender the confidence to take on the risk of business lending that they would not ordinarily do so on their own. For startups looking to secure such a business loan, it's essential that they 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?
Securing a line of credit for a small business might seem daunting, but today, more than ever before, numerous opportunities are available. As an update, online platforms are reviewing both traditional and online lenders, assisting businesses in their quest for the best secured business line of credit.
Is a secured line of credit a good idea vs. unsecured business lines?
The answer lies mainly in the needs of the business. The flexibility offered by a business line of credit makes it a popular financing option for small businesses. This usually comes down to requirements set by the lender. Given a choice unsecured is a better option.
Is an unsecured business credit line a better option?
While unsecured credit lines do offer some advantages, those benefits often come at a price. They typically carry higher costs with less favorable terms compared to other options.
What are the rates for a secured line of credit?
Rates for secured lines of credit can vary, the interest rates on these credits are contingent upon your qualifications and choice of lender, with ranges from 6.75% and could climb up to 18% or higher. Do note that an unsecured line of credit usually commands higher rate ranges.
Do business lines of credit require a personal guarantee?
Yes, indeed. A personal guarantee is often associated with a secured line of credit, but it also accompanies credit card contracts—so it's not an uncommon practice.
Which bank is best for a business lines?
The best avenue for this type of funding is often where your business banking currently takes place. This should serve as a brief summary of how to choose a bank for securing a line of credit.
Is a business credit card the same as business lines?
Business credit cards can be considered a variant of revolving credit, similar to a business line of credit, and they are distinct from the term loans category of business lending, according to our accurate and regularly updated editorial content.
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? Are you aware of your credentials or potential areas where you lack knowledge in terms of the product or lender selected when applying for a secured business line of credit, which often requires an appraisal of collateralized assets? Always perform integrity checks, closing the loopholes by exploring all financing possibilities, and resources available within the realm of online business financing.
When determining the ideal funding option, it's crucial to consider the minimum payment scenario and execute a cost versus benefit analysis. Contact one of our Advancepoint lending specialists for a detailed comparison, mindful selection, and smart savings strategy.
