What Is a Secured Business Line of Credit, and How Does a Secured Small Business Line of Credit Work?
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 credit line 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 credit line 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.
Benefits of a Business Line of Credit: Why Do Businesses Use Secured Lines 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?
When assets guarantee a loan or line of credit, those assets are considered collateral. This collateral offers financial institutions a lien on liquid or seizable assets by the lender in the event of a default to recoup losses. Because of this extra protection for the lender, a secured credit line can come with higher credit limits and significantly lower interest rates than unsecured credit lines.
A business line of credit that is unsecured is 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.
Source: Sterling Rowe Financial Group LLC
Secured Business Line of Credit Requirements
As with most financing options, 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
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?
National 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 and excellent cash flow. Many also restrict from lending to specific industries as well with rights reserved.
Terms
Line Amount: No maximum to specific limits
Interest Rate: Prime rate + 1.00% or starting at 3.75%
Repayment: Semi-annual to annual renewal
Draws: Unlimited
Credit: Good to excellent
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 and good cash flow. 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.
Terms
Line Amount: No maximum to specific limits
Interest Rate: Prime rate + 1.00% or starting at 3.75%
Repayment: Semi-annual to annual renewal
Draws: Unlimited
Credit: Good to excellent
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
Draws: Unlimited, cash advance fees apply
Credit Score: Good to excellent
Online FinTech 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. These lenders generally have more lenient credit, financial health, time in the industry, and other requirements compared to banks or Credit Union’s.
Terms
Maximum Credit Line Amount: Up to $250,000
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 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?
A 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.
How do I get high business credit lines?
The better your credit, the condition of your financials, and the more collateral you have to offer, the higher the amount of your credit limit can be.
What are the rates for a secured credit line?
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.
Does a business line 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 line of credit?
Where you do your business banking is the best shot at getting funding in this form.
Are credit cards the same as credit lines?
Business credit cards are a form of revolving credit very similar to an unsecured business line 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 marketplace. It is also important to do a cost versus benefit analysis when choosing the best funding option.
