Business Expansion

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

Last updated on July 30, 2020

Jacques Famy Jr

What Is a Secured Business Line of Credit?

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

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

Why Would a Business Want a Business Line of Credit?

Business lines of credit are popular because they are open, revolving, and have more flexibility than a business term loan. Business term loans offer a fixed amount of money over a fixed term.

A secured business line of credit is an excellent option for companies that are looking for the lowest rates due to the collateral protecting the default of a loan. 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: What Do Businesses Use Secured Lines of Credit For?

  • Cash on-demand 24/7
  • Only pay interest on daily balance
  • Flexible payments
  • Pay for expenses
  • Emergency financing needs
  • Controls fluctuation in daily flows of cash to cover low revenue periods
  • Purchase equipment and/or goods
  • Products and services 

Secured vs. Unsecured Business Line of Credit

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

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

Unsecured business lines of credit are harder to get. After all, they are a greater risk to the financial institution because none of the business owner’s personal assets are at risk because there is no personal collateral required, so the borrower’s assets are not available for seizure upon any default. Companies who get unsecured lines of credit are either well established or highly desirable for business 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 necessary personal information about you as the business owner and your organization’s information on an application. 

The Application Will Typically Consist Of:

  • Company name
  • Company Address
  • Start Date/ formation 
  • Company FEIN number
  • Nature of your business activities
  • Annual and average monthly gross sales
  • Profit & Loss (if applicable)
  • Owner(s) Name 
  • Owner(s) Address
  • Owner(s) Social Security # and Date of Birth
  • Any and all collateral (if applicable)

 What Can Be Used as Collateral?

  • Equipment
  • Business intellectual property
  • Business physical infrastructure
  • Real Estate (if applicable)

Credit Requirements

Credit requirements will vary greatly depending on the lender, but the credit of the business owner plays a significant role in the approval decision. It’s true that the better the credit, the better the terms you will be offered. There are secured business lines of credit available for excellent, good, fair, and even sub-prime credit scores depending on the lender, but make no mistake, your terms and rates are offered according to personal credit. 

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

National Banks

Traditional national banks like Wells Fargo, Bank of America, Citi Bank, Chase, and PNC Bank do offer secured lines of credit and will have the best rates available. Still, they have the strictest standards in the industry 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 certain industries as well.  

Terms

Amounts: No maximum to specific limits

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, but can require high personal and business credit standards, annual revenue statements, at least three years in business, and multiple years’ tax returns to show business profit and cash flow. Regional banks take a more personal approach to underwrite a secured line of credit and do seem to be more friendly to small businesses. Processing times may be up to a week to get funds.  

Terms

Amounts: No maximum to specific limits

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

Repayment: Semi-annual to annual renewal

Draws: Unlimited

Credit: Good to excellent

Credit Unions (CU’s)

Credit unions are a mixed bag in terms of secured business lines of credit. They have great rates and terms but many CU’s stay away from business lending altogether, as they are risk-averse. 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. 

Terms

Amounts: No maximum to CU’s specific limits

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

Repayment: Semi-annual to annual renewal

Draws: Unlimited

Credit: Good to excellent

Online FinTech Lenders  

Online lenders, also known as FinTech (Financial Technology) lenders, are a relatively new industry. Coming onto the scene around the 2008 financial crisis, FinTech lenders stepped in to help the underserved market of small businesses. These lenders generally have more lenient credit, financial health, time in business, and other requirements compared to national banks or credit unions.

Terms

Amounts: $100,000 up to $250,000

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

Repayment: Semi-annual to annual renewal

Draws: Unlimited

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

 Benefits and Tradeoffs of Online (FinTech) Lenders

  • Faster processing  times-Funds in as little as one day
  • Lower credit standards than alternatives
  • Limited paperwork– Usually the only requirements are a one-page application and business bank states
  • No financial statements required (amounts under 100k)- No tax returns, profit & loss, or balance sheet is required
  • Lower asset or cash flow requirements
  • Higher approval rates than alternatives
  • Typically higher rates than alternatives

The U.S. Small Business Administration (SBA) Business Line of Credit

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

SBA CapLines

Description: Working capital

Maximum Loan Amount: $5 million

Use of Proceeds: Finance seasonal and/or short-term working capital

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 Rates: $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 secured business line of credit?

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

Is a secured business line of credit a good idea?

Business lines of credit are the most popular business financing option available to small businesses. Its flexibility and terms are very appealing to most small business owners to satisfy their financing needs. 

What credit score do I need to get a secured business line of credit?

For banks and CU’s, you will need at least very good credit, but for online lenders, they accept everything from excellent, good, fair, and even sub-prime credit. 

Does a business line of credit affect personal credit scores?

No, secured business lines of credit do not typically report to personal credit reporting agencies Experian, Equifax, or Trans Union.

How do I get a high business credit line?

The better the credit condition of your financials and the more the collateral you have to offer, the higher the amount of your credit limit can be.

What are the rates for a secured business credit line?

Interest rates will depend on your qualifications and the lender you choose. Rates range from 3.75% up to 18% and higher.

How much does a secure business line of credit cost in fees?

There can be no closing fees for some applicants for secured credit lines, but typically fees are 1% to 3% of your credit limit.

Does a secured business (LOC) line of credit require a personal guarantee?

Yes, secured lines of credit often have a personal guarantee, but so do credit cards!  

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.

* All loans made by either WebBank, an FDIC-insured Utah industrial bank, or Bank of the Internet Federal Bank, an FDIC-insured federally chartered thrift located in California. In connection with the loans, the Banks' underwriting conditions and terms apply.