Understanding Business Lines of Credit

January 13, 2022

A business line of credit allows businesses to borrow money for operational expenses. A business line of credit is usually cheaper for borrowers because the interest rates tend to be lower.

There are two main types of business LOCs:

Secured Business Line of Credit

Most businesses have secured business lines of credit. These LOCs are usually secured by short-term assets since lenders might request them in case of default. Items with a high resale value, such as inventory and accounts receivable, comprise short-term assets. A lender is not likely to ask for capital goods in order to secure a line of credit.

Unsecured Business Line of Credit

A secured business line of credit has collateral, but an unsecured business line of credit does not. Unsecured business lines of credit tend to be approved more quickly than other types because borrowers don't have to worry about pledging assets. On the other hand, unsecured business credit lines tend to have higher interest rates, since lenders assume extra risk by not requiring collateral. Business lines of credit are typically offered by banks or other financial institutions as they can hold on to a borrower's assets in case of late payments.

Lines of Credit Are Similar to Short Term Loans

Although business lines of credit and term loans are both forms of short-term business financing, there are key differences between the two:

Term Length: Short-term loans last for a set amount of time, such as one year. This means that borrowers will need to repay their debt or renew their loan before then if they want to keep using it. On the other hand, business lines of credit can last for several years, if not indefinitely.
Collateral: Short-term loans typically require collateral such as short-term assets that are high in value and easy to liquidate, which makes them ideal for securing short-term loans. Business Lines of Credit often don't require any assets to secure the loan .
Loan Amount: Short-term loan financing is usually based on the borrower's current operational expenditures. Short-term lenders will want to see proof that borrowers can repay their debt before they approve their loan application. Term loans allow borrowers to borrow a set amount of money regardless of how they use it. This makes term loans useful for major investments because borrowers can use it for multiple purposes without having to ask the lender beforehand.

Interest Rates: Interest rates on unsecured short term credit tend to be higher because lenders assume extra risk by not asking for collateral.

In summary, a business line of credit is used to cover operational expenses such as purchasing inventory and accounts receivable, while a short term loan is useful for major investments such as buying real estate or equipment.

National Legacy Capital Group is headquartered in San Diego, CA. We specialize in business lines of credit, short term loans and equipment leasing. Call (858) 345-6338 to speak with a representative today!

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