Unsecured Line of Credit
With an unsecured line of credit, you don't have to risk your personal property. Read on to know more about this.
In an unsecured line of credit, you do not have to secure with a collateral such as a movable or an immovable asset. Instead, a fixed annual fee is charged for accessing funds, depending upon the offered credit line. Some lenders even offer free usage for the first year and start charging from the second year onwards. Contrary to this, collateral is used in a secured line of credit and is mostly followed in developing countries. The most commonly used collateral are the company's operating assets such as investments and accounts receivable. While dealing with business financing, an unsecured line of credit serves as the best option and provides for the temporary financial needs (if any) of the growing business. However, there are both pros and cons of an unsecured line of credit.
Advantages
With an unsecured line of credit, you have the advantage of borrowing money any time (as per your need) by simply writing a check. It is more flexible than loans; as there is no restriction while accessing funds. Another advantage is that you can even repay money in lump sum, as per your convenience.
As long as you pay the outstanding bills, you can repeatedly use your credit line and also save yourself from the hassle of reapplying for credit. An unsecured line of credit is as convenient as using a credit card in which you can access funds instantly, whenever the need arises. The interest rate of an unsecured line of credit is much lower than the rate charged with credit cards. The interest rate depends upon the lender; it is in between prime minus one percent (-1%) to prime plus 6 percent (6%).
Disadvantages
The credit limit offered in an unsecured line of credit is less than the fund of a secured line of credit. The amount of accessible fund can be ten times higher than that offered in an unsecured line of credit. It is due to the fact that it poses a greater risk to the lender as there is no collateral pledge. One major disadvantage is that due to its easy usage (like credit cards), many people may land into debt. However, it all depends on the user to decide whether an unsecured line of credit is advantageous or disadvantageous.
Eligibility
It is to be noted that not everyone is eligible for an unsecured loan or an unsecured line of credit; one needs to meet certain criteria for qualification such as two years in business and a good credit score and annual revenue. The lender also checks the financial status of the applicant and can deny credit, if he/she is found to have a previous record of bankruptcy. In case, the applicant has just started his business (not completed two years), there is a possibility that he may get a minimum credit line.
One word of advice while starting a business is to apply for an unsecured line of credit, as it is the best way to finance the routine and unexpected expenses of your business with minimum interest rates. While applying for an unsecured line of credit, check for the interest rate, grace period, annual fees and additional charges. Spend quality time while deciding on a particular card, as some lenders may charge a lower interest rate than others.
Advantages
With an unsecured line of credit, you have the advantage of borrowing money any time (as per your need) by simply writing a check. It is more flexible than loans; as there is no restriction while accessing funds. Another advantage is that you can even repay money in lump sum, as per your convenience.
As long as you pay the outstanding bills, you can repeatedly use your credit line and also save yourself from the hassle of reapplying for credit. An unsecured line of credit is as convenient as using a credit card in which you can access funds instantly, whenever the need arises. The interest rate of an unsecured line of credit is much lower than the rate charged with credit cards. The interest rate depends upon the lender; it is in between prime minus one percent (-1%) to prime plus 6 percent (6%).
Disadvantages
The credit limit offered in an unsecured line of credit is less than the fund of a secured line of credit. The amount of accessible fund can be ten times higher than that offered in an unsecured line of credit. It is due to the fact that it poses a greater risk to the lender as there is no collateral pledge. One major disadvantage is that due to its easy usage (like credit cards), many people may land into debt. However, it all depends on the user to decide whether an unsecured line of credit is advantageous or disadvantageous.
Eligibility
It is to be noted that not everyone is eligible for an unsecured loan or an unsecured line of credit; one needs to meet certain criteria for qualification such as two years in business and a good credit score and annual revenue. The lender also checks the financial status of the applicant and can deny credit, if he/she is found to have a previous record of bankruptcy. In case, the applicant has just started his business (not completed two years), there is a possibility that he may get a minimum credit line.
One word of advice while starting a business is to apply for an unsecured line of credit, as it is the best way to finance the routine and unexpected expenses of your business with minimum interest rates. While applying for an unsecured line of credit, check for the interest rate, grace period, annual fees and additional charges. Spend quality time while deciding on a particular card, as some lenders may charge a lower interest rate than others.
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