No tags yet.
Credits are used everywhere and at all times. Small, mid and large-size businesses often ask for credit lines to expand their business or simply start a project. But many people do not know what kind of financing is the most appropriate under their particular circumstances. The need of a decision can be overwhelming due to the wide range of funding options available at the financial market, especially in developed countries such as the United States. Under this context, a common doubt is related to a secured versus an unsecured credit line.
First of all, the borrower must understand what the difference between both credit types is. A secured credit has a collateral that favors the lender in case of default. The most typical example is a mortgage. When the borrower obtains a home mortgage, the lender has the house itself as a guarantee. If there is a default, the lender does not lose the money because the house can be taken to recover the debt.
In contrast, the unsecured credit does not have an asset as collateral. Because of that, the lender is taking a higher risk if compared to a secured credit. If the borrower does not pay as agreed, the lender cannot take any asset from the borrower.
If you are someone thinking of a credit for your business, you surely want to know why you should choose an unsecured business credit. Keep reading and learn about the top advantages of an unsecured credit line.
1. No collateral needed in an unsecured credit line
As mentioned above, the key feature of an unsecured credit line is the absence of a collateral. Of course, this is a great advantage for you. It is not necessary to put your house or another asset in the papers. No deposit neither. You only have to make a contract and the lender trust that you will keep your promises. The nonexistence of collaterals gives the added advantage of less paperwork. In general, the approval of unsecured credit lines is faster to the processes required when the credit is secure
2. Flexible use of the credit
When you apply to an unsecured credit line, the lender approves a credit limit. At any moment you cannot have a debt higher than that limit. But you can have a lower amount. This means that you do not have to use the entire amount but, if on some occasion you think you need it, you can. As you see, there is total flexibility. If the lender gives you $10,000 and you do not require using them for two months, there is no problem. No one will pressure. Then you maybe have to use only $4,000. You decide how much debt to have, according to you particular situation.
3. Flexible payments
Thanks to the nature of a credit line, you can pay whatever amount you want and whenever it is convenient for you. There is flexibility and this is a very attractive advantage when you have uncertainty about your future cash flows. Probably, you cannot predict very well how your income will be so you want to have the benefit of a credit without being connected to a long debt.
With an unsecured credit line, you can pay the full amount if you have the money to do it. In this way, you can decide to be free of debt at any time. But if the most convenient scheme is to pay the minimum established by the lender every month because you do not have enough available budget, it is fine too. You even have the option of paying an amount over the minimum but under the total debt. Every time you pay, your capital decreases in addition to the owed interests.
4. Potential credit increase
If you pay on time your current unsecured credit and show that you are a responsible payer, it is highly probable that your credit line will be increased. In general, lending institutions want to give more credit, but this will be given only to those borrowers that represent a low risk for them. Having an unsecured credit line, it is an easy way to obtain more credit in the future, when you really need a large loan. You can start now with a small credit line that maybe seem too short for your future projects, but be patient and wait for a credit rise once you demonstrate how good payer you are. In the near future, you will have more money available for making your ideas come true.
Having an unsecured business credit has real advantages for you as a borrower. However, like any financial tool, those benefits come with some disadvantages that you have to know and learn to manage. First of all, unsecured credit lines are usually linked to higher interest rates because of the absence of collateral. But this higher cost can be diminished if you pay as much debt you can with your excess income.
Also, you must be careful with the use of your unsecured credit line. An “open” credit can be a temptation even in a situation when you do not really need to use it. Purchasing designer furniture or spending in an expensive business dinner might not be the best way to get in debt. Always plan your future needs and your credits to be sure that the cost is justified by an expected positive rate of return. Your credit should be ideally associated to investment projects or to solve urgent needs caused by unexpected events. If your investment will generate a higher profit rate than the interest rate you are paying, then the unsecured credit line is a right decision for your business.
Finally, you must know that unsecured credit lines are usually approved to businesses with good credit scores. You have to be very responsible with your payments under all circumstances with the aim of maintaining your record clean. Building an impeccable credit record is really important for a business that wants to ask for an unsecured credit in the short term.
This article was written for Grand Teton Professionals for FastUnsecured. We have great unsecured funding opportunities for you and your business. If you lack financial resources we can get you up to $50K of fresh unsecured funds from each of our 27 allied lenders. You can apply for a free credit analysis and give us the opportunity to help you! We offer 60-minute approvals and funding within 72 hours. Please contact us at support@fastunsecured.com. For Media Relations, please contact Misty.Burrell@GrandTetonProfessionals.com.