Businesses use business credit lines to borrow the money they need when they need it rather than opting to take out a fixed loan.
The lender who extends the LOC does so having evaluated the market value, expected profitability, and any risk taken on by the business. The line of credit is based on the results of this evaluation.
The LOC may be secured or unsecured. This will tend to depend on the requested LOC’s size as well as the evaluation’s results. The interest rate is variable.
Unsecured Business Credit Line
With unsecured business lines of credit, the lender attempts to compensate for an increased risk by limiting the number of funds that can be borrowed. The risk is also mitigated by higher interest rates being charged.
It is the same reason that the APR on a credit card is so high. Technically a credit card is an unsecured line of credit.
You do not have to pledge assets when you open the account and so if any payments are missed, the lender has nothing to seize in compensation.
Secured Business Credit Line
From the perspective of lenders, secured lines of credit are more attractive because they offer a method for recouping the funds that have been advanced if the borrower defaults on payment.
The benefit for individuals and limited companies of secured lines of credit is that they tend to come with higher maximum credit limits and much lower interest rates than their unsecured counterparts.
