Business LoansBusiness Line of Credit

The Advantage of a Secured Business Line of Credit

Secured business line of credit

Starting a business can be an expensive proposition, and it’s not always possible to fund your new endeavor with cash. Taking out a loan can be tricky because you may not know how much you need to borrow. If you’re looking for a flexible way to borrow money for payroll, equipment, marketing and other startup expenses, consider getting a secured business line of credit. This option will allow you to finance your business expenses at a steady pace.

What is a secured business line of credit?
Why would you want to secure a line of credit for your business?
Requirements for a secured business line of credit
Business lines of credit: top options
SBA line of credit
When would a secured business line of credit be better than one that is unsecured?

What is a secured business line of credit?

A secured business line of credit is a revolving credit line that you can secure with a variety of collateral options including real estate. You use a secured business line of credit just like a credit card, only paying when you borrow money. This means you can pay for expenses as they come up rather than receive a lump sum as you would with a small business loan.

When you draw from your business line of credit, you will only need to pay interest on the amount you actually use. Then, in many cases, you’ll pay back the balance later.

Secured vs. unsecured line of credit

In contrast, an unsecured business line of credit doesn’t require any collateral. However, there might still be strings attached. Alternative business line of credit lenders, for example, do not typically require real estate or equipment to secure their lines of credit, but you still may have to sign a personal guarantee or agree to a lien on your business. With a secured business line of credit, you may be able to take advantage of larger spending limits and lower interest rates.

Why would you want to secure a line of credit for your business?

In addition to being able to borrow more money and take advantage of lower interest rates, a secured business line of credit is a great option for newer companies lacking a financial history or a proven track record needed to qualify for an unsecured business loan.

With a secured business line of credit, you won’t need to keep taking out a new loan every time you need funds. This will help you avoid additional credit inquiries as well. By paying back only interest when you start using your loan funds, your company will have a better cash flow.

You can also pay for your expenses as needed to help your company grow and avoid over-borrowing. Plus, you can use the secured business line of credit to help cover fluctuations in cash flow.

Secured business line of credit requirements

In order to obtain a secured business line of credit, you need to meet a few requirements. First, you’ll need to provide basic information about yourself and your company. This includes your name, address, the name of your business, the start date of your company, the nature of your business, number of employees, annual gross sales and net profit, etc. Some small business lenders will also require you to have a certain number of years in business as well as a minimum annual revenue amount.

You’ll also need to disclose any other business loans you currently have and include how you’ll use the loan funds. In addition, you need to have some collateral to put up in order to get the secured business line of credit, which may include assets like real estate or a certificate of deposit (CD).

Finally, you’ll need to have a good credit standing for your personal and/or business credit score.

If your credit score is low, you may have a harder time receiving approval for a secured line of credit. Be sure to check your personal and business credit score before applying.

Business lines of credit: Top options

While many traditional banks offer secured lines of credit for businesses, alternative lenders also offer lines of credit that you can apply for online. If you can meet a bank’s credit, annual revenue and time in business requirements, rates will most likely be lower. Some banks may also offer online applications to their existing customers.

Online lenders

Online lenders have generally lenient credit and time in business requirements when compared with banks. They also may provide faster funding times. The trade-off is typically higher rates.

Kabbage FundBox OnDeck BlueVine InterNex Capital
Maximum Amount $250,000 $100,000 $100,000 $250,000 $10,000,000
Rate 1.25% - 10.00% monthly charge Start at 4.66% for a 12-week repayment plan APRs start at 10.99% Start at 4.80% APRs between 12.00% and 18.00%
Repayment Terms 6, 12 or 18 months 12 or 24 weeks 12 months 6 or 12 months 12 months with the option to renew
Minimum Credit Score  None 500 600 600 None
Best For Businesses with relatively low annual revenue Short-term repayment options Transparency — discloses its average APR Relatively new businesses Large borrowing amounts

Kabbage

To qualify for a secured business line of credit from Kabbage, you must have been in business for one year, and have $50,000 in annual revenue or $4,200 in monthly revenue. Each time a business owner draws from their line of credit, a new loan agreement is drawn up. This arrangement plus a monthly fee structure — versus interest rate — can make its costs confusing to understand. It also can be quite expensive, especially for larger amounts at longer terms. Kabbage does offer lines of credit at lower amounts than competitors, as little as $1,000.

FundBox

FundBox has one of the lowest required minimum credit scores of lenders we looked at as well as time in business requirements — just two to three months. But its fees can also be expensive, as high as 19.42% for a 52-week plan in most states. Like others on this list, you’ll be required to make fixed weekly payments.

OnDeck

OnDeck offers small business lines of credit with APRs starting at 10.99% though the average is much higher, at 35.2%. Even so, this may be lower than the equivalent APR of lenders that calculate fees on a monthly basis. Typical customers do have three years in business and a minimum annual revenue of $300,000 to qualify, but it’s possible to apply online in 10 minutes and get approved and receive funding as soon as the same day. Lines of credit start at $6,000.

BlueVine

To qualify for a small business line of credit from BlueVine, you need a credit score of at least 600 and a business that has been around for at least six months. You also need at least $10,000 per month in revenue. Simple interest rates start at 4.80% over 26 weeks. BlueVine states that your rate will be based on your personal credit score, your business details and other factors. Like others on this list, BlueVine requires a personal guarantee.

InterNex Capital

An InterNex Capital line of credit starts at $250,000 with 12-month repayment terms and the option to renew. There is no minimum credit score to apply; instead, InterNex Capital looks at business details and collateral. You do need to be in business for two years and have at least $1 million in annual revenue to apply.

Banks

As we’ve mentioned, banks will have lower rates but may have high revenue and time in business requirements. Minimum borrowing amounts may be higher as well, though some banks will offer an unsecured business line of credit as an alternative with lower starting amounts.

Wells Fargo Bank Bank of America PNC Bank Chase Bank
Maximum Amount $100,000 or $500,000 Starting at $25,000, no maximum $3,000,000 $500,000+
Rate As low as prime + 1.00% Rates start at 3.75% Variable May be variable
Repayment Terms 1-year draw period may apply Annual renewal Draw period unavailable 12 to 60 months
Collateral Wells Fargo savings or CD account or business assets CD account or blanket lien on general assets Receivables, inventory or equipment Not specified
Best For New or established businesses Veterans who qualify for special savings Larger, short-term funding needs Longer terms

Wells Fargo Bank

There are two Wells Fargo secured business lines of credit: the Business Line or Prime Line. While the Business Line may be suited for relatively new businesses or those rebuilding business credit, with amounts between $5,000 and $100,000, the Prime Line is designed for established businesses with $2 million to $5 million in annual revenue. It offers amounts between $100,000 and $500,000.

Business Line holders can use their Wells Fargo savings account or CD as collateral while business assets such as accounts receivable, inventory, equipment or cash are acceptable for the Prime Line. Business Line interest rates start at prime + 1.00% while Prime Line rates have a 5% floor. You would make interest-only payments for the one-year draw period. If the line is not renewed, it would be converted to a five-year loan. Annual fees may apply.

Bank of America

To qualify for a Bank of America secured business line of credit, you need to have been in business for at least two years with a minimum annual revenue of at least $250,000. There is no set maximum borrowing amount for a secured Bank of America business line of credit. Note that military veterans can qualify for a discount on loan administration and origination fees. Even if you’re not a military veteran, Bank of America Preferred Rewards for Business members also qualify for discounts.

PNC Bank

PNC offers a single secured line of credit intended for established businesses, those with at least three years in business and solid credit. Amounts start at $100,001, so this line is intended for larger working capital needs. You may borrow smaller amounts through its unsecured line of credit. The secured line carries an annual fee of 0.25% of the committed line amount.

Chase Bank

Chase offers two business lines of credit, the main difference being the amount businesses may borrow. The Business Line is available between $10,000 and $500,000 while the Commercial Line offers amounts greater than $500,000. It’s possible to keep the Business Line open for a minimum of five years with the option to renew while the Commercial Line has 12– or 24-month terms, also with the option to renew. A Chase business line of credit may require collateral.

SBA line of credit

The U.S. Small Business Administration (SBA) offers an array of loans and small business lines of credit intended to help business owners expand their services and grow.

CAPLines

CAPLines are part of the SBA’s popular 7(a) loan program with amounts up to $5 million that help small businesses with short-term and cyclical working-capital needs. Maximum terms for CAPLines are up to 10 years with the exception of the Builders program, which has five-year terms. The four lines are:

  • Seasonal CAPLine: Finance seasonal increases in receivables, inventory or labor costs.
  • Contract CAPLine: Finance labor and material costs for assignable contracts.
  • Builders CAPLine: Designed for costs for small construction companies, general contractors and builders.
  • Working CAPLine: Capital for companies that provide credit to other businesses and that repay their CAPLine by converting short-term assets to cash.

While the SBA does not extend the financing — approved lenders do — it guarantees a percentage of the loan. It also sets maximum interest rates, which are pegged to the current prime rate. The SBA guarantees up to $3.75 million of the $5 million available through CAPLines. Rates may be fixed or variable. Variable rates range from 6% to 8% (prime and a spread of 2.75% to 4.75%). Fixed rates ranged from 8.25% to 11.25% as of May 2020.

When would a secured business line of credit be better than one that is unsecured?

A secured business line of credit is going to allow you to borrow larger amounts for generally lower rates than an unsecured line. It is definitely more flexible than an unsecured business loan, mostly because you have the option to borrow money as you go as opposed to receiving a lump-sum amount. A line of credit could also be a better option if you are just starting your company or rebuilding your business credit.

Being able to borrow money as you need it may work better with the nature of your business, especially when expenses can come from all different directions. It could also help you properly budget, borrowing only when you need to supplement cash flow or to fund a new venture or project.

When considering a secured business line of credit, make sure you know the type of collateral you’ll need to put up. Be sure you can pay back the money you withdraw, using a business line of credit calculator. Carefully weigh the pros and cons when searching for the best revolving line of credit, and shop around for the right lender.

 

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