When the need for funding arises, a business might look to a lender for a loan or a line of credit. Acquiring a line of credit is a common option that many businesses can benefit from. Differentiating between secured and unsecured credit, though, can be tricky.
Secured credit commonly uses assets like accounts receivable, inventory, or machinery and equipment as collateral to provide credit against. Securing credit against a new or struggling company is not easy to do, as these businesses might not have the assets to serve as collateral. For these companies, unsecured lines of credit are a more viable option.
A Risk with Large Pay-Offs
Unsecured lines of credit provide no collateral for which a lender can attach default insurance. It is based rather on the personal credit profile of the company. The credit profile is determined on the FICO credit score of the company, as well as the length of time it has had that credit and the percentage of credit being utilized. A high rate of utilization (meaning, how much credit is actually being used through credit cards or previous lines of credit) can reduce the credit score. This is all based on revolving debt, allowing a company to continuously borrow against their credit then pay it off.
Unsecured lines of credit are well suited for new businesses that might not be able to get a loan through a bank. The length of time in business is not a determining factor in issuing this type of credit. The only true measure of receiving an unsecured line of credit comes from the credit score. While risky to the lender, the opportunity for successful lending is prevalent. A company with a good credit score, regardless of assets or other collateral, can garner a line of credit that will assist in the growth of the company.