What Is the Business of Line Credit With a Collateral?
A business line of credit with collateral is a flexible loan you can take for your business and pledge your personal or business assets as collateral. Once you leverage your assets, you can draw the funds you need for working capital. Sometimes the value of your asset determines the amount, terms, and interest rates you access.
You can use the business of line credit to fill in short-term expenses like paying for employees or purchasing inventory.
Unlike traditional Small Business Loans, where you get a lump sum of funds and repay over a pre-stated period with interest, business lines of credit with collateral are less strict. See below how they work.
How Does a Business Line of Credit With a Collateral Work?
A business line credit with collateral, commonly known as a secured business line, is a business financing that works like a credit card. It requires you to pledge your business or personal assets as collateral.
For instance, you have access to a specific limit of funds, say $100,000, but your business needs amount up to $80,000. You can use the $ 80,000, and your interest rate will be calculated on it rather than the whole amount. Then you’ll pay back the finances over a certain period, weekly or monthly.
Some lenders allow you to repay the whole balance early to cut interest costs.
You can continuously withdraw funds from your credit line as often as you need, but always make timely payments and stay within your credit limits.
How Much Money Can You Acquire?
The limit amount you can get depends on the value of your collateral and your business needs. Lenders believe high-value collaterals help reduce the risk of losing their money.
For example, your business has equipment worth $ 250,000, and your lender is offering a maximum of 80% Loan-To-Value (LTV) which means you can get a LOC of up to $ 200,000.
Mostly, high liquid assets have lower discounts, and most lenders prefer a borrower to offer collateral with more value than the loan amount. However, some lenders accept collateral equivalent to your loan amount. Meaning you get 100% Loan-To-Value. Lenders use a loan to value metrics to determine your loan limit.
What Are the Qualifications for a Business Line of Credit With Collateral?
Each lender has different eligibility requirements. However, there are baseline factors that cut across regardless of the lender. They include:
Time in Business
When you seek a business line of credit from traditional banks, most will require your business to have been in operation for a few years, an average of one to two years. But some lenders accept as low as 3 months which is ideal for most startups and expanding companies seeking business lines of credit.
When you seek a business line of credit from traditional banks, most will require your business to have been in operation for a few years, an average of one to two years. But some lenders accept as low as 3 months which is ideal for most startups and expanding companies seeking business lines of credit.
Credit History
In most cases, your credit score shows the likelihood of repaying your business line of credit. So low scores may limit the amount you get and the terms. Averagely most lenders consider a score of 680 plus. However, some lenders can consider you for the credit with as low as 580 credit score.
Business Revenue
Most lenders have a minimum set amount of revenue to qualify for a business line of credit. This could be monthly or annually, and the revenue varies from each lender, with an average of $10,000 per month and $ 250 000 per annum.
Collateral Type
Even If the above qualifications don’t favor you, a collateral may boost your chances of getting funds on better terms and rates. Lenders ask for different types of security, these include:
- Physical Collateral. Some lenders require a physical collateral, like a real estate property, and inventory or equipment.
- Lien. Other lenders prefer to file a lien on your business. So if you default, they can legally claim your business assets.
- Personal guarantee. Some lenders will ask you to sign a personal guarantee to permit them to take your assets if you fail to repay the business line of credit.
Where Can I Get a Business Line of Credit With Collateral?
Banks and Credit Unions
Traditional banks and credit unions are good as they are familiar and comfortable. So if you are in no rush, and have a high credit score, and excellent finacial statements, traditional banks and credit unions might be the best answer for you.
Alternative Financing
On the other hand, Alternative financing are perfect solution if you have low credit scores, short business history, and need fast funding. Many approve of “riskier” business owners with low credit scores and emerging business needs.
Note this, If you are a business owner that understands time is money and have already calculated the exchange in cost for speed, flexibility and more friendly qualifying conditions, definitely you’ll opt for alternative financing. Although it may have higher costs because it allows you to purchase what you need to help your business’s bottom line costs and/or top line revenue immediately.
See below for more benefits of working with an alternative financier.
What Are The Benefits Of Business Line of Credit With A Collateral?
- Quick and easier qualification process. There’re no demanding requirements and endless paper works because the process is online.
- You can get funds in less than 24 hours. While traditional banks take weeks and even months to give a decision on your application, some lenders may approve you in less than 2 hours. This saves you time and as some would say, time is money.
- You’re not restricted on how to use the funds. Some traditional banks and credit unions may ask for detailed business plans on how you’ll spend the funds, etc. However, we give you the freedom to use your finances how it fits your business.
If you have done your research, calculations, and any lingering considerations, and your decision is to move forward in getting a business line of credit with collateral through alternative financing, consider working with FV Vantage.
