The Pros and Cons of a Secured Line of Credit

If you’re thinking about using a secured line of credit to finance your business’s operations, you might be wondering what advantages and disadvantages it offers. Many businesses use a secured line of credit. Rather than obtaining a loan, they’ll seek a line of credit from a bank or alternative lender. What are the pros and cons of using a secured line of credit exactly?

The Pros and Cons of a Secured Line of Credit

What Is a Secured Line of Credit?

A secured line of credit is an extension of credit that’s backed by collateral. It’s not the same as a secured loan. A loan is a fixed amount of money that you borrow from a lender. A line of credit, on the other hand, is a revolving credit account from which you can draw money. The term “secured line of credit” specifically refers to a line of credit that’s backed by collateral.

The Pros of Using a Secured Line of Credit

Because they are backed by collateral, secured lines of credit are easier to obtain than unsecured lines of credit. You don’t need good credit to obtain a secured line of credit. Many lenders, in fact, won’t even look at your credit. As long as you have the necessary collateral, you can obtain a secured line of credit.

You won’t get slapped with high fees if you use a secured line of credit. Other forms of business financing often come with fees. The closing fees for a business loan, for example, can range from 2% to 7%. Secured lines of credit, conversely, have little or no closing fees.

A secured line of credit offers payment flexibility. You’ll only have to make payments to the lender if you draw money from it. If you don’t use your secured line of credit, you won’t have to make payments for that period.

The Cons of Using a Secured Line of Credit

The borrowing limit for a secured line of credit may be smaller than that of a business loan. All lines of credit have a borrowing limit. When compared to the amount of a business loan, though, it’s typically lower.

You’ll need collateral to obtain a secured line of credit. All secured lines of credit, as well as secured loans, require collateral. Collateral consists of assets with which you guarantee repayment to the lender. As long as you pay back the secured line of credit, you’ll retain ownership of the collateral. If you default on the secured line of credit, the lender can claim ownership of the collateral.

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