You’ve heard the expression: businesses come in all shapes and sizes. The same can be said of unsecured funding options. But trying to narrow down the best fit can leave you feeling frustrated and uncertain. For the sake of clarity, let’s run some comparisons that will aid in the decision making process. One of the first questions borrowers have is what’s the difference between an unsecured credit line and an unsecured business loan? This article will answer that question and help you figure out which one is best for your business.
One of These Things is Not Like the Other
A common misconception among borrowers is that all unsecured funding is the same. This is not the case. In order to make the best choice for your business, you need to know how these resources differ from one another.
An unsecured business loan offers the benefits of a traditional loan without the drawback of collateral. You still have to meet qualifying criteria and show that you can pay themoney back, but you’re not at risk of losing property or assets during the life of the loan.
An unsecured credit line works a little differently. Think of it as an interest-free credit card, without the card. When you apply for a credit line, you are charged a fixed annual rate, given a pre-set spending limit, and use checks to access the funds. As long as you pay off the balance, the credit stays available.
Both of these resources are collateral-free and unrestricted. You’re probably asking yourself…what’s the catch? The truth is, it all comes down to the borrowing structure.
Understanding Lending and the Unsecured Structure
The primary differences between a loan and a credit line are risk and pay out.
When you apply for a loan, secure or unsecured, you have to go through an application process, find out how much money you qualify for, and agree to a variable interest rate and payback what you borrow. If you need additional funding down the line, the process repeats.
With an unsecured line of credit, you apply once. When you are approved, that’s it. There’s no need to continually apply for funds. The interest rate is set and reasonable with reusable credit that you pay off as you go. A lot of businesses prefer this option because the interest rate is lower and the headaches of continually applying are gone. The down side is that the spending limit is lower than the payout you can expect from an unsecured loan.
Truth be told, the best fit between the two depends on what you want to do with the funds you receive. If you need to cover a large expense upfront, an unsecured loan is a smart choice. If you want the security of easily accessible emergency funds, than an unsecured credit line is better. It’s all in the eye of the beholder.
One thing’s for sure, no matter what you need the funding for, there’s an affordable way to make it happen.