Ways Small Businesses Can Use An Unsecured Business Line Of Credit

An unsecured business line of credit is one type of loan that works similarly to a credit card. Instead of borrowing a huge lump sum of cash, you are given a line of funds you can borrow up to, and you only have to pay back the amount you use with interest. The line of credit is revolving, which means when you repay the amount you borrow, the funds are immediately available to borrow from again without needing to apply for a new loan. A line of credit is a great source of financing for small businesses under some circumstances, but there are some occasions where it wouldn't be appropriate. According to Lantern Credit, “If working capital is low or negative, you may find it helpful to receive funding to cover expenses that are essential to remaining successful.”

1. You Should Use An Unsecured Business Line Of Credit For Regular Operating Expenses

A line of credit is handy for smaller operational and overhead expenses. For example, if you're a little short on funds to pay your employees for the pay period, tapping into a line of credit can be useful. It might also be helpful to use when you need to pay your vendors or suppliers for shipping orders, or even to pay off some utility bills. Anything that's considered a smaller short-term expense could fall into this category.

2. You Can Use An Unsecured Business Line Of Credit For Small Equipment Financing

Since getting the proper equipment and technology is important to helping your business function and grow, you might consider using your line of credit to finance affordable equipment that you could pay off relatively quickly. You shouldn't use it to buy major pieces of equipment that are incredibly expensive and would take years to pay off. But smaller equipment that can get a quick return on investment is ideal.

3. You Shouldn't Use An Unsecured Business Line Of Credit On A Big Ticket Equipment Item

Construction equipment like dump trucks and cranes, or logistical equipment like semi trucks and trailers probably shouldn't be purchased with an unsecured line of credit. Those kinds of items are better off being financed by a traditional business loan with a long term if you're planning to own the equipment. If you only need equipment for a short time, you should probably look into renting or leasing it.

4. You Shouldn't Use An Unsecured Business Line Of Credit On A High-risk Business Venture

Certain kinds of business activities are usually not permitted for using a line of credit such as payday lending. That's because like a regular business loan, the lender wants to make sure the borrower isn't likely to lose the funds and end up defaulting. It's especially important with an unsecured line of credit because theoretically, this form of financing doesn't require assets to be used as collateral, though there are still ways the lender can recover their funds.

In conclusion, if you're a small business owner, getting an unsecured business line of credit can be helpful if you need funding and don't have sufficient collateral for a large secured business loan. However, you will usually be required to have higher credit scores for unsecured funding, and you'll be charged higher interest rates and have to pay off your amount borrowed within months as opposed to years. You'll probably find the advantages outweigh the drawbacks for a line of credit, but always read the fine print before applying for one.

This article does not necessarily reflect the opinions of the editors or management of EconoTimes