Types of Line of Credit

Business lines of credit can be classified into two types based on whether the line of credit involves the securing of collateral against the amount borrowed or not.

Secured lines of credit

Businesses need to nominate certain assets as collateral before a lender approves this type of credit line. The enlisted assets should be of equal or greater value collectively than the total credit amount available for withdrawal. A secured line of credit has lower repayment interest rates and provides a higher credit limit for businesses to tap into. Additionally, the creditworthiness parameters are relatively less stringent in this option, as lenders consider it a safer money lending avenue. In case of a payment default, the lender can seize or liquidate the assets listed as collateral in the credit line documents. Collateral normally includes accounts receivable, machinery and other inventory, company property, stocks, shares, insurance policies, or business guarantees.

Unsecured lines of credit

On the other hand, unsecured lines of credit do not include collateral. However, a business will need to have a perfect repayment record and credit rating before the lender can approve an unsecured line of credit for their business operations. Unsecured lines of credit are much harder to get for a large majority of businesses as not many may have a perfect credit history.