Increasing your credit limit on a business line of credit depends primarily on what type of line you have. Your lender will base their decision on whether you secured the line of credit or opted for an unsecured line of credit. Both secured and unsecured lines of credit have their pros and cons, and your strategy for appealing to your lender should be different for each type. Working with a mortgage broker is the best way to get customized guidance, but this article will give you the basics you need to get started.
Business lines of credit are an easy source of working capital on an as-needed basis without the high interest rates of credit cards. Unlike most business loans, they are not tied to a specific purchase, providing greater financial flexibility. Another distinct advantage is that they don't have the option to choose between secured and unsecured credit. Secured lines work best for companies with strong asset portfolios. Unsecured lines of credit benefit businesses with high credit scores and gross income.
Secured Lines of Credit
To get a secured line of credit, your business must provide collateral. These assets reduce the borrower's risk, which encourages lower rates for borrowers. If you default on the loan, your creditor has the right to repossess the property. The amount you can borrow is directly proportional to the value of your collateral, whether it's real estate, equipment, supplies, or accounts receivable.
Property values are negotiable and determined by the lender, even if you have an appraisal done on the property. It's common to get about 80% of the property's value, so make sure it's worth more than what you need to borrow or be prepared to offer more assets to secure the loan. If you already have a line and your property has appreciated, let the lender know its new value so they can consider approving you for a higher credit limit.
Secure Lines are the best:
- Businesses tend to manage balance sheets
- Getting started without an established credit history
- Borrowers who need more money than an unsecured loan offers
- Companies looking for long-term loans
Before choosing a Secured Line of Credit:
- Remember that the lender can take the property as collateral if you default on the loan.
- Some lenders require a personal guarantee, which makes you personally responsible for the loan.
- If your assets go down, the lender may ask for additional assets to secure the loan.
Extending a Secured Line of Credit:
- Invest in income generating activities to increase cash flow and annual income.
- Provide the lender with additional collateral or prove collateral appreciation.
- Make sure you've met any benchmarks in your first contract.
- Meet your payment deadlines and the lowest price consistently.
Unsecured Lines of Credit
Like most business credit cards, an unsecured line of credit does not require collateral to secure the loan. Instead of using asset value as a basis, unsecured lines are based on cash flow and margins. One major benefit of unsecured lines of credit is that you won't risk your business assets if you have trouble making payments.
Although getting an unsecured line of credit depends more on your credit score than a secured line, it's not impossible to get one if you have bad credit. However, you may end up with a higher interest rate or lower credit limit than you would with good credit. Ask your dealer to show you options for unsecured lines that fit your credit profile.
Unsecured lines are best:
- Companies with strong credit history and good credit scores
- Businesses that do not want to provide collateral
- Borrowers who want to speed up the approval process
- Small business people with small capital needs
Before choosing an Unsecured Line of Credit:
- Lenders reduce their risk on unsecured lines by charging higher interest rates.
- An unsecured line of credit may not provide enough credit to meet your goals.
- Unsecured lines generally have strict eligibility requirements.
Extending an Unsecured Line of Credit:
- Increase your cash flow and net income.
- Stay on top of your credit score – business and personal.
- Keep your loan documents up to date with your lender.
- Be prepared to demonstrate how your business will benefit from additional credit.
Our team is here to help you secure and maximize your business credit availability throughout your business cycle. Our brokers will represent you through your lender and help you position your business to be approved for the appropriate limits at each stage of growth. We offer expert advice on managing debt, increasing cash flow, freeing up cash, and increasing your credit score. Ask us how to get the best deals on new lines of credit, too!
