It’s easy to understand why a business that has a line of credit set up is superior to one that has no such advantage. This is so even though the business with the line of credit may not actually immediately need the money. For a business without a line of credit, it is possible a piece of equipment breaks and must be replaced or repaired and no money is on hand for this extra expense. Unsecured credit is riskier and is hard to obtain. Smaller businesses don’t have the track record or the ability to get unsecured loans.
Advantage 1
The solution is an already established line of credit. The same careful planning for available credit will take care of any extra expenses and will allow the company to maintain its present way of serving the public. There will be no need to cut back on inventory or laying off of employees.
Advantage 2
Another advantage is there’s no need to reapply for a loan each time. You’ve already been checked out and found to be reliable and you aren’t considered a risk.
Advantage 3
Interest rates will be lower because of this secured line of credit. The amount you’ll pay will remain steady and since it’s guaranteed in writing the company loaning the money cannot raise the rate on down the road when you again apply for credit.
Collateral
The most common collateral when applying for a secure line of credit is accounts receivable and/or the inventory. Depending on the amount of the money borrowed, if you falter on payment the lending company may take over your business and sell at a loss to get their money back. Examples of a secure line of credit are home mortgages, car loans, or home equity loans. Unsecured lines of credit are credit cards.
Disadvantage 1
However it’s labeled, a secured line of credit is debt plain, and most often not simple. And debt is not always a good thing when in business. It means another company holds a lien against your business and that fact may prohibit any futuristic planning for expansion, for sideline ventures or for venturing into international trade. But secured lines of credit are inevitable in today’s world. How many people can afford to buy a home or a car outright?
Disadvantage 2
A line of credit may be secure or insecure. It simply means you have an open avenue to obtain money from a source whenever you need it. The company making such a deal available must find this a lucrative business else they would go out of business. In other words you’re the underdog in this business transaction.
Disadvantage 3
The most annoying and aggravating disadvantage of unsecured lines of credit is the staggering amount of interest charged. When people indiscriminately use credit cards to buy whatever they desire at the moment they’re gambling with their future. When they default on payments the only way out is often bankruptcy.
Secure lines of credit also have their disadvantages, and they are far from being secure even though they are often more secure than unsecured loans. Borrowing beyond one’s ability to pay never seemed to matter when the times were good. Caution was thrown to the wind and people lined up to buy what they couldn’t afford, a house too large for their needs, a car out of their category, and so on it went until the foundation for all that free money collapsed. An example of this was the 2008 downsizing of the economy. It was a direct result of unregulated business practices.
Borrowing is never a good idea unless there’s no other way of financing one’s home, one’s business or educating one’s children. Other lines of credit are open-end credit and closed end credit. Essentially they are simply another way of speaking about unsecured and secured loans.
Open-end credit is revolving credit such as credit cards; closed-end credit is a fixed amount of money for a “certain purpose for a specific period of time.” Examples are money to buy houses, cars, payday loans and other such transactions.