Increasing your credit limit on a business line of credit depends first on which type of line you have. Your lender will base their decision on whether you’ve secured the line with assets or opted for an unsecured line. Secured and unsecured lines of credit both have their pros and cons, and your strategy for appealing to your lender must be different for each type. Partnering with a loan 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 a convenient source of working capital on an as-needed basis without the high interest rates of credit cards. Unlike many business loans, they aren’t tied to a specific purchase, providing maximum financial flexibility. Another distinct advantage they have is the option to choose between secured and unsecured credit. Secured lines work best for companies with strong asset portfolios. Unsecured lines benefit businesses with high credit scores and net income.
Secured Lines of Credit
For a secured line of credit, your business must supply collateral assets. These assets lower the lender’s risk, which promotes lower interest rates for borrowers. Should you fail to pay back the loan, your creditor is entitled to recover the asset. The amount you can borrow is tied directly to the value of your collateral asset, whether it’s real estate, equipment, inventory, or accounts receivable.
Asset values are subjective and determined by the lender, even if you have an appraisal done on the asset. It’s common to get around 80% of the value of a property, so be sure it’s worth more than you need to borrow or be prepared to offer multiple assets to secure the loan. If you have a line already and your asset has appreciated, let the lender know its new value so they can consider approving you for a higher credit limit.
Secured Lines are best for:
- Businesses that tend to carry a balance
- Startups without an established credit history
- Borrowers that require more capital than an unsecured loan provides
- Companies seeking a long-term loan
Before choosing a Secured Line of credit:
- Remember that the lender may seize collateral assets if you default on the loan.
- Some lenders require a personal guarantee, making you personally liable for the loan.
- If your asset depreciates, the lender can request additional assets to secure the loan.
To increase a Secured Line of credit:
- Invest in revenue-generating activities to increase cash flow and annual income.
- Offer the lender additional collateral or prove collateral appreciation.
- Make sure you’ve met any benchmarks in your original contract.
- Meet your payment deadlines and minimums consistently.
Unsecured Lines of Credit
Like most business credit cards, an unsecured line of credit requires no collateral to secure the loan. Instead of using an asset’s value as a basis, unsecured lines are based on cash flow and margin. One primary benefit of unsecured lines of credit is that you won’t risk your business’s assets if you run into a problem with repayment.
Although getting an unsecured line of credit relies more heavily on your credit score than with a secured line, it’s not impossible to get one if you have bad credit. You may, however, end up with a higher interest rate or a lower credit limit than you would with good credit. Ask your broker to show you options for unsecured lines that fit your credit profile.
Unsecured Lines are best for:
- Companies with a strong credit history and good credit scores
- Businesses that don’t want to provide collateral assets
- Borrowers who want to fast-track the approval process
- Small business owners with lower capital needs
Before choosing an Unsecured Line of Credit:
- Lenders mitigate their risk on unsecured lines by charging higher interest rates.
- An unsecured line may not offer enough credit to meet your goals.
- Unsecured lines often have stricter qualification requirements.
To increase 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 documentation up-to-date with your lender.
- Be prepared to show how your business will benefit from the additional credit.
Our team is here to help you secure and expand your available business credit throughout your business lifecycle. Our brokers will advocate for you with your lender and help position your business to get approved for the right limits at each stage of growth. We offer expert advice for managing debt, increasing cash flow, freeing up capital, and raising your credit score. Ask us how we can find you the best deals on new lines of credit, too!
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