The primary difference between a secured and an unsecured business LOC is that a secured credit facility has underlying collateral of which a bank or finance company can claim if you default on your credit line. As we have seen in previous articles, the collateral that can be used to secure a line of credit can vary greatly. Collateral can include but is not limited to:

 

Property owned by your business or personally
Equipment owned by the business
Accounts receivables
The general cash flow of your company (although this is semi-secured).

 

With an unsecured line of credit, there is no collateral involved. Again, this type of business LOC is highly akin to a credit card. Your income and your personal/business credit are the factors considered when applying for this type of credit line.

 

The primary benefit of using a secured line of credit is that the interest rate is typically far lower than that of an unsecured credit facility. Again, in the event of default, a secured line provides the bank/finance company with a great deal of security as you have pledged a tangible (and saleable) asset that the bank can use to recoup their debt investment. With an unsecured business line of credit, the granting financial institution has far less flexibility when attempting to require the funds that they originally lent to you.

 

As such, and if it is possible, you should try to obtain a secured business LOC. This will ensure that should something go wrong with your business – you have spelled out exactly what you stand to lose to the bank. However, it should be noted that if the collateral that you have pledged depreciates in value during the duration of the revolving credit facility then you will still owe the balance of what was recouped versus what was borrowed.

 

It should be noted that while obtaining an unsecured credit line is certainly possible, the current lending environment has caused almost all banks to now require substantial collateral for obtaining a business line of credit.

When looking for a business loan, most financial institutions will require that you have a properly prepared business plan that showcases your business, your usage of business loan funds, the industry in which you are operating within, how you intend or how you will continue to market your business, and the expected financial results of the business over the next three to five years. It is always preferable to have a five year financial projection in your business plan when you are applying for a business loan. As we have discussed through our other articles, banks and finance companies have increased their lending standards significantly, and by providing a full five year financial statement – you will show them a level of seriousness and professionalism that is not often provided by other business people.

 

As an example format, your business plan for a business loan should be formatted in this manner (this is not a steadfast rule):

 

Executive Summary
Usage of Debt Funds
Products/Services Offered
Corporate Organization and Management Biographies
Economic, Industry, Customer, and Competitive Analysis
Marketing Plan
Personnel Budgets and Head Count
Financial Plan

 

In regards to your financial plan, you should have a standard profit and loss statement, common size income statement, cash flow analysis, balance sheet, breakeven analysis, and business ratios page. The sample business plan available on LookingForBusinessLoan.com provides you with all of the tools that you need to draft an appropriate business plan.

 

As we have stated before, it is very important that your business plan or prepared financial statements are reviewed by a certified public account prior to submitting a business loan application. This individual can ensure that there are no factual or material errors on any of the documents that you have produced or have had a third party produce on your behalf.