Small and medium-sized enterprises (SMEs) can face cash flow challenges due to fluctuations in demand, supply shocks, unexpected expenses, or even growth opportunities.

If your business is facing cash flow gaps and needs access to working capital, a business line of credit – whether secured or unsecured – can offer practical support. If you’re unsure about the differences between secured vs. unsecured finance, keep reading.

Understanding the pros, cons, and best uses of each type of business line of credit is essential to choosing the right solution for your company’s needs and growth.

What is the Difference Between Secured vs Unsecured Finance?

A business line of credit allows SMEs to access funds up to a specified limit whenever needed. The amount borrowed (with interest) can be repaid over time, and funds can be re-borrowed as required while the facility remains open.

For an SME, a line of credit works similarly to a revolving credit facility like a credit card.

What makes a line of credit secured or unsecured?

Like business loans, lines of credit can either be secured or unsecured.

A secured line of credit requires collateral – such as equipment or property – to be provided as security in case the borrower is unable to repay.

An unsecured loan doesn’t require any collateral. While there are no assets at risk in the event of default, approval is more dependent on your business’s creditworthiness and financial history.

Some lenders may still require a personal guarantee for an unsecured line of credit. In this case, you – as the business owner – could be personally responsible for repaying the loan if your company defaults.

What are the Pros of a Secured Line of Credit?

Larger Limits

With the backing of collateral, lenders are generally more willing to offer larger credit limits – giving your SME access to more working capital.

Lower Rates

SMEs that secure their line of credit with collateral can often benefit from lower interest rates – reducing the overall cost of the facility.

Longer Terms

Businesses may also enjoy longer repayment terms, as lenders have greater confidence in the borrower’s ability to repay over time.

What are the Cons of a Secured Line of Credit?

Asset Risk

By definition, a secured line of credit requires collateral. If your business defaults, you risk losing those assets to the lender.

Longer Approval

Assets used as collateral must be formally valued. While this isn’t usually a major inconvenience, it can extend the approval timeline.

Approval Paperwork

Similarly, the more detailed approval process also comes with extra paperwork and administrative requirements.

What are the Pros of an Unsecured Line of Credit?

No Collateral

An unsecured line of credit doesn’t require collateral. This makes the facility more accessible – and eliminates the risk of losing business assets if you default.

Streamlined Approval

An unsecured line of credit is typically approved faster than a secured one, making it more suitable for urgent funding needs.

Simpler Application

With no asset valuation required, the application process is simpler and faster – helping your business access working capital sooner.

What are the Cons of an Unsecured Line of Credit?

Higher Rates

Because there’s no asset to secure the facility, lenders take on more risk – which usually results in higher interest rates.

Lower Limits

Similarly, an unsecured line of credit often comes with lower limits due to the absence of collateral.

Personal Guarantee

An unsecured business line of credit can be harder to qualify for – and may still require a personal guarantee instead of a business asset.

What are the Best Uses for Secured vs Unsecured Business Line of Credit?

A secured business line of credit may be right for your business if you answer yes to the following:

  • Do you have significant business assets or operate in an asset-heavy industry?
  • Do you need to access a larger funding limit?
  • Do you need longer terms for your credit facility?
  • Are your assets stronger than your credit history?

An unsecured business line of credit could be a better fit if you answer yes to the following:

  • Do you lack access to a suitable business asset?
  • Do you have strong business financials or high creditworthiness?
  • Do you need to fund short-term or unexpected expenses?
  • Do you work in an industry with few tangible assets?

ScotPac – here to help your business succeed

Many SMEs will need a business finance solution at some stage in their growth journey. Whether a secured or unsecured line of credit is right for you will depend on your financials, funding needs and business goals.

Fortunately, the lending specialists at ScotPac can provide the personalised advice you need to make a confident decision.

Explore your options today and discover how our team can fuel your business’s growth!