As a new business owner, you likely don’t have a lot of reserves built up to cover expenses. It can take several years for some businesses to become profitable. There are options to explore that will allow you to pay your bills as your company grows.

Applying for a line of credit is a common way for business owners to pay everyday bills and unexpected expenses. It allows you to draw funds as you need the money rather than taking it in one lump sum like a term loan. You only pay interest on the funds used. Lenders can offer a variety of lines of credit, so you should choose the one that makes the most financial sense for your business.

Unsecured Line of Credit

Unsecured means you will not have to pledge any collateral to get the loan. Since this presents a higher risk to the lender, the loan terms may be less desirable. The interest rate can be higher, and the amount of credit they are willing to offer is lower. Lenders may require your revenue stream to be at a certain level, a good credit score, and one year of financials.

Secured Line of Credit

Securing a loan means the borrower will be pledging some type of collateral to access the funds. Since the lender has something to recuperate if the loan defaults, they can offer a lower interest rate. There are different types of collateral a business owner can pledge:

Invoices

Invoice-backed credit is an option for businesses that have outstanding invoices which will be paid later. You can access the funds right away and can pay down the loan when your customers pay you. If you default on the loan, the lender has rights to the customer payments.

Equipment

Suppose your business relies on expensive pieces of equipment to operate. In that case, you can finance it and use the equipment as collateral. If you cannot meet the repayment schedule as agreed, the lender can take possession of the equipment.

Inventory

Like equipment, if you need to purchase a high volume of inventory, you can use it as collateral. Most inventory-backed lines of credit require the borrower to only use the funds for inventory.

Lines of credit can be an excellent tool for business owners. They can be very flexible and not overly difficult to obtain. Most importantly, it offers a safety net and provides peace of mind for unplanned expenses.