How does a secured line of credit work?

Selina Finance
Nov 4 · 3 min read
A secured line of credit can help save businesses a lot of money with lower interest rates and flexible repayments

A secured line of credit is a type of loan that closely resembles an overdraft in its flexibility, giving businesses and their owners’ easy access to funds for cases ranging from everyday working capital to business expansion.

A secured line of credit works similarly to an or overdraft or credit card

Once you’re issued with a secured line of credit, you’ll have access to a pool of money which you can dip in and out of whenever you like, whether that’s to purchase new equipment, hire new staff, smooth out your cash flow, refinance previous debts, or pay suppliers, it’s up to you.

The difference between a term loan and a line of credit is that unlike a loan, where you receive the full amount requested from day 1, a line of credit lets you just draw the funds that you need immediately. You can leave the rest of the funds untouched, ready for you to use at a later date.

This allows you to save a lot of money, as you’ll only ever pay interest on the amount outstanding from your line of credit, instead of the full loan amount.

Maybe you own a small business and would like to have access to £100k, but you only need £20k now to pay a key supplier. This is exactly the type of scenario that a line of credit is perfect for.

A £100k line of credit would allow you to draw (and only pay interest on) the £20k now, leaving £80k for a rainy day. Want to repay funds? You can do this as easily as re-drawing funds from your facility without incurring any fees.

This provides business owners with a very flexible way to manage their finances.

What does secured mean?

Secured means that the line of credit is linked to an asset that you own. That asset is commonly a property or piece of machinery. Basically something that holds its value relative to the amount borrowed.

By securing any borrowings against an asset, you significantly de-risk the transaction from a lender’s perspective. This is because if you’re unable to keep up with repayments or default on the facility, the lender can take over possession of your asset.

The benefit to the customer? Lower interest rates, higher credit limits, and longer lending terms. A line of credit that is secured against property can have interest rates as low as 4.95% per year, far cheaper than a typical overdraft, credit card or unsecured loan.

How to visualise a secured line of credit

Below is a pretty nifty graph showing how Selina Finance’s secured line of credit works for an individual with a £100,000 line of credit:

A helpful infographic depicting how a secured line of credit works
  1. Based on your individual circumstances, you can be issued with a secured line of credit that amortises over a set period. This basically means the maximum line of credit you have available to you decreases over time.
  2. Unlike a term loan, where you receive a fixed amount of funding on day one, a line of credit allows you to draw whatever amount you need up to and including your credit limit.
  3. Repayments can be made at any time and no cost to yourself.
  4. You may draw additional funds from your line of credit at any time, again with no cost to yourself.
  5. You’ll only ever pay interest on the amount outstanding from your line of credit. Nothing drawn, nothing paid!
  6. At the end of the term, you have the option to extend your line of credit subject to a re-assessment on your situation.

Interested in exploring how a secured line of credit to help fund your business? Visit www.selinafinance.co.uk for more information.

Selina Finance

Written by

A start-up digital lender offering secured credit facilities for businesses and property investors across the UK

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