In today's harsh economy, people often think that credit is a solution to financial difficulties. Many businesses accept credit cards and other forms of credit. Just because everyone else is taking out credit it doesn't mean you should do the same, you should consider your financial status. However, if your business is really going down and credit seems to be the solution, then you can go ahead. Before you apply for any credit you need to understand different types of credit and choose the right type of credit for your needs. If you are not well informed you may find yourself paying more than you should.

There are different types of credit namely: secured and unsecured credit. The first thing you need to learn is to distinguish between secured and unsecured credit.

SECURED CREDIT

When you have secured credit your creditor has a right or control over your assets. This means that your creditor can repossess your assets  if you don't pay back the debt according to the terms agreed upon in the initial credit agreement. For example if you have  bought a house and now you are unable to pay the bond as agreed upon on the credit agreement, your creditor has the legal right to repossess the house.

The types of secured credit are:

1. Secured credit cards

For a secured credit card you must make a deposit against the card's credit limit. If you've got money in your savings account, that money can also be used as collateral for a secured credit card. A secured card seems to be a good choice only if you are just starting a new credit record or if you need to repair a damaged credit history.

2. Line of credit

Line of credit is an agreement between a creditor and a borrower, specifying the maximum amount of credit a borrower may have access to. This agreement also clarifies its conditions, such as when the money must be repaid, and how. A line of credit may take several forms such as cash credit, overdraft or a loan. It may be secured by your home, a certificate of deposit or any other asset you own.

3. The Bond over your home

When you buy a house the bond is secured by the house.

4. Car loan

When you take out a loan to buy a new or used car the loan is secured by the car. Thus the duration of the car loan period is much shorter than the housing bond.

5. Home equity loan

If you consider this type of loan then you must use your house as surety.

UNSECURED CREDIT

For this type of credit there is no security to secure the loan. The creditor will have to accept that you will repay the debt according to the terms stated in the loan agreement. You give your assurance that the debt will be paid by signing the document.

If you do not meet the agreement the creditor will make demands for payment. If you don't meet the demands then the creditor may go to the extent of handing your debt over to debt collectors.

Types of unsecured loans are:

1. Some bank loans

Some bank loans are called signature loans because your signature is the only surety that you will repay the loan.

2. Most MasterCard's and Visa card

For this type of credit you only agree to pay at least the minimum amount on your balance each month.

3. Petrol cards and retail store cards

For this type of credit you have to pay the minimum amount of the balance monthly. If you do not pay on time the interest will be added on monthly basis and the money owed will be increased. Cited: Creditfit, 2009.

Be cautious!!!

Stephen Timm from Businessowner suggests that entrepreneurs who sign agreements with banks or with suppliers should always sign surety equivalent to their shares in the business. Business owners with existing loans who decide to take out another loan should be careful, especially if they sign unlimited surety on the second loan as the unlimited surety can now be used to cover the first loan as well. Business owners should make sure that they have alternatives available to them so as not to settle on the worst possible terms.

Sources:

• Business link
• Businessowner
• Brighthub
• Findlaw
• Credithealth
• Credithelp
• Nedbank

Last Update: 06 July 2010