Could Your Business Benefit from an Unsecured Business Line of Credit?
Access to capital can make or break a small business, especially during trying financial times. Some businesses may need money to pay bills. Others looking to grow may need funds to hire new employees, purchase additional inventory, and launch marketing campaigns. In short, small businesses often need cash on demand to survive and expand. The biggest obstacle for small businesses, however, can be qualifying for traditional credit that would allow them to pay bills during economic downturns or fund expansion. Bad credit often can hold small business owners back. This makes it harder for them to get small business loans than larger companies. The good news is that there are ways for small companies to get access to funds without having to pay fees and interest upfront. An unsecured business line of credit can provide the money a small operation needs. These work like an insurance policy that you pay only when you need it.
What is an Unsecured Business Line of Credit?
An unsecured line of credit gives borrowers access to cash with no fees or interest until they withdraw money. The qualifications for some types of unsecured lines of credit can be stringent. They often require a minimum number of years in business and a sales minimum from the previous year. These strict requirements are due to lenders taking borrowers at their word that they will repay the loan. Bad credit applicants, however, can receive other types of lines of credit, such as business credit cards.
The most significant difference between a secured and unsecured line of credit is that a secured line of credit requires collateral. Collateral allows lenders to seize the asset if the borrower does not make payments on time. Examples of collateral include a house or a car. In return, secured lines of credit typically come with better terms, lower interest rates, and higher limits on spending.
Qualifications for an Unsecured Business Line of Credit
Borrowers must meet several qualifications to receive approval on an unsecured line of credit. Lenders typically look for a business to have a positive cash flow, a good credit history, and a projection of earnings in the future. These items will typically indicate whether a borrower can pay back the loan. The more confident a lender is that you will repay the loan, the better interest rate and terms you can receive.
There are typically two types of unsecured lines of credit for businesses: traditional and untraditional, each with its own qualifications. A business line of credit is usually issued for between $10,000 and $100,000.
This type of unsecured business line of credit is more difficult to acquire and requires more paperwork and qualifying factors. Typically, traditional unsecured lines of credit are issued by major banks and other standard lenders. They often demand a lot of documentation. Applicants may have to submit personal and business tax returns, financials, business registration documentation, and information about their bank accounts.
Borrowers with a traditional unsecured business line of credit also need to undergo a yearly review of financial operations to maintain the business funding. Borrowers who receive a traditional unsecured business line of credit can write checks for any business expense against the line of credit.
Non-traditional lines of credit
This form of loan is much easier to obtain and doesn’t require collateral. Borrowers can receive cash quickly and are often offered flexible repayment options. The application requires much less paperwork and documentation. Qualification for the line of credit depends on the business’s FICO score. Businesses with non-traditional lines of credit also do not have to undergo an annual review to determine that they are still qualified to have the loan.
Many small business owners can’t get a traditional loan or line of credit. This can be because hard financial times have left them with bad credit. In these situations, business owners likely won’t qualify for a secured line of credit. Instead, they should consider an unsecured business line of credit for bad credit, like a business credit card.
Pros and Cons of an Unsecured Business Line of Credit
The biggest benefit of an unsecured business line of credit is that it allows a small company to quickly access cash to make payroll, replenish inventory, or pay for other pressing expenses the business needs to pay off before moving forward. A borrower may secure better terms with a traditional business line of credit. However, there are many upsides to applying for an unsecured line of credit.
Primary Benefits of an Unsecured Business Line of Credit
- Fast access to money: Unsecured lines of credit allow business owners to use whatever amount of credit they’d like when they’d like. Companies may face financial situations they didn’t expect that needs an immediate resolution. An unsecured business line of credit can provide immediate cash during these times.
- Easy money transfer: Unsecured lines of credit can transfer cash for business expenses in a number of ways. This can be online, over the telephone, or through a check written against the line of credit.
- Generous credit limits: When small business owners need to make a large purchase, they can usually pay for it with a business credit card that has a high credit limit. Many business credit cards also offer a 0-percent APR for twelve months. This means that owners will have lower monthly payments. They also won’t pay interest on the debt as long as borrowers pay it off within a year.
- Flexible payments: While business loans require fixed monthly payments, unsecured lines of credit come with more flexible payment options. Each month, borrowers can choose to pay the full amount they owe, pay the minimum monthly payment, or pay more than the minimum monthly payment. These options allow businesses to repay their debt at a schedule that works with their monthly financial situation.
- Separation of personal and business: Since the unsecured business line of credit is issued to the company, not the individual, the company can begin to build its own credit history apart from the owner.
- Develop a good credit history: Making timely payments on an unsecured line of credit can help a business build a strong credit score. This could allow a business owner to apply for bank lines of credit in the future. That could lead them to having better terms for future loans.
The primary drawback of an unsecured business line of credit, especially credit cards, is that owners must exercise discipline when tapping into the credit line. Debt can quickly build up. Especially if owners feel it’s only necessary to make the minimum payment each month when there’s no fixed monthly payment. Interest on a growing outstanding balance can become substantial, leaving the business in a difficult financial situation.
Unsecured Business Line of Credit vs Business Credit Card
Whether an owner applies for an unsecured business line of credit or a credit card will likely be dependent on the applicant’s credit score. For example, a growing company that has not endured a financial downturn is likely in a good position to take on fixed monthly payments that come with a business line of credit in return for better terms and more financial accountability to the lender. Owners who need fast cash, but have a poor credit rating, or have just started out, can access funds immediately through a business credit card, which typically has a quick approval process.