At some point in your business, whether small or large, you will need cash to help you meet capital needs and grow. This where an unsecured business line of credit comes in. In this article we will discuss what an unsecured line of credit is and how to get one.
What Is an Unsecured Business Line of Credit?
An unsecured line of credit allows people to receive funding without a collateral, but lenders do have their own set of requirements. Since you do not have to offer up your assets to help cover the funding, the lender carries the risk.
Lenders require a strong credit and long business credit history to qualify. Therefore, lenders will charge higher fees and interest rates, issue low credit limits, require short payback terms (meaning big monthly payments), and ask you to sign a personal guarantee. Startups will have difficulty getting approved for an unsecured business line of credit due to the fact the lenders require a minimum length of time in business.
The Pros of a Business Line of Credit
As previously mentioned, collateral is not required for this type of financing. You must however make your payments on time to maintain a good standing with the lender. If you fail, the lender will send debt collectors to secure the payment and defaulting on payments will have a negative impact on your credit score.
A line of credit is available for people to borrow only when you need it and you can use it for any reason. You will be charged interest on any funds that you borrow that are not repaid right away. Traditional bank loans on the other hand require regular payments and for the funds to be used for a specific purpose.
The processing time is quicker than the application process for a traditional bank loan which can take several weeks or months. With an unsecured line of credit, you can be approved for funding in as little as 24 hours if you have a strong credit history and credit score.
You are also free to use the credit line how you want. You can use it to purchase advertising, make utility payments, make repairs, purchase inventory for your business and more.
The Cons of a Business Line of Credit
There is a limit on how much money you can borrow. The credit limit is based on your credit history and if it is determined that it is risky, you will not be given a large amount of funding.
This type of financing also has higher interest rates for the same reason that lenders limit on how much money you can borrow. Higher interest rates mean you will have higher monthly payments if you carry a balance.
With an unsecured line of credit, it can be easy for you to overspend and abuse your credit limit because these are available to you on demand. If you do not have discipline, you may find yourself in deep trouble with a line of credit.
Applying for an Unsecured Business Line of Credit
The first step is to make sure you qualify. You must meet the lender’s minimum credit score, years in business, and annual revenue requirements.
Then you want to gather financial documents and business records for the lender to review. Some of these records include:
- Business name, address, phone number, and email address
- Type of business
- Annual revenue
- Business owner information
- Business tax returns
- Balance sheet
- Business profit and loss statement
Be sure to check with your lender before applying so that you have the appropriate documentation ready.
After that, you will choose a lender and submit your application. If you are doing it online, it will take a just a few minutes. If you want a large line of credit, you might need to apply in person.
Once you submit your application, you must wait for the approval. If you do not get approved, the lender will let you know the details of why you were not approved so you can improve your chances of being funded in the future.
Alternative Financing Options
An unsecured business line of credit is beneficial to many small business owners, but there are also other options to consider such as the following:
- Merchant cash advances
- Revolving or non-revolving line of credit
- Secured line of credit
- Bridge financing
- Equipment financing
- Inventory financing
The Bottom Line
When you are looking for financing for your business, there are many options available and an unsecured line of credit is not best for everyone. Before applying, make sure you have weighed your options so you can choose the right one for you.