Are you looking to grow your business?
Well, it goes without saying that "it takes money to make money." That's one reason that an unsecured business line of credit is the secret weapon of many successful companies. Business capital is the lifeblood of successful ventures, businesses die without it.
So to start, we'll explain what an unsecured business line of credit is. Later in this article we'll explain all of the advantages unsecured revolving lines of business credit have over other types of business loans, and we'll talk about where you can find these loans and what you need to do to get them without a problem.
So let's get started.
What Is An Unsecured Business Line of Credit?
A business line of credit is similar in many ways to personal lines of credit like home equity loans or credit cards. Similar in the sense that you have access to a certain amount of capital - let's say, $100,000 - but with the line of credit you don't incur any interest or have to make payments until you use the entirety of the funds.
An unsecured business line of credit does not have to be backed with collateral such as inventory, commercial property, or company receivables in order to secure the line of credit. In other words, you don't have to worry about losing part of your business in the unfortunate case that you have trouble paying back the line of credit.
Business lines of credit are often called "revolving" lines of credit because you have continual access to it. You can return to your line of credit again and again for the funds your business needs. For example, if you have a $100,000 line of business credit and you take out $40,000, you will still be able to access the remaining $60,000 whenever you need to. When and if you pay down that $40,000 to $0, you will have access to the entire $100,000 for your business needs without having to apply and be approved again.
An unsecured business line of credit will usually have a lower interest rate than an unsecured term loan. The closing costs will often be lower too, but, if you use more than your designated borrowing limit or are late on a payment, the banks may raise your interest rate sharply.
Best Time To Apply For An Unsecured Business Line of Credit
When deciding whether to extend a business line of credit, lenders like to see liquidity. For that reason, if you're running a business that has a healthy cash flow, now is the time to apply for an unsecured line of credit. Being able to show your liquidity to the banks now is important, it's a key factor in getting approved, especially if you're applying for a small business line of credit. Basically, you should apply for your business line of credit BEFORE you need it, not when they are able to see your business has a problem with funding. Because after all....
"A bank is a place where they lend you an umbrella in fair weather and ask for it back when it begins to rain."
- Robert Frost
A business line of credit should be looked at as your insurance policy in case you need cash in a crunch to keep your business humming along without a hitch. An unsecured business credit line is often referred to as an operating line of credit, because that is what it helps your business do, continue operating as usual. Being able to finance ongoing operating expenses like your payroll, and be prepared in case of short-term cash flow problems can be the difference between growing your business into an empire or shutting the doors for good.
That's why it's important not to tie up your line of credit paying for long-term investments like buying real estate, that is not the purpose of it. If you misuse your line of credit in this way you won’t have access to funds in an emergency, which is the whole point of a business line of credit.
Benefits of Obtaining an Unsecured Business Line of Credit:
- Emergency Funds On Hand: Gives your business a financial cushion. Access to available funding at all times can help your business weather a financial storm and regain balance without suffering major damage to the business.
- Payment Flexibility: With an unsecured business line of credit you aren't burdened with fixed monthly payment and have much more flexibility in the manner you'd like to pay the loan down. You can choose to pay a minimum percentage of the loan balance, pay more than the minimum due or pay the balance down completely.
- Helps Establish Business Credit: Using this credit can help you establish more business credit history, in turn making more business financing available in the future. Banks love to lend to businesses with a history of paying back loans. In fact, your business can began establishing its own credit record as an entity, separating it from the your personal credit record.
Different Kinds of Unsecured Business Credit Lines
You should know that there are options when looking for credit lenders. An unsecured business line of credit can come in the traditional and non-traditional form.
Traditional Lenders: The traditional lender of course would be the banks, but sometimes it's very difficult for small businesses to deal with the traditional banks because they often want small business lines of credit backed by collateral (asset-based lending). Banks are not in the business of putting much faith in your company if you aren't running a major corporation.
Also, the traditional bank line of credit will require that you submit a substantial amount of financial documentation in order to qualify for a revolving line of credit and they also require a financial review of your business every year. This can be quite a headache, even if you are able to get the line of credit you have to continually prove that your business deserves to keep it. Because of the strict requirements that need to be met, some businesses opt for the easier cash advance, but they usually end up worse for it. In the end, these are very stable financing solutions for your business and if you have the financial documentation to get the traditional line of credit it can be a great source of financial backing for your business.
Non-traditional Lenders: The business credit card is an option that more businesses are starting to turn to for a few reasons. Businesses credit cards (also known as corporate credit cards) are easier to obtain, especially for startup and small businesses that would have trouble getting a traditional unsecured business line of credit.
Business credit cards can be obtained without the need of excessive financial documentation such as personal tax returns, credit references, business tax returns, bank account information, business registration documents, etc., and you will not be subject to any annual reviews. The only real qualification is a great FICO score. The disadvantages to using corporate credit cards is that it's not truly a business line of credit in the sense that the loan will affect your personal credit instead of falling under the umbrella of your business.
Another disadvantage to using business credit cards is that the interest rates can jump, many will offer a 0% APR for the first 12 months or so but you need to be sure that your rate is still advantageous after the introductory period.
The Risk Of Misusing an Unsecured Business Line of Credit
While an unsecured business line of credit gives your business financial flexibility and convenience, there are also a couple disadvantages that you should take note of. The biggest disadvantage of having an unsecured line of credit is when the line of credit is misused or mishandled.
In the wrong hands, an unsecured line of business credit can turn into a vehicle for accumulating debt. Because there are no fixed monthly payments, many business owners elect to only pay down the minimum monthly payments on their outstanding credit balances. This compound interest adds up quickly, especially when a company holds a sizable balance.
Also, you need to remember that unsecured business line of credit without personal guarantee doesn't mean you won't lose anything if you don't pay the line of credit back. If you don't pay off your line of credit you can destroy your company's ability to operate in the business ecosystem in the future. Unsecured business line of credit lenders will report what you do, whether it's good or bad.
If you or your business become a credit default threat you can't realistically expect to get another business loan without paying extremely high rates. This will make growing your business more difficult, and even hamper your personal finances. Getting an unsecured business line of credit with bad credit is next to impossible, so if you have a line of credit it is extremely important to stay in good standings.
An Alternative Unsecured Business Loan If You're Denied a Line of Credit
Peer-to-peer lending companies are making loans available to people who have been denied an unsecured business line of credit. P2P loans are not revolving lines of credit though, they are term loans that often come at lower interest rates than the term loans you'd be offered from a traditional bank.
Unlike cash advance loans, peer-to-peer loans from the major U.S. lenders don't have a prepayment fee or any hidden fees. You can apply in under 5 minutes and receive multiple quotes. With billions of dollars of loans under their belts, both Prosper and Lending Club have extremely high recommendations coming from past clients.
This is how peer-to-peer loans differ from unsecured business lines of credit:
- They come with a fixed monthly payment schedule.
- The major companies usually charge an origination fee on your loan between 1-6%.
- These are term loans - usually between 1-5 years.
- They don't service loans in the entire U.S. yet.
- They don't need appraisals, business plans or projections about your company.
- They don't require title insurance.
These loans are great for expanding your business, buying inventory, working capital, purchasing equipment, refinancing and much more. So if an unsecured business line of credit doesn't fit your businesses exact needs or if you're denied, you still have business financing options.
Unsecured Business Line of Credit for Real Estate Video
If You Are Interested In Peer-to-Peer Business Loans:
If you would like to apply for a peer-to-peer loan from one of the top 2 U.S. peer-to-peer lending companies you can do that here. Peer-to-peer lending is an exciting new option for borrowers and investors, to receive a loan quote from Lending Club or Prosper does not affect your credit. Choose from the options below.
- Check rates for a personal loan up to $35,000 from Avant
- Compare rates for a personal loan up to $35,000 from Lending Club
- Check rates for a business loan up to $300,000 from Lending Club
- Invest In P2P Loans Through Lending Club
Your financial opportunities have never been greater with the growth of peer-to-peer lenders in the U.S., see how you can take advantage of it today.