How do you qualify for an unsecured business line of credit?
An unsecured business line of credit refers to a financial loan that gives you the ultimate liberty to draw and repay funds over and over again. This type of mortgage provides a level of flexibility which a regular loan doesn’t. To put it precisely, it keeps you from the hassle of reapplying as well as from the worries of having the collateral to bag a loan. So, an unsecured business line of credit is perfect for businesses that don’t have any guarantee, i.e., real estate or inventory to present. It is the ground difference between an unsecured and secured business line of credit loan.
It works similar to how a credit card functions. With this particular type of loan, you can draw funds to a specific limit, for example – say, $100,000. As mentioned earlier, you can take out funds as many times as you like as long as you don’t compromise the credit limit. Be it for managing the cash flow or buying inventory or equipment, an unsecured business line of credit will solve any of your pressing issues. Additionally, the lender may also give you the freedom to repay your full balance early. This way you can save up on interest costs which is a plus point.
So, how exactly does it work?
It is natural to wonder how does it work now that you must have understood what an unsecured business line of credit is. If it doesn’t require any collateral, then on what basis does a lender sanction the loan? Well, that is one legit question!
It isn’t everyone’s cup of tea to be able to secure this loan. A lender gives their approval after having gone through the borrower’s personal and business creditworthiness. In addition to this, the business operations need to be stellar as well for one to secure the loan.
Considering the fact, this type of loan, unlike a secured business line of credit, is not backed by collateral, the lender automatically has a thread of risk continually lurking around. It is for this reason that an unsecured business line of credit happens to have higher interest rates as compared to the secured one.
Therefore, when you decide to apply for this loan, make sure you have weighed your decision well enough to make the final move.
Who does this line of credit suit?
For a business that requires a temporary fix or a recurring working capital influx, an unsecured business line of credit will be the perfect outlet. In addition to this, as we said earlier, it is meant for those who do not have any collateral to pledge before the lender.
A business that seems to roll on cyclical revenues, this type of loan would prove to be the most suitable one.
It is because it can provide an ongoing availability of funds owing to its revolving nature. For a clearer picture, let’s suppose you are a business of a restaurant situated at the lakeside. In summers, the house is full as everyone kind of beat the heat by making their way to your lakeside restaurant. As a result, the sales soar and soar. As winter strikes, you see your business slowing down for obvious reasons. It is during these slow times that you can seek help from this loan.
So what are the takeaways?
Well, this loan is for a business who is:
-looking for a solution for his short-term capital needs
-without a collateral
-wired into a seasonal burst of revenues.
Now comes the most important question! How do you qualify for an unsecured business line of credit?
For starters, to be able to bag one with an online lender, it is imperative to have a credit score of 600+ in addition to your business operating for at least six months and be able to generate revenue around $50,000 or more.
Since there is no requirement of collateral, the lender may require an exclusive personal guarantee coupled with your business assets with a blanket UCC filled.
Let’s now move on to what happens when it comes to borrowing it from a traditional lender!
Again, since there is no collateral involved, a traditional lender in comparison to an online lender tends to set a higher bar. They have quite strict requirements that make it a bit challenging to secure.
So, to secure it, one needs to have a credit score of 680+. It requires the business in question to be operating for at least two years or more which is a lot as compared to that of the requirements by an online lender. Speaking of the annual revenue, it should exceed $200,000. However, both of the lenders have the commonality of involving no collateral. If it is anything they require is a personal guarantee.
In case a borrower happens to be a defaulter, the lender will call out you to pay back the loan through your assets.
With an online lender, you can manage to get your loan in a matter of a few minutes. Typically, they need to connect with your business checking account to make the necessary inquiries. To be precise, they dig into and verify your business income. Following this, you can qualify for the loan within hours. Subsequently, you are more likely to receive your funds within the next two to three business days, on the other hand, it might take a week or so if you’re dealing with a traditional bank.
They might give you the option to reach out online to apply for the loan but will still ask for a paper application delivered to the bank. After having gone through the financial status and repayment capability, the funding approval and process, as said earlier, will then take a week to say the least.