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A Guide to Qualifying for Unsecured Business Credit Lines

Qualifying for Unsecured Business Credit Lines

Business owners can take advantage of new business opportunities or cover any short-term expenses with an unsecured business line of credit. You don’t have to give up any collateral, such as machinery or receivables, to get this type of credit line.

It depends on the lender, but you may need a certain credit score for businesses, as well as a certain number of years in business. Various banks and online lenders offer this loan type of startup and existing businesses to flourish in the market. Our plans are totally client-friendly, and you will not face any hurdles in applying for them. However, here’s what you ought to know about unsecured business credit.

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Overview of Unsecured Business Credit Lines

There are many lending institutions that extend unsecured business lines of credit in the form of loans. These are the two most popular types of unsecured business loans:

  • Traditional: It takes a lot of documentation for a business to qualify for a traditional unsecured business line of credit. There are several kinds of documentation required, including personal tax returns, business tax returns, bank account information, and documentation used for business registration. To maintain the traditional unsecured credit line, the business must also complete an annual review.
  • Nontraditional: The business can use credit cards in its name to obtain unsecured business lines of credit. Credit cards for businesses provide businesses with fast access to money and payment flexibility. You qualify for a nontraditional unsecured business line of credit based on your FICO score, require less documentation, and do not have to submit an annual report.

How Unsecured Business Credit Lines Work?

You must enter information about your business when applying for an unsecured line of credit. You may also have to provide some personal information if you are applying for an unsecured line of credit with a lender.

Upon approval, you will receive a credit limit you can use as needed for a given period. If you use a business checking account or small business credit card, you can withdraw as much or as little as you require for your business.

In contrast to a traditional small business loan, you will only incur interest on the amount you borrow. To repay your debt, you typically make monthly or weekly payments.

Secured VS Unsecured Business Credit Lines 

The collateral that is put up when a borrower takes out a secured line of credit constitutes a security deposit. Collateral can take the form of property, inventory, or equipment.

In traditional financial institutions, such as banks or credit unions, secured credit lines may be preferred over unsecured credit lines. Since lenders are taking on less risk when giving out secured credit lines, there may be a higher credit limit and a lower interest rate.

Businesses with poor business credit may only qualify for secured credit lines because of the inherent risks of short track records and weak credit profiles.

An unsecured line of credit doesn’t demand collateral, while a secured line does.

Lenders are more likely to charge higher interest rates on unsecured lines of credit because they assume more risk. The usage of a credit card can be for personal or business reasons. For businesses with extensive experience and stellar credit reports, unsecured business credit lines at reasonable rates are more likely to be approved.

Business lines of credit vs. 0% business credit cards

In theory, business credit cards are lines of credit, but they differ from traditional business loans in several ways.

When you draw on your business line of credit, you receive actual cash in your bank account. It can be secured by collateral and provides a higher credit limit. With a business credit card, you can get cash, but there are fees (usually referred to as cash advance fees) and a higher interest rate.

While traditional lines of credit do not offer rewards or cash back for spending, business credit cards can. The rewards typically relate to business expenses like office supplies, gas, internet, and cable. After signing up for the card, you may also be able to take advantage of 0% interest promotions.

Smaller businesses without established finances, as well as newer businesses with smaller ongoing expenses, should use business credit cards, while more mature companies should use business lines of credit.

Ways To Qualify for Business Lines of Credit 

A lender will examine several factors about your business and you personally when you apply for an unsecured business line of credit. These are the following:

Credit report

Credit scores of both your personal and business credit are required for unsecured business lines of credit.

There are two types of business credit scores, which range from zero to 100. An excellent credit score of 700 or more determines the type of loan a business can apply for.

Besides applications for loans and history of loan payments, a business credit report also contains information about loan payments.

You may also be eligible for certain terms based on your personal credit score, depending on the type of credit line you’re applying for.

Low credit scores don’t mean you can’t get a line of credit, just that you may have to secure it with collateral at first.

Bank account

A good-standing business bank account is one of the main requirements for applying for an unsecured business line of credit.

The average daily balance of the account is also considered by lenders in addition to the account’s overall status. Companies that frequently overdraw their accounts or bounce checks tend to be looked down upon by lenders.

Generally, lenders prefer business accounts with positive cash flow, since this assures them that the business will make a profit on a regular basis.

Financial history

Lenders often require businesses applying for unsecured credit lines to show a financial history of at least two years. This ensures the lender that the business will continue to operate without folding.

Several documents can be used to prove a company’s financial standing, including tax returns, bank statements, and financial statements.

Applying for a Line of Credit

Financial records and documents demonstrating creditworthiness are required by most lenders when applying for a term loan. Make sure you find out what documentation a lender requires before your first meeting.

Online lenders are less likely to require additional paperwork than traditional lenders like banks and credit unions. The basic information you’ll need to apply includes the following:

  • Business License
  • Tax Returns
  • Bank statements for the past four months
  • Bank account for a business
  • P&L, AR, AP, Cash Flow, etc., are all standard financial documents.

The lender will ask you about the specifics of your company’s financial position, so any documents you don’t understand should be discussed with a trusted advisor, accountant, or CPA. So you understand exactly what the documents reveal about your business’s financial health.

Generally, lenders will not grant a LOC to:

  • Startups or idea-stage companies
  • Recover losses from past operations
  • Take care of immediate expenses that won’t necessarily lead to profits

LOCs are available to businesses that can demonstrate the following:

  • Additional revenue generation is profitable for the business.
  • An organization’s management understands its financial aspects.
  • To qualify for a LOC, the business must demonstrate that it is able to make periodic payments and have a plan for how the funds will be used.

Understanding Lines of Credit

It is essential that you fully understand the qualifications, loan conditions, interest rates, and fees of your chosen lender before opening a line of credit.

  • Set-up fees, transaction fees, and annual fees may apply. It is possible for a bank to charge an opening fee of $150 (or more) for the first 12 months of an account, but then charge an annual fee at the beginning of the second year.
  • Most lenders require businesses to pay down their unpaid LOC balance to $0 at some point during the year, often for at least 30 days. A lender is assured the borrower is generating sufficient cash flow to operate independently of the LOC and is not reliant on the financing for cash flow or capital.
  • Lenders may have the right to call any LOC due to the unpredictable nature of the market. This would result in the LOC being reduced to zero without warning if the full balance is not paid. Business owners should always be prepared to replace the line of credit or scale back to a loss of credit if their business relies on it.

3 Tips on Keeping a LOC

  1. Don’t let your average running balance get close to your credit limit by maintaining a regular payment schedule. By doing this, you will demonstrate to your lender that you understand the value and flexibility of the LOC.
  2. Covering operating losses with a LOC is not the best option – it will make repayment difficult.
  3. If you want to apply for a LOC at the right time, think strategically about your capital needs for the year. Cash flow is one of the factors that influence a lender’s decision to grant a credit line to a business.

Final Words!

You can fund growth and profit-generating projects with an unsecured business line of credit. As well as covering gaps in normal cash cycles, they can be used to make seasonal businesses operational year-round, and they can fund expenses that add value and enhance success in conjunction with other financial instruments. In any case, BitX Funding can assist you in making the right decision about this type of loan. Contact us at any time if you want to open new doors to business success.


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