Is an Unsecured Line of Credit Right for Your Small Business?

Is an Unsecured Line of Credit Right for Your Small Business?

Unsecured Line of Credit

Whether it’s new equipment you need or a new employee you want to hire, at some point in the business cycle, your small business will need some cash. That’s when third-party financing, such as business loans, come into consideration, as a means for your small business to overcome the challenging phase, or to simply continue growing.

While a secured business loan requires obtaining collateral, usually in the form of real estate, unsecured business loans won’t require making such a pledge, meaning that if the default occurs, the lender won’t be able to claim your property. While having higher interest rates, unsecured business loans are easier to apply for and more straightforward, but the credit scores you need to meet are higher than for a secured credit line.

Types of unsecured lines of credit

 

When considering applying for an unsecured line of credit, there are three basic types of loans you need to be familiar with.

A revolving loan will grant you a certain credit limit, which you can spend when you need to, repay, and if needed, spend again, as long as you are paying the commitment fee. Another type of unsecured loan is a term loan, which comes with a fixed amount and a repayment schedule with fixed installments, and a fixed or floating interest rate. You can also get an unsecured consolidation loan for purposes such as credit card debt or other personal debt.

Pros and Cons of unsecured lines of credit

 Pros

The most distinctive feature of unsecured lines of credit is that you won’t have to pledge your personal or business property in order to get some cash. Sometimes, such a difference is enough to make this line of credit beneficial for you. It may be the case that you don’t have enough property to satisfy your lender, you don’t want your property to get undervalued by a bank, or you just don’t want to make such a pledge – making unsecured lines of credit your first and only option.

The application process for an unsecured line of credit tends to be faster and more straightforward. This type of application is much easier to process, as you won’t need to provide information on your property, neither wait for its evaluation, so you can get the decision and your funds shortly after the application.

Flexible repayment options, and an opportunity to borrow only the sum of money you actually need, while having constant access to available funds, are also some of the perks valued by many small business owners who opt for unsecured business loans. It’s a big plus that, as long as your balance is being paid, you can reuse the credit, without having to constantly re-apply.

Cons

Cons of unsecured lines of credit

Still, unsecured credit lines also have their downsides, which should be carefully addressed before making any kind of decision.

Higher interest rates. This type of loan will usually cost you more than a secured loan. Lower risk for you, in terms of not guaranteeing your loan with a property pledge, means a higher risk for the lender and comes with higher interest rates, increasing your individual loan payments and making them less affordable.

High requirements. Offering no collateral as a guarantee doesn’t mean the lender won’t ask for some kind of security from your side. The lender will usually have your business meet stricter qualifications – you will need a high credit score and a history of timely payments, to ensure that you are responsible when borrowing. Both your personal and business records will be checked, and your revenue reports, cash flow statements, and years doing business will be also taken into consideration.

Who usually qualifies for?

 

This line of credit usually works well with small businesses which have temporary or periodic working capital needs, or which don’t have the available collateral to pledge. It’s an ideal solution for those who need cash quickly and can pay it back promptly.

To qualify for unsecured lines of credit, you will need to meet certain benchmark criteria. You’re more likely to be approved a loan if your company has operated over a year in business. OnDeck requires a credit score of over  500 and $100K in gross annual revenue but doesn’t serve small businesses in a number of industries, such as adult entertainment, drug dispensaries, rooming and boarding houses, etc.

So, if you are in a need of some cash to get your business back on its feet, or to keep on growing, make sure to measure all your pros and cons carefully in order to make a well-informed decision.

Your Word

If you have any comment regarding this article or the line of credit in general, please use the comment box below.

 

 

About Author: I’m Willy Beamen, contributor for Bizzmarkblog with 15 years of experience from Sydney, Australia. My work is mostly focused on helping small business owners and local startups to get off the ground and expand.

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