The challenge to changeMitchell Chapmanunsecured business lines of credit, personal lines of credit, financing flexibility, short-term needs
Understanding unsecured business lines of
credit
For the past several months, the mortgage industry as a whole has
become somewhat of a gloom-and-doom industry. Each day, as we read
the financial news, we learn of another major mortgage lender
closing its doors and/or suspending its loan pipeline. What were
once bread and butter products and programs, how we made our
living, have now become ancient relics and part of the good old
days. With adversity comes the opportunity for prosperity. One
income opportunity lies in the area of unsecured business lines of
credit. However, it requires a totally different mindset from that
of the traditional Mortgage Broker and loan officer. With that
comes the challenge to change.
Whether it is to meet seasonal inventory demands, remodel your
office space or any other short-term financial need, an unsecured
business line of credit is an excellent way to have extra funds
available to your business when you need them. Not unlike a credit
card, an unsecured business line of credit can provide you with the
necessary funds to complete a project or make it through a cash
flow crunch. Based on the funds you use, you pay interest on the
outstanding monthly balance only.
Many new business owners use personal lines of credit in order
to finance their companies when starting out. However, once the
business has made it through the initial growth phase, it is
advantageous to apply for an unsecured business line of credit.
While an unsecured business line of credit will have more stringent
qualifications than a mortgage and can perhaps be more difficult to
obtain than personal lines of credit, once you have one, you will
leverage your buying and borrowing power. Unsecured business lines
of credit vary in how they are set up. For example, some lenders
will require tax returns and business financials, regardless of the
amount sought. However, some lenders do not have this requirement
and their process is application only. Such credit lines can also
be based on receivables and, in some cases, inventory (although
this is less common since the value of inventory can decline very
quickly and is, therefore, seen as a greater risk to the lender).
The interest rate can also differ, since commercial rates may equal
or exceed the prime lending rate (also based on the level of risk
as perceived by the lender). Therefore, it is advisable to shop
around. While seeking an unsecured business line of credit, you
will also want to know that the interest being paid is only on the
money being borrowed, as opposed to being calculated on your
borrowing limit or in any other manner. Also, some lenders provide
special interest rates for a limited time frame such as prime minus
one for the first six months. A revolving line of credit can allow
you to always have the funding available that you need and give you
peace of mind as a business owner.
For financing flexibility, nothing beats an unsecured business
line of credit. Structured very similarly to your personal credit
cards, unsecured business lines of credit allow the principals of
approved two-plus year old business to borrow and to use only as
much money as is needed, up to the established unsecured business
line of credit limit, to stay on top of seasonal and business cycle
fluctuations. Application and repayment requirements are generally
far simpler than term loans and other common financing options.
However, an unsecured business line of credit is by no means a
panacea for a small business, nor is it entirely free of
requirements and risks. In just 60 seconds, we'll show you how to
determine if an unsecured business line of credit is right for
you.
0:54 What do you need and why?
An unsecured business line of credit is suitable for temporary,
short-term needs such as covering cash flow, purchasing supplies
and inventory, and financing receivables. For larger, long-term
investments such as new facilities, equipment and other fixed
assets, a conventional business loan or other financing mechanism
may be more appropriate.
0:48 Shop around
Procedures to qualify for, use and repay an unsecured business line
of credit vary among lenders. Nearly all will charge fees for
start-up, transactions and annual use, and will require personal
credit scores of 660-plus for each bureau with no late payments,
liens, judgments, collections or bankruptcy. However, there are no
annual reviews of how youre using your unsecured business line of
credit.
0:35 Consider the costs
An unsecured business line of credit offers the same convenience as
credit cards do, and many of the same risks. You must manage these
funds wisely to make sure you don't abuse them. Unlike loans,
interest rates on an unsecured business line of credit may vary
with the market, your balance and other factors. The interest rates
are generally in the range between the prime rate and prime plus
four; sometimes they can be higher.
0:27 Line up your qualifications
Your application for an unsecured business line of credit will not
require a business plan, tax returns or business financials. The
process is application only on a stated-income and stated-asset
basis up to $50,000 per lender. Amounts over $50,000 per lender
will require full documentation to include the last two years'
personal and business tax returns as well as the last two years'
business financial statements.
0:14 Build-in sound budgeting
Just because you qualify for an unsecured business line of credit
doesn't mean you have to use it. Good business planning, financial
management and operational skills can help you minimize the need
for an unsecured business line of credit (and, accordingly, your
debt), leaving those funds available for true emergencies.
0:06 Cash in on experience
Assistance with unsecured business lines of credit and other forms
of business financing is always available from National Business
Finance. Experienced counselors can help you through every
step--from needs assessment to applications and money management.
These services are an ideal investment in the future of your small
business.
Mitchell Chapman is the executive director of National Business
Finance. He may be reached at (954) 495-4791 or e-mail
[email protected].
