The Importance of Unsecured Lines of Credit for Businesses
There are times when small businesses need additional cash, and unsecured business lines of credit may provide liquidity for short periods of time. As business owners evaluate their credit options, understanding lines of credit may be important when finding the right credit option for the circumstances.
How to Qualify
Businesses that want to qualify for unsecured business lines of credit may need to take steps prior to applying for the loan to help lenders feel more comfortable approving the loan. Developing a relationship with a business banker can be beneficial, combined with maintaining positive bank balances and making all payments on time. Having a specific business plan that includes details about how credit will be used can give the lender a clearer picture of the credit risk. Business owners can also keep their personal credit scores as high as possible, as personal credit history may reflect on the business.
During the term of the loan, be sure the company meets the requirements, or covenants, set by the lending institution. Meeting the prescribed standards may put the company in the position to ask for a larger line of credit or better terms in the future.
Benefits to the Business
With unsecured business lines of credit, the business is typically not required to pledge collateral to repay the loan, which can be helpful for companies with few fixed assets, or that have already pledged those assets against long term loans. Lines of credit do not typically have monthly payments, which can save cashflow during periods when the loan is needed. The business also pays only for the funds that are in use, and not for the remaining balance of available credit.
Businesses may use line of credit funds for multiple reasons, rather than for only the stated reason on the loan application. The flexible nature of a line of credit can allow the business owner to manage cash flows and minimize the times when additional cash is needed. A credit line may also be less expensive than other forms of short-term credit, including credit cards, factoring and merchant cash advances.
When to Apply
As with many types of financing, the best time to apply for unsecured business lines of credit may be when the funds are not immediately needed. Building business and banking relationships to set up credit availability during periods of positive cash flow and higher cash balances can put the company in a stronger position to take advantage of opportunities that require additional cash or credit in the future.