A business line of credit is a popular financing option for small business owners because it comes with flexible terms. For instance, you can use the funding for pretty much any business expense, and you only pay interest for the amount you withdraw.
Plus, with an unsecured credit line, there are no collateral requirements.
Keep reading to find out more about how you can get a business line of credit without putting up collateral.
How Does a Business Line of Credit Work?
To understand how a business line of credit works, think about a business credit card.
A business line of credit is a type of business financing where you get access to a set credit limit. The credit line allows you to withdraw money as needed and make repayments on the loan amount borrowed.
Then, since it’s a revolving credit, you can borrow again up to your credit limit.
So, it’s not your typical short-term loan where you receive a lump sum amount and pay it back with set monthly payments. A line of credit offers you the flexibility to only borrow the funds you need as business expenses come up.
The great thing is you’re only charged interest on the amount you withdraw. So, if you don’t need the money yet, you don’t have to take it out.
But it gives you peace of mind knowing you have cash in case you need immediate access to capital.
What Is a Business Line of Credit For?
Small business owners typically use funds from lines of credit as working capital. Working capital refers to the money you use to cover operating expenses, such as rent, utilities, and buying inventory.
For startups and new businesses, having access to capital in the early days is critical to starting and growing their companies.
But even established businesses need cash sometimes. For instance, companies that sell on credit may use lines of credit to cover cash flow gaps when customer payments are delayed.
Seasonal businesses might also use credit lines to stay afloat during the off-season. They may use the funds to pay their workers or keep up with rent and utilities. In addition, a business line of credit allows entrepreneurs to hire more people or stock up on inventory to prepare for the upcoming peak season.
One of the benefits of a line of credit is that you can use it for any business purpose. Unlike other small business loans, such as equipment financing, you’re not contractually obligated to use the funds for a specific purpose.
It’s also a great way to establish a credit profile for your company. Many entrepreneurs take out a line of credit and pay it off to build a credit history and relationship with lenders.
How Much Money Can You Get With a Business Line of Credit?
The amount of money you receive with a business line of credit depends on the lender. Your credit score and income also affect the credit limit you get approved for. Whether you put up collateral or not may affect your funding as well.
If you’re applying with a traditional bank, unsecured credit lines typically go up to $100,000. For secured lines of credit, the amount you can borrow depends on the value of your collateral.
If you apply through the Small Business Administration (SBA) like the SBA 7(a) program, loans of up to $25,000 don’t require collateral. But if you’re looking to borrow more than $350,000, the SBA requires that the lender collateralize the loan.
Plus, the loan application process for bank and SBA loans can be time-consuming because they have strict requirements. That’s where alternative financing options come in. Online lenders often have fewer requirements and a quicker turnaround. In addition, online business loans offer larger amounts without asking for collateral.
At Clarify Capital, for example, you can receive up to $750,000 capital through a business line of credit. Since we work with more than 75 lenders, you get the best rate. And all types of businesses can qualify. Contact us today and speak to a Clarify advisor to explore your financing options.
Can You Get a Business Line of Credit Without Collateral?
Yes, you can get approved for a business line of credit without putting up collateral. Many financial institutions like banks, credit unions, and SBA lenders offer unsecured credit lines. Alternative lenders offer different types of financing with no collateral requirements as well.
Secured vs. Unsecured Business Line of Credit
Before you start applying for lines of credit, let’s discuss the difference between unsecured and secured loans. Basically, a secured business line of credit requires a borrower to pledge assets as collateral to secure the loan.
Personal assets can include a home, car, or art. The collateral could also be in the form of business assets like commercial real estate, inventory, or equipment.
As security for the loan, the lender would then have the authority to seize the assets in case the borrower can’t pay back the line of credit. Lenders ask for collateral to lower their risk, but it also helps borrowers because they can typically negotiate lower interest rates.
In contrast, unsecured business lines of credit allow business owners to borrow money without having to put up assets to secure the loan. Borrowers are evaluated based on their creditworthiness, their business income, and other factors like how long their company has been operating.
To minimize their risk, lenders may ask for a personal guarantee or a general lien.
About Personal Guarantees and General Liens
Lenders may include conditions on unsecured loans, such as personal guarantees and general liens to protect themselves in case borrowers can’t pay back the loan. A personal guarantee, as the name implies, means you agree to personally repay the loan if your company can’t. So, the lender may not be able to seize your assets if you don’t pay, but signing a guarantee gives them the right to sue you to collect on the debt.
On the other hand, signing a general lien means you agree to give the lender the right to seize your personal or business property as compensation for the unpaid debt. In essence, your assets become collateral.
Both a personal guarantee and a general lien increase the risk of getting your assets seized in case you can’t repay your loan. That’s why it’s important to understand the terms of your loans before signing on the dotted line.
How to Get a Business Line of Credit Without Collateral
There are many financing options available to all types of businesses. Whether you’re a new business or an established company, you’re sure to find one that suits your needs.
Here are a few tips on how to get unsecured business loans.
1. Gather the Information You Need to Apply
To make sure the application process goes smoothly, prepare the information lenders may ask to see, including:
Your credit score: Your personal credit score and business credit score represent your creditworthiness. That’s why it’s best to regularly monitor your credit score so you can try to improve it or correct errors if there are any.
Time in business: Lenders assess their risk of lending to you based on your years of operation. Some lenders may require that your company be operational for at least two years. But online lenders with less strict requirements will accept your application if your business has been operating for at least six months.
Annual revenue: Lenders would like to be assured that you have the cash flow to pay back your loan. So, they typically require you to have a minimum monthly revenue of at least $10,000. Reach out to the lender and ask about their requirements so you know what to expect.
In addition, make sure you have the following documents on hand:
- Identification documents, such as a driver’s license, Employer Identification Number (EIN), and Social Security Number (SSN)
- Personal and business bank statements
- Personal and business tax returns
- Business financial statements, such as balance sheets and profit and loss (P&L) statements
- Business plan
2. Determine the Amount You Need to Borrow
Whenever you plan to apply for a loan, know how much capital your business needs. Knowing this can help you decide on which type of loan to apply for and how to prepare.
This is because loan terms and eligibility requirements can vary.
While you should be careful not to borrow too much, it’s also critical not to borrow less than what you actually need. Being short on capital as you’re trying to implement a project can leave you with cash flow gaps with nothing to fall back on.
Most credit lines are revolving, but you have a set credit limit. This means you can only withdraw up to your limit. So, make sure you borrow enough to cover your expenses.
3. Find a Lender
You can start looking for a line of credit lender with your bank. But like we talked about, traditional banks typically have stricter requirements for business loans. Focusing on having a relationship with just one financial institution also limits your choices.
Expand your search to compare requirements, rates, and terms. Ask for recommendations from other business owners for lenders.
Another option is to work with professionals like Clarify Capital. You get a dedicated advisor to help you find the best suitable lender for your needs. And you can access a marketplace of lenders without contacting them individually.
4. Apply for a Business Line of Credit
So, you know how much to borrow and you’ve also prepared all the documents you need. Now, you’re ready to apply for the line of credit. Depending on the lender you choose, the application process may take a few days or a few weeks.
Online lenders typically have a quick turnaround time, with borrowers getting funded within 24 hours. On the other hand, banks and credit unions may take a few days to a week to let you know about your application.
Find the Best Business Line of Credit for You With Clarify Capital
Starting and growing a business is difficult without capital. Luckily, there are many financing options available for small business owners. However, navigating the process of applying for a loan can take time.
As a business owner, you don’t have time to spare to research loan requirements for every lender. Understanding the terms of your loans is equally important to make sure you’re getting the best rates. Clarify can help you with all of this.
Don’t go it alone. Contact us today and talk to a Clarify advisor to find the best business line of credit for you.