If you’re in need of some quick cash-flow, there are a few options at your disposal. Find out why an unsecured line of credit is among the most promising.
Whether you’re starting a new business or growing an existing one, you need to have a stable positive cash flow. It’s the lifeblood of your business that allows you to finance everyday operations and growth-oriented projects.
It’s also true that any business can experience a cash crunch at some point. A business line of credit acts as a safety net for businesses facing cash flow disruptions. It could come in the form of an emergency repair or an unexpected shortfall in available cash. In these situations, unexpected expenses can arise, and having a business line of credit provides a financial cushion to handle unforeseen costs and maintain stability. You get the idea.
When and if this should happen, an unsecured business line of credit can get you unstuck at a reasonable cost. It allows you to access funds quickly to cover expenses and manage cash flow during challenging periods. Let’s take a closer look at how it works.
What Is an Unsecured Line of Credit?
Simply put, an unsecured LOC is a form of lending that doesn’t require you to put up anything as collateral, therefore unsecured. You may also know that a credit card account is also unsecured.
Unlike a loan, you don’t get the funds in a lump sum. You tap into the line of credit when you need the money up to a limit, known as your approved credit limit or borrowing limit. This means you can draw funds up to this pre-approved amount as needed. After paying some or all of what you owe, you can reuse the funds. Basically, you draw whatever amount of money you need and pay it back whenever a partial payment is due (usually accrued interest). Some lenders may charge a draw fee each time you access funds from your line of credit. In the meantime, you can keep drawing more money up to the limit as long as you keep your account in good standing.
This type of line of credit is considered a revolving line, similar to how a credit card works, allowing you to borrow, repay, and borrow again up to your borrowing limit without reapplying. You might’ve heard it called by the other name of ‘revolving credit’. Because of its convenience, this is one of the first choices for businesses that need ongoing external financing. Unsecured lines of credit often come with a variable interest rate, which can fluctuate based on market conditions and the lender’s benchmark rate.
For comparison, a non revolving line allows a one-time draw up to a fixed borrowing limit and does not replenish as you repay.
Business Loan vs Business Line of Credit
When it comes to financing your business, understanding the difference between a business loan and a business line of credit can help you make the right choice for your needs. A business loan typically provides a lump sum of money upfront, which is repaid over a fixed period with a set interest rate. This type of funding is ideal for large, one-time expenses such as purchasing equipment, expanding your premises, or refinancing existing debt. The repayment schedule is predictable, but you’ll pay interest on the entire loan amount, regardless of how much you use.
In contrast, a business line of credit offers much more flexibility. With a business line of credit, you’re approved for a revolving credit limit that you can draw from as needed. This makes it an excellent tool for managing cash flow fluctuations, covering operational expenses, or taking advantage of unexpected opportunities. You only pay interest on the funds you actually use, not the entire credit limit, which can help keep borrowing costs down. Additionally, a business line of credit can be easier to access repeatedly, as long as you maintain a good credit history and keep your account in good standing.
When deciding between a business loan and a business line of credit, consider your business’s financial situation, the purpose of the funds, and your ability to manage repayments. If you need ongoing access to funds to cover day-to-day expenses or seasonal cash flow gaps, a business line of credit may be the better option. For larger, one-off investments, a business loan might be more suitable. Both credit offers have their place in a well-rounded business financing strategy.
1. You Don’t Need a Perfect Track Record
Major banks have high standards for loan applications. They scrutinise every detail of your business to make sure you’ll be able to pay back the loan. Lenders will review your financial history, annual revenue, and financial statements—including income statements—to assess your eligibility. Without collateral, it can be quite hard to get a regular bank loan.
3rd party lenders, on the other hand, are much less demanding. Many of them will listen to you and consider your situations even if your credit history isn’t ideal. Online lenders may have more flexible requirements and faster funding, but may still require personal guarantees for approval. Of course, those with a good credit history will be able to negotiate a better deal. The interest rate has an inverse relation to the risk that a lender has to assume.
To get the best possible deal, it’s a good idea to seek help from a business advisor. They can help you build a credit profile with an eye towards more favourable loan terms. Demonstrating your business’s ability to repay can also improve your terms. Moreover, they can make sure that the application process is fast and smooth.
For example, a two-year-old business managed to get $70,000 in just 10 days after applying. After the advisor helped them clean up their credit profile, they managed to get a no-doc unsecured line of credit with ease.
2. It’s Easily Accessible
The attraction of an unsecured business line of credit is that you can have the money whenever you need it. Businesses access lines of credit through various financial institutions, including banks, credit unions, and online lenders. Moreover, most lenders have digitised fund management and transfers for easy access.
With a line of credit, you can avoid cash flow mishaps and bottlenecks. In addition, you can react quickly to both unexpected setbacks and profitable opportunities. An unsecured business line of credit serves as a flexible funding solution for managing operational needs.
3. You Can Repay Whenever You Want
When you take out a term loan, there’s always a fixed repayment schedule with set monthly payments. Term loans require you to follow this structure, and if you miss the deadline, you’ll have to pay late fees or penalties. While some loans may allow early repayment, there can often be charges or restrictions.
This isn’t the case with an unsecured line of credit. These products offer flexible repayment terms, allowing you to manage your cash flow more effectively compared to the rigid structure of term loans. You can pay down the credit line so that you can access more money whenever you want. What’s more, you can repay it in full without any additional fees—early repayment is typically allowed with no penalties. And if you can’t repay in full, you don’t have to. As long as you pay the interest rate and fees as agreed, you get all the flexibility with your outstanding balance.
4. You Only Pay for What You Use
A term loan comes with an interest rate on the full amount of the loan. If you end up not using all the money borrowed, you still pay on everything.
With an unsecured business line of credit, you only pay interest on the funds that you access. In the long run, this can prove to be a much more cost-effective financing option. However, some lenders may charge an annual fee or an origination fee for setting up and maintaining the line of credit. Unsecured business lines of credit may also come with higher interest rates compared to secured options, due to the increased risk for lenders.
It means that you have full control over the money that you borrow. If you’ve overestimated the amount that you need, you won’t face additional fees for borrowing money that you don’t use. When comparing the costs of borrowing money, a business line of credit can be more flexible than personal loans, which often have fixed interest rates and lump sum disbursements.
5. Your Credit Line Grows with Your Business
Many business owners decide to go with an unsecured line of credit for the long term. It’s always a good idea to have some spare cash for when you need it. And since you don’t have to pay for it if you don’t use it, there’s really nothing to lose here.
Better yet, your borrowing power grows with your business. Secured lines and secured business lines require collateral, often offering higher borrowing limits and lower interest rates, while unsecured business lines and unsecured lines do not require collateral but may have stricter eligibility requirements and lower limits. Small businesses often use lines of credit to manage seasonal fluctuations, address cash flow issues, and for purchasing inventory as their needs grow. In addition, you can always work to improve your standing and negotiate a better deal with the lender.
Effective Loan Management: Making the Most of Your Credit Line
Maximizing the benefits of your business line of credit starts with effective loan management. First, take the time to fully understand the terms and conditions of your credit line, including the interest rate, repayment schedule, and any associated fees. This knowledge will help you avoid surprises and make informed decisions about when and how much to borrow.
It’s wise to only draw funds when necessary and to repay borrowed amounts as soon as possible to minimize interest charges. Regularly reviewing your credit limit and adjusting it based on your business’s needs can help prevent overextending your finances. If your business qualifies, you might also consider the differences between a secured line and an unsecured line. While a secured line of credit may offer a lower interest rate and higher credit limit, an unsecured line provides greater flexibility and doesn’t require collateral.
By managing your business line of credit responsibly, you can maintain a healthy cash flow, build a positive credit history, and support your business’s financial stability. Staying proactive about repayments and monitoring your account activity will ensure that your line of credit remains a valuable financial resource for your business, both now and in the future.
Building Business Credit for the Future
Establishing and maintaining strong business credit is essential for small business owners who want to access the best financing options, including business lines of credit. A solid business credit profile opens the door to higher credit limits, lower interest rates, and more favorable terms on business loans and lines of credit.
To build your business credit, start by making timely payments on all your financial obligations, including business credit cards, lines of credit, and small business loans. Keep your credit utilization low by only using a portion of your available credit, and regularly review your credit reports to catch and correct any errors. Opening a business credit card or taking out a small business loan can also help demonstrate your business’s ability to manage credit responsibly.
As your business grows, continue to monitor your credit history and adjust your financial strategies to maintain a positive profile. A strong credit history not only helps you weather cash flow challenges but also provides the financial resources needed to pursue growth initiatives and respond to new opportunities. By prioritizing business credit building, you’ll set your company up for long-term success and increased financial flexibility, ensuring you’re ready for whatever the future holds.
The Bottom Line
You can now see why many business owners decide to go with an unsecured business line of credit. It’s an easily accessible option that can help you finance your business without severely affecting your cash flow.
Better yet, it’s among the most cost-effective financing options if properly managed. Although the interest rate is higher, you don’t have to pay interest until you use the funds. And then only on the amount that you owe. As a result, you can direct more money towards growing your business.
Of course, there are still a few additional things that you should know about an unsecured LOC before you make your final decision. And we can help you with this. For more details about this financing option, go ahead and visit our website.
