An unsecured credit line raises many questions for small business owners. A popular enquiry is “who benefits most from the funding”?
This is a reasonable question considering lenders make it sound like approval’s guaranteed. If the idea of a risk-free loan with guaranteed approval sounds too good to be true; it is. There’s a grain of truth to the reasoning.
While it’s true that unsecured lending is less strict and more forgiving of bad credit than a traditional loan; there are still basic requirements a borrower has to meet in order to be approved. Taking closer look at the litmus test for approval will give you a better idea of who benefits most from the unsecured credit financing.
Liability vs. Viability: The Checks and Balances of Unsecured Credit Lines
Getting back to the original question of overall gain, it depends on two factors; the needs of your business and, to a slightly lesser degree than traditional financing, your level of borrowing risk.
While the majority of borrowers turn to unsecured loans to alleviate a cash flow problem; the lending companies have to look at both sides of the investment coin. An Unsecured credit line is lauded as being a collateral-free loan. This is true, but what businesses need to understand is; collateral-free doesn’t mean risk-free.
The risk of lending funds to an applicant increases if the loan’s unsecured. Think of collateral as insurance for your lender; without it there’s no guarantee the borrowed funds will be repaid, so approval has to be assessed using some form of credit history that proves the loan is a feasible investment. The terms and conditions vary by lender.
Credit history could mean:
• Payment history
• Evidence of other accounts
• Sales records
• Your personal/professional credit score
The first step to qualifying is to make sure that you’ve established a professional credit score.
Advice from the Experts
If your business needs unsecured credit quickly, here’s how the experts recommend you make qualification a sure thing.
• Have a previously established credit history on record with the Small Business Financial Exchange. This can be in any of the forms listed above, just don’t have too many credit balances owing. You don’t want your debt-to-income ratio to affecting your qualification.
• Credit check or no credit check; have a credit score of at least 660.
• Make sure your business has been established between 6 months and two years (depending on the lending requirements).
• Don’t make late payments.
• Review your credit report quarterly and correct any errors.
Following these approval guidelines will help you qualify faster, establish lending relationships, and maintain good credit even in emergency situations; allowing you to judge the benefit of the process for yourself.
The truth is any business that meets the qualifications of the lender can apply for an unsecured credit line. The terms and conditions vary, but these general guidelines are enough to get started. Beyond that, gauging the degree of benefit is in the eye of the beholder.