How to Obtain a Small Business Line of Credit


Like a small business line of credit, an unsecured small business line of credit gives a business access to cash that is available to be used to solve any unforeseen business expense. Unlike a small business line of credit, however, there is no separate lump-sum payment made at check opening which must subsequently be paid at monthly interval. Instead the business pays for its credit when its cash balances increase or its borrowing requirements are satisfied. With this in mind, it is often best to consider these three tips prior to obtaining an unsecured business line of credit.

The first tip relates to the cash on hand and existing customer relationships. When considering a small business line of credit, it may be desirable to allow existing accounts receivable to serve as collateral. This method allows businesses to raise money at a much lower cost than if they were to obtain traditional loans and credit cards. In most cases, however, businesses will find themselves short of cash flow as new purchases and clients are expensive to hire and maintain. Therefore, it is important to carefully consider the viability of adding accounts receivable to a business line of credit.

Businesses should also ask whether the small business line of credit they are considering will be compatible with their overall cash flow picture. For example, if a business owner utilizes a large balance on its credit card to make new purchases, the higher the balance, the more cash flow problems tend to develop. At the same time, a working capital shortage can result if the credit card is regularly recharged.

On the other hand, a working capital problem can also occur if a bank declines an application to extend credit because a business owner’s credit is bad. A working capital issue is especially important if the business operates on a cash or credit only and requires a large balance in order to conduct normal operations.

Most banks offer working capital management lines of credit, including business lines of credit, to businesses who qualify. However, many banks also offer unsecured commercial loans that do not require collateral as long as the borrowers have a steady income. Unsecured business loans may have a higher interest rate than preferred commercial loans from traditional lenders but they offer a flexible repayment schedule and variable payment amounts that businesses can use to manage their cash flow.

Business owners who wish to increase their financing options without securing additional collateral should consider applying for unsecured lines of credit through one of these lenders. Lenders may be willing to work with small businesses on a cash basis or allow them to purchase guaranteed credit cards from their lending system.

Small business line of credit options offered by traditional lenders usually have repayment terms of up to thirty years. Business owners may pay off their debt over this period, but they may also have to pay additional interest. Lenders may also choose to charge an annual service fee. Business owners can obtain shorter repayment terms through unsecured financing, but they have to pay these fees. This is because borrowers are required to repay the interest and fees only during the term of the loan. Because this type of financing has a shorter repayment period, borrowers can afford to pay a lower interest rate and service fee.