Qualifying For an Unsecured Business Line of Credit
If you’re looking for financing for your business, an unsecured business line of credit (LOC) could be a great option. An unsecured business LOC can be used for any purpose such as working capital or financing inventory or equipment purchases. The interest rate on an unsecured business LOC is usually lower than the interest rate on a personal loan, and the interest rate is usually variable. This type of loan doesn’t require you to put up any collateral, making it a good choice for small businesses that may not have the assets to secure a loan. Here’s what you need to know about qualifying for an unsecured business LOC:
- Your business must be in good standing with the credit bureau. Most lenders will require at least 600 or above on your personal credit report. You can find out what your score is by contacting Experian, TransUnion, Equifax – all three major agencies provide free reports online through their websites every year, so there’s no need to pay an extra fee.
- You must have a history of timely payments on your personal credit card and other loans, as well as no negative marks from creditors or collections accounts.
- Your personal credit card use should reflect paying off balances each month without accruing interest charges or carrying large balances from month-to-month in order to qualify for an unsecured business LOC.
- You need to demonstrate that you can handle debt responsibly by having a low debt-to-income ratio and showing financial stability by maintaining steady cash flow over time.
- You want your company’s annual revenue to be at least $50,000. The average small business qualifies for an unsecured business line of credit with a limit of $30,000. This is based on the businesses’ credit score and annual revenue. A higher credit score and/or more revenue will result in a larger credit limit.
The Application Process Steps
Applying for an unsecured business LOC can seem like a daunting task. Here are four steps we suggest you take before you apply and when applying:
Step One: Check Your Credit Score
The first step is to check your credit score. This will give you an idea of how likely it is that you’ll be approved for a line of credit. You can get your free credit score from several different sources. Also, as mentioned above, all three credit agencies provide free reports online every year.
Step Two: Gather Documents
Gather the documents needed for your application. These will include financial statements like bank and credit card statements, tax returns, and other documents that demonstrate your revenue stream. Take the time to organize these documents so you can present them in a clear way when applying for a line of credit.
Step Three: Apply
Once you’ve gathered all necessary documents, apply online or fill out an application in-person at your local bank or credit union (if they offer an unsecured business LOC). Most lenders have an online form that makes it easy to submit your request quickly and efficiently. You’ll need basic information about yourself as well as some financial details such as income level from last year’s taxes; this will help the lender determine your credit limit.
Step Four: Wait for Approval
Once you’ve applied, it may take a few days or weeks to receive a decision on your application. Be patient and stay in touch with the lender as they review your request. If approved, you’ll typically receive notification and be able to start using your line of credit right away!
Reasons Lenders Might Deny You
Your credit score is one factor that lenders look at when considering a loan. A low credit score could disqualify you from getting an unsecured business line of credit.
Additionally, if your company has been in operation for less than two years or you have not generated any revenue, you may also be disqualified. Lenders will also want to see that you are using the line of credit for business purposes and not personal reasons. If you can provide evidence that your company is growing and has potential, you may be more likely to qualify for an unsecured business line of credit.
Debt-to-Income Ratio & Other Factors
Other factors that lenders consider include your debt-to-income ratio, which is the amount of debt you currently have compared to your income and your annual revenue. Lenders want to know that you have the ability to repay the loan, and they don’t want to lend money if your debt-to-income ratio is too high or if your business doesn’t generate much income.
Another factor for qualifying for an unsecured line of credit is how long you have been in business and how profitable it has been during this time period. If a company has only operated for a short period, lenders may not be as willing to give them access because there can be many unknowns when starting up new ventures such as what kind of success rate will occur or whether customers will purchase products from them at all!
You should also provide evidence about how well you are managing your finances by showing them monthly income statements or annual reports that prove the profit margin has been positive over time.
Get to Work!
Now that you know how to qualify for an unsecured business line of credit, if that’s something that you are interested in doing now, then get to work gathering the information you will need. If it’s something you think you will be interested in in the future, then take special care to manage your business credit in a way that makes it attractive to lenders so that qualifying is not something you have to worry about again!
If you have questions and would like a free consultation on how to secure an unsecured business line of credit, please get in touch. We have years of experience in the financial sector helping emerging and established businesses alike with all their funding needs.