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4 Questions to Ask Yourself Before Taking Out an Unsecured Business Line of Credit

An unsecured line of credit is among the most attractive external financing options. Find out how to determine if it’s the right one for you.

Does your business have any cash flow issues? Are there any pressing matters that require more money than you have on hand? If so, an unsecured business line of credit can be a fitting solution. Unlike term loans, it’s a highly flexible and cost-effective way of injecting some cash into your business when you need it.

Of course, this doesn’t mean it’s perfect for everyone. There are a few things that you need to consider before you decide to apply. 

1. Can You Afford It?

As there’s no collateral, your lender will have to assume a higher risk. Because of this, you’ll want to make sure that you can meet the interest rate charges and additional fees. This requires you to take a close look at your cash flow and see how much you’re able to set aside for repayments.

One of the biggest advantages of an unsecured line of credit is that you only have to pay the interest and fees on a monthly basis. Better yet, the interest only applies to the amount of money drawn.

This means that there are no deadlines to paying it back. You can pay down the credit line as much as you can afford, and then draw down more of that line of credit as needed.

Despite this convenience, you still need to make sure you can pay the price of your unsecured line of credit. The interest rate can vary based on different factors, and there are a few one-off and ongoing fees that you have to account for. 

2. Why Do You Need It?

In general, business owners turn to an unsecured line of credit to meet their short-term capital needs. You shouldn’t draw money out of your credit line to spend on unnecessary projects that won’t help your business grow.

One of the most common reasons why businesses need an unsecured LOC is seasonal business performance. For example, the summer may be the slow season for certain business, but in spite of the slower receipts, you can use a line of credit to ensure smooth day-to-day operation. And once the business picks back up, you can pay down the credit line and save it for the next off season.

In addition, an unsecured business line of credit is perfect when lucrative opportunities come up unexpectedly, such as if a supplier offers a sizable discount for you to stock up. This is also true for projects you can’t afford. For example, you might want to launch a marketing campaign that isn’t going to bear fruit now but the future.

You can take the money out of your credit line and finance the campaign, then pay it down once you see the results. Not only that, but you might also generate additional profits on top of that.

After that, you can leave the LOC sitting there until you need it again. Better yet, this doesn’t create any expenses.

3. How Much Can You Borrow?

It doesn’t make sense to take out a line of credit that doesn’t cover all your needs. This may even result in your business having to pay interest and fees for no reason. This is why you need to find a lender that will give you all the money you need at reasonable terms.

This depends on both the lender and your own standing. Lenders generally have a fixed minimum and maximum amount they’re willing to offer their clients.

More importantly, your credit history will ultimately determine how much you can borrow as well as the borrowing costs. Many third party lenders are willing to take another look at those who couldn’t get approved by major banks. Still, those with a good credit history can get a better deal, as they can show that they’re a more reliable borrower.

It’s best to find different options and compare them to see what works best for you. In addition, you might want to find a way to improve your credit profile in order to negotiate a better deal.

4. How Long Will It Take Until You Get the Funds?

The exact approval period will depend on factors specific to your needs and performance. But in general, it takes much less time to get an unsecured line of credit approved compared to any secured loan products.

By virtue of putting up an asset as collateral or security, the lender would have to evaluate the asset to their best ability. Your application might go through many officers and loan managers. As a result, it can take weeks or even months for your application to get approved.

In comparison, the application and approval process for an unsecured LOC is much simpler. Because of this, you might get an approval in as little time as a few hours.

Of course, this will vary from one lender to another, and from one borrower to another. Before you apply, do your part and establish that you’re deserving of the lender’s trust. 

Is an Unsecured Business Line of Credit Right for You?

After answering the above questions, you’ll know if an unsecured line of credit is a good option for your capital needs. As convenient and flexible as it is, not everyone may find it worthwhile. This has to do with the higher interest rates since you don’t have to put up any collateral.

On the other hand, you’re not risking any of your valuable assets and you can have the money you need right away. As long as you can meet the interest rate repayments, this can be a great option for getting the cash you need.

Still not sure if you should go with an unsecured line of credit? We’ve got you covered. To learn more about applying for an unsecured business line of credit, go ahead and visit our site.

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