Seeking additional funding to take your business to the next level? You’re not alone. According to the Federal Reserve, 40% of businesses in the US applied for loans in 2017, and 59% of those planned to use that money for expansion. American businesses take out millions in funding every year from banks and private lenders, with both parties assuming a substantial risk if the business fails.
While bank loans continue to be the most popular option for business owners, alternative and private online lenders are becoming more and more popular. Lenders like Evolution Capital Group make it easy to take out loans and lines of credit of every size and offer flexible payment programs that work with your business as you grow.
For small businesses without many assets, unsecured personal lines of credit are a valuable tool for growth. Yet, many business owners still don’t understand what they are, or how to use these revolving credit loans to their advantage.
What is a Business Line of Credit
A typical business loan offers a cash advance in a lump sum, which you must begin paying off immediately, regardless of when and how you plan to use the money. In contrast, a business line of credit acts similarly to a credit card.
You, the business owner, are given a lending ceiling, similar to your credit card limit, and you can take out any amount up to that limit at any time. You only pay interest and fees on the amount you’ve taken out, and fees are calculated against your current balance. Plus, you can take out money many times over, making it easy to take out the funds you need, pay them back and then use them again for new or unexpected expenses.
Unsecured vs. Secured Line of Credit
An unsecured line of credit works the same way most loans do. Whenever you take out a loan, the lender is taking a risk; if your business fails or doesn’t grow the way you think it will, you may not be able to pay the loan back. Secured lines are made less risky via upfront collateral.
For example, a mortgage is a loan where the collateral is your house. If you default on the loan, the bank can take your house away and sell it to make up for their losses. Secured lines of credit work the same way, with some business asset of yours acting as collateral from the beginning. This helps mitigate the risk for the lender, which, in turn, means lower interest rates on your balance.
While a secured line of credit requires collateral, an unsecured line of credit does not require initial collateral. Instead, the lender fills out a Uniform Commercial Code (UCC) filing, stating their interest in your company, which acts as a lien against your business as you grow. The filing enables the lender to pursue a judgement in the case of a loan default, and potentially garner your revenue or business assets to settle the debt. Essentially, it’s a “future” lein; while a secured line of credit requires collateral you have right now, an unsecured LOC is similarly guaranteed against your coming success and assets you will acquire that are owned directly to the business.
This makes unsecured lines of credit a great option for small businesses that are just starting out, and may not have any significant physical assets. It’s also a great option for sole-proprietors, especially those building an online or software-based business. With no initial collateral, these lines of credit are typically more hazardous for the lender; yet, some programs offer rates as low as 12% annually for those who qualify.
Pros and Cons of an Unsecured Credit Line
The major advantage of an unsecured line is that you don’t have to put up money or collateral to begin the loan, although a UCC filing may result in a judgement on the business if you default. At the same time, the major disadvantage is the prime rates of interest that you’ll need to pay on a monthly basis. Other pros and cons of choosing an unsecured line of credit include:
- Take out money anytime you need it.
- Only pay against what you’ve used.
- Can help you consolidate other debts in one place.
- Funds are approved much faster than personal loans.
- Often do not require high credit score
- You do not need to be majority owner of the company. Some will accept 25% owner applicants.
- Although most programs are very lenient with the credit score; some may require a good credit score for approval depending on company revenues.
- Many programs require proof of steady income.
- Inability to make payments will negatively affect your credit score.
- Defaulting can result in a lawsuit and garnishment on the business only.
Unsecured Line of Credit from Evolution Capital Group
Evolution Capital Group offers competitively priced unsecured lines of credit. Our offering includes lines of credit with limits up to $250,000, and flexible 6, 12, and 18-month repayment terms. Plus, our quick approval process means you can often get funds the same day you apply!
How to Qualify for an Unsecured Line of Credit
Wondering if an unsecured line of credit from Evolution Capital Group is right for you? In order to be approved, you’ll have to meet a few minimum qualifications. This program requires all business applicants to have an annual revenue of at least $50,000 (or have brought in at least $4,200 for three months prior to applying). You’ll also need to have been in business for at least three months.
These requirements make sense for two reasons. First, with an unsecured line of credit, the lender is taking a big risk. So, showing that you have steady income increases the chance you will be able to afford your monthly payments. Requiring businesses that have at least a year of history eliminates brand new businesses which could flare out after only a few months, leaving the lender high and dry. Since only half of businesses survive the first year, this helps mitigate the risks to the lender, and keep interest rates more reasonable for other lendees.
In addition to these basic requirements, our program usually requires a credit score over 550 to qualify for a personal line of credit. Again, this helps mitigate risk by showing that you’ve been able to pay off credit card bills and other loans in the past. Click here if you’re interested in applying.
Using Credit Lines to Expand Your Business
Unsecured credit lines are a fantastic way to access quick, flexible funding for your company. If you have a steady revenue stream and want a revolving line of credit you can pull from, again and again, an unsecured credit line may be perfect for you. If you have more questions about the loan types offered by Evolution Capital Group, contact us online, and one of our experienced advisors will get back to you as soon as possible.