3 crucial tips to help you qualify for an unsecured business line of credit
Qualify for an unsecured business line of credit
- Build your business and personal credit scores to help you qualify
- Plan ahead: establish a relationship with a lender and build a financial history
- Consider online lenders: nontraditional credit lines require less documentation
A line of credit can be a valuable financial tool for businesses. Business lines of credit (BLOCs) are a flexible, versatile form of financing a business can use to grow its business or pay for unexpected expenses.
A business line of credit allows a business to borrow up to a certain limit, and make payments on the outstanding balance over time. With a revolving credit line, once the balance is paid down, the available credit replenishes and can be used again as needed. Business lines of credit are coveted, and qualifying is difficult, especially if you have no collateral.
There are two different kinds of BLOCs. Secured credit lines are secured by collateral, which may be secured by cash savings, equipment or real estate.
Unsecured credit lines are not backed by collateral. This lack of collateral poses a greater risk to the lender, so unsecured BLOCs are generally harder to qualify for, and may have higher interest rates than secured lines. They may still offer lower interest rates than other unsecured financial products, such as credit cards, however.
Assuming you don’t have collateral and need an unsecured BLOC, how do you go about getting one? Here are three tips that can help you increase your chances of getting approved for an unsecured business line of credit.
1. Build your credit score
Because an unsecured BLOC isn’t backed by collateral, lenders will place greater emphasis on credit scores. That could mean either the business’s score, the owner’s personal score or both. Building one or both of these scores could place your business in a better position to qualify for an unsecured BLOC. Start by requesting copies of your credit report from the major credit reporting bureaus. If you find errors, dispute them. Pay off larger debts to improve your debt-to-income ratio. Most importantly, make sure you pay your bills on time every time.
2. Plan ahead
It’s difficult (though not impossible) for a startup to qualify for a business line of credit. Lenders often require businesses to have at minimum a two-year financial history. So plan ahead: Establish a relationship with a lender now by taking out a small business loan as a way to establish credit and demonstrate to the lender your ability to repay the loan. In the next few years, your business will be in a better position to apply for a BLOC and get approved.
3. Consider online lenders
Online lenders often offer nontraditional credit lines that may be easier for businesses to qualify for. These kinds of credit lines are usually based on the borrower’s FICO credit score and don’t require as much documentation as a traditional credit line. Also, unlike traditional BLOCs, nontraditional BLOCs don’t require an annual review. Be aware, however, that you may end up paying higher interest rates due to the greater risk to the lender.