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Which Unsecured Business Lines of Credit are Best for Your Business?
By Marco Carbajo Published: May 21, 2014
Whether you’ve been in business for a couple of weeks or five years, access to cash is a crucial element of survival for a business. When the going gets tough, a business can fail unless it has access to cash on demand.
For business owners, getting unsecured business lines of credit is by far the best choice for having that cash on demand. The fact is that business owners want access to funds – whenever they need it, at a competitive rate and with flexible payment options. The National Federation of Independent Businesses says, “Think of it as an insurance policy that never needs to be paid until you need it.”
It’s important to note there are two main types of unsecured business lines of credit one needs to consider: traditional and non-traditional.
So how do you determine which one is best for your business?
The traditional business line of credit issued by a bank calls for a substantial amount of documentation in order to qualify such as financials, personal tax returns, business tax returns, bank account information, business registration documents, etc.
In addition, once a line is issued an annual financial review is required to maintain the line of credit. While a traditional credit line offers various benefits such as check-writing privileges, it tends to be the most difficult line of credit to obtain and maintain.
In a recent survey conducted by the National Small Business Association, “29 percent of small business owners report having their lines of credit reduced in the last four years and nearly 1 in 10 had their line of credit called in early by the bank.”
In my opinion, a non-traditional line of credit in the form of business credit cards are the best unsecured business lines of credit a company can get. It provides the fast access to cash and payment flexibility associated with a traditional credit line but without all the drawbacks.
Qualifying for this type of revolving credit line is FICO® driven and doesn’t require the yearly reviews, excessive documentation and level of scrutiny that comes with a traditional credit line.
Some of the advantages of non-traditional business lines of credit are as follows:
1) Access to cash quickly – With unsecured business credit cards . you can utilize as much or as little credit from your line as you want to, anytime and anywhere
2) High credit limits – Business credit cards carry high credit limits, making it extremely convenient to finance larger business purchases. Many cards even offer 0% APR for the first 12 months.
2) Flexibility – With business credit cards you have flexible payment options compared to a fixed month-to-month payment that comes with a business loan. When you tap into your credit line, you have three options every month. You could pay the full amount due, pay at least a minimal portion of the balance or pay greater than the minimum amount due.
3) True separation – Business credit cards enable business owners to separate personal and business expenses while benefiting from business credit reporting. This makes it possible for business owners to establish the creditworthiness of the business itself.
4) Personal credit protection – Small business credit cards that report solely to the business credit agencies allow business owners to protect their personal credit ratings while building their business credit.
While a non-traditional business credit line provides all the convenience and flexibility a business needs, there are some negative aspects to consider. The major drawback is the ability for a business to accumulate debt. Without a fixed payment schedule, business owners may be tempted to simply pay the minimum monthly payment on its outstanding balances. By carrying debt, compound interest can really add up, especially if a company carries large balances.
No matter what type of unsecured business lines of credit you decide to obtain for your business, it’s crucial to manage any debt responsibly. Traditional and non-traditional business lines of credit are essential tools for any business to have in its financial arsenal.