Business lines of credit are among the most popular business financing options because of the flexibility they provide. With one, their company can have additional cash injection to spend on almost any type of business expense, including working capital, inventory reordering, or creating a safety net for emergencies.
However, the loan business line of credit application can be overwhelming for many. Aside from meeting the lender’s requirements (which are often stringent), the company has to submit a long list of documents, including business plans and articles of organization, which can be time-consuming. Plus, lack of collateral can sometimes hinder the business from qualifying for the financing.
For that reason, companies often turn to unsecured business line of credit with no documentation (no doc) requirements to make the process less complicated. If this is your first time hearing about it, then you probably want to read on. We’ve gone ahead and laid out everything you need to know about it.
Business Lines of Credit (LOC) Overview
Business lines of credit (LOC) are financing options that open a credit line to small business owners. Once approved, they can draw money from it as needed. It’s a revolving credit, which means that businesses can borrow cash, repay it, then reuse the funds again.
A business line of credit can provide businesses between $10,000 to $5 million in funding, and the repayment period can go up to 10 years. However, the financing terms will depend on the lender and your business’ eligibility (i.e., credit history, revenue, cash flow, etc.). Most of the time, companies with excellent financial and credit backgrounds tend to get approved for flexible financing terms.
With a line of credit, you’ll be able to cover any business expenses. This includes, but is not limited to:
- Replenishing inventory
- Staff hiring
- Equipment purchase
- Bridging temporary/seasonal cash flow gaps
- Building an emergency fund
- Buying office or store supplies or fixtures
A business line of credit can be secured or unsecured. A secured line of credit requires collateral for security, whereas unsecured lines of credit do not. In terms of risk, an unsecured line of credit tends to carry more risk due to the lack of collateral that the lender can seize in the event of nonpayment.
In general, banks offer the best financing rates, but you’d have to be creditworthy to qualify for the financing from them. That means newer companies, by nature, will have lesser chances of getting approved for traditional financing. On the other hand, alternative lenders might be willing to work with startups and businesses with a poor financial or credit background.
What is a ‘No Doc’ Unsecured Business Line of Credit?
Usually, lenders will require a plethora of documentation from the applicants. In the case of a ‘no doc’ unsecured business line of credit, lenders will require a few or, in some cases, zero documentation. Plus, since it’s unsecured, borrowers won’t need to present collateral for security.
Business owners apply for an unsecured business line of credit with no doc requirements for a lot of reasons. It could include the following:
- They were declined for a conventional loan because of an issue with their documents.
- The business can’t produce the required documents because of delays in accounting or other financial problems.
- The business owners are in a hurry to get funding, and they don’t have enough time to procure the required documents.
- They cannot present collateral to secure the loan.
Unsecured Business Loans vs. Unsecured Business Lines of Credit: Which One is Better?
Both unsecured business loans and unsecured business lines of credit work to provide additional cash to business owners so they can invest and grow their company, they do have differences that make one a better choice than the other.
For one, unsecured business loans provide a lump sum of cash to the borrowers. The borrowers will have to use and pay for the entire loan amount granted to them, plus the interest. Additionally, unsecured business loans are not revolving. Once you’ve paid off the loan within the established time frame, you won’t be able to draw money from it again. If you need more funding, you’ll have to go through another application process.
With unsecured business lines of credit, the borrowers are not obliged to use the entire credit amount. They can take what they need and repay that amount (plus interest) within the agreed time. It’s also a revolving credit, so once the businesses pay the money back, their credit limit goes up and they can access the same funds again if needed.
So, which of the two is the better choice?
Ultimately, the decision on which type of loan best fits you would depend on your need. If you’re looking to invest in a big, one-time opportunity, an unsecured business loan will make a good choice. However, if you’re looking for a financing option that lets you draw money whenever needed, but don’t want to pledge collateral or go through an extensive documentation process, then a ‘no doc’ unsecured business line of credit would make more sense.
Pros and Cons of No Doc Unsecured Business Lines of Credit
As with other financing options, no doc unsecured business lines of credit come with its set of pros and cons. It’s important to know what these are so you’ll be better informed when deciding whether it’s the best financing for your company or not.
1. Helps build business credit
Startups or companies that have a poor credit history can apply for an unsecured business line of credit to help establish their credit history. With no documentation requirements, the application will be much faster and they can start building their credit as soon as the funds reach their account. As long as you repay the loan on time, you’ll be able to establish a good credit record.
Once you’ve established a good history of credit, your business will then be in a better position to qualify for comprehensive business. Moreover, if your credit score reaches an excellent point (between 670 to 850), lenders will be more willing to extend credit with flexible terms to you.
2. No need for collateral
Lack of collateral often hinders businesses from qualifying for conventional business loans. Even if a business has enough assets, the operators may not be comfortable putting a valuable resource that the bank can seize if the company becomes unable to pay off the loan.
With no doc unsecured business lines of credit, you won’t have to present any kind of collateral to the lenders. You can be assured that your personal assets will stay safe in your possession.
3. Earn rewards on purchases
Like business credit cards, some lenders can offer cash backs and rewards for their lines of credit. Borrowers can earn points and rewards by using the card that comes with the credit line for any business expenses. For instance, if you’re traveling for business, using the credit line to purchase your ticket may qualify you for an equivalent number of points.
Once you’ve accumulated enough points, you’ll then have a choice: convert it into travel miles or use the points elsewhere (i.e., shopping discounts or cashback). The offering(s) will vary from one lender to the next.
4. Little to No Documents Needed
Most lenders that offer no doc business lines of credit may not require the business to submit a lot of paperwork, unlike traditional loans. If they do, it wouldn’t be as extensive as when applying for a business loan from banks. At the very least, they would need the applicants to submit only the following requirements:
- Driver’s license
- Bank statements
- Voided business check (if any)
- Credit score
- Copy of personal tax returns
That said, you won’t have to go back and forth to fulfill the documents the lenders need. This makes no doc unsecured business line of credit one of the most convenient financing options.
5. Faster approval
Most lenders that offer no doc unsecured business lines of credit are online lenders, and they’re known for their fast approval process. This is because they have the technology and algorithms that underwrites the loan itself. The applicants only have to sync their bank accounts or accounting software to that of the lender’s technology.
After submitting your application and syncing your accounts, their system will automatically start working and evaluate your eligibility. With that, borrowers can expect to hear from the lenders within a day or two after applying. If approved, the lenders can have the credit line up and running within 24 hours, and the borrowers can use it immediately.
1. It can be more expensive than other financing options
Lenders face a more considerable risk with no doc unsecured lines of credit because they will have little evidence of your repayment behavior or capability. They won’t have a good sense of your revenue, cash flow, or financial stability as a whole. They’re basically just taking your word that you’ll be able to repay the loan.
That said, to offset the risk and make sure that they won’t lose too much in the event that the borrowers cannot fulfill the repayments, they will be more inclined to charge a higher rate. On top of that, they will charge additional fees, which increases the overall costs of the loan.
2. Shorter repayment periods
Borrowers that apply for an unsecured line of credit without documentation can expect a shorter repayment period for the financing. Unlike SBA loans or traditional bank financing, which can go as long as 25 years, the repayment period for unsecured business lines of credit with no doc requirements could only be as short as a couple of months to a few years.
With that, if you’re looking for long-term financing, you may have to look at other financing options. But then again, you’d probably have to go through the tedious process of gathering documents and meeting the lender’s requirements (six-figure revenue, at least a few years of business history, etc.).
3. Lower credit limit
Aside from the shorter higher rates and shorter repayment periods, another way that the lenders mitigate the risk is by offering lower loan amounts. They will base your credit limit on your credit history and the nature of your business. If both the lenders find both these factors risky, you’ll likely be eligible for a lower loan amount.
The simplest explanation is that a business line of credit functions in the same way as a non-physical business credit card. When a company qualifies for a line of credit (LOC), it is granted access to a credit limit. Because a LOC is a revolving loan, the company will only have to repay the amount it spends and will only have to pay interest depending on the amount borrowed. A business can use a business line of credit to borrow cash and repay it as needed, given that the outstanding balance does not exceed the credit limit.
Is a Business Line of Credit the Same as a Business Credit Card?
The quick answer is no. A business line of credit is a revolving loan that allows small business owners to borrow a specific amount of money on a regular basis. The funds may then be used to meet immediate business needs. Businesses typically use a line of credit to cover short-term working capital needs such as inventory purchases, marketing campaigns, and necessary equipment maintenance. It may also be used to bridge seasonal cash flow deficits.
Business credit cards also allow business owners to gain access to additional capital, and they too are considered a revolving loan. The main difference between the two is that business credit cards offer much lower credit limits than a business LOC.
That said, some business owners prefer a business credit card because it allows them to better track their spending. Certain business credit cards will also come with rewards programs that can help entrepreneurs save when paying for common business expenses such as office supplies. Furthermore, some offer 0% APR for first-time users while others have more flexible repayment terms. However, many of them have high interest rates.
What Is an Unsecured Line of Credit?
Some business funding alternatives require potential borrowers to put up an asset, known as collateral, as security for the loan. This asset could be real estate, goods, equipment, or another asset of value that the company possesses.
For example, an equipment loan is usually secured by the equipment purchased from the amount funded by the loan. If the borrower isn’t able to pay on time, the lender can then take said equipment and sell it to someone else. The asset, in this case the equipment, already helps repay the loan.
What startup founders and decision-makers should know is that unsecured business lines of credit are not the same as secured business lines of credit.
There is no collateral or security deposit to backup an unsecured LOC. This is why a company may be authorized or denied this type of funding based on a very close look at its qualification criteria. This includes the company’s credit score, financial situation, and any other qualifications that a lender deems relevant.
Who Offers Business Lines of Credit?
Banks are more commonly thought of as the traditional lender that provides business lines of credit. They tend to offer larger credit amounts, but also have a longer application process with more stringent criteria. For example, most banks will require businesses to have been in operation for a certain number of years and show significant sales. Banks tend to be wary of providing LOCs to startups or newer businesses.
Depending on the lender, the amount available under a business line of credit varies significantly. For example, non-bank lenders (such as online lenders) have fewer qualification requirements but offer lower credit limits.
A Guide to Applying for a Business Line of Credit for Startups
It’s now quite simple to apply for a business line of credit. Most lenders allow potential borrowers to apply online, eliminating the need for a face-to-face appointment.
For startups, however, it’s good to note that online lenders want to get a full picture of the company’s operations. Examples of documents that they may ask for include personal and business tax returns, financial statements from the business’s bank account, business registration documents, credit references, and annual revenues.
It’s helpful for a startup to provide as much financial information as possible since the company has little or no operating history. Previous transaction records may also be included, such as invoices paid to vendors or unpaid accounts receivables. What applicants should keep in mind is that the application must persuade the lender that the startup will be able to fully repay its debts.
Lenders prefer to lend money to companies that have been in operation for at least six to twelve months. They’ll also be interested in seeing a consistent cash flow, some history of financial success, and a good credit history. The startup owner’s personal financial history and credit score may also be taken into consideration.
How a Startup Can Increase Its Chances of Qualifying for a Business Line of Credit
New businesses can increase their chances of getting approved for a business line of credit in the same way that they can for any other business loan. One method is to put up collateral, which is known as a secured line of credit.
Collateral doesn’t necessarily have to be a major asset like a vehicle, equipment, or real estate. A startup founder may be able to pledge alternative sources of funds for a business line of credit. A lender, for example, might let an applicant pledge the value of their accounts receivables. This is known as invoice financing.
Another alternative is to establish personal or corporate credit before applying. Paying off corporate credit cards on schedule, for example, shows lenders that a startup can manage credit responsibly. The company owner/s may also opt to increase their personal credit scores, especially if the lender conducts personal credit checks as part of the application process.
A startup might be able to get an unsecured business line of credit instead of applying for more working capital if it waits until the company is more established. It may not be necessary to submit collateral if it can be proven that company finances are stable and up to date.
A Closer Look at a Secured Business Line of Credit
When a business owner gets a secured business line of credit, the lender normally puts a lien on the asset being used to secure the funding. The sorts of assets that a lender may take as collateral vary. Some examples are vehicles, inventory, cash, financial securities (such as CDs, stocks, and bonds), real estate (whether business or personal), equipment, and even invoices.
It’s sometimes easier to qualify for a secured business line of credit than an unsecured one because of the collateral. Collateral, in the perspective of a lender, minimizes risk, which then makes for a more appealing borrower.
Putting up assets, though, can do more than just improve one’s qualification chances. Collateral may also help a loan applicant secure lower rates, higher credit limits, and better terms from a lender.
A Closer Look at an Unsecured Business Line of Credit
Many business owners, of course, prefer to obtain funding without putting their assets on the line. Some companies, particularly startups, may not yet even have any assets that a lender would consider acceptable.
If a business falls into one of these categories, then an unsecured business line of credit might be a better fit.
An unsecured business line of credit functions more similarly to a business credit card. This is simply because money can be borrowed up to the account limit and, as long as the account is well-managed and balances are always paid, the account holder can borrow again against the same line of credit in the future. There’s no need to put up collateral to back the money that the company borrows. Though this reduces the risk a borrower takes, it means more risk for the lender which results in higher costs. This is why unsecured LOCs typically cost more than secured ones.
To offset their risk, lenders that issue unsecured business lines of credit may opt to charge higher interest rates and fees, issue lower credit limits, and ask for shorter payback terms with bigger monthly payments. Some may also ask borrowers to sign a personal guarantee.
However, this doesn’t mean that an unsecured business line of credit is a bad choice. Loan applicants just need to consider both the advantages and disadvantages of each option before choosing one.
Personal Guarantees on Unsecured Lines of Credit
Lenders will only approve business funding requests if they are okay with the risk. If an applicant doesn’t have any collateral to put up as security for a business line of credit, a personal guarantee may be requested instead.
A personal guarantee (PG) basically makes the borrower a co-signer on the business’ credit line. The borrower then guarantees to reimburse the obligation if the company fails to do so. It’s another approach for a lender to verify that the business owner is willing to take some risk despite not putting up an asset as collateral.
However, it’s important to note that personal guarantees may be required for some secured business lines of credit. This is why it’s always best to read the fine print and ask the lender questions regarding personal guarantee requirements before applying for a line of credit or any type of loan.
Comparing the Unsecured Business Lines of Credit by Different Lenders
One of the most important factors to consider while researching financing options is the cost. How much will it cost for the borrower to get the money needed?
Two questions need to be asked. The first is, “What will the lender’s interest rate be?” The second is, “Are there any other charges?”
To help answer the questions above, here are three popular lenders that offer business lines of credit, along with the current rates and fees that each one charges:
Wells Fargo is the fourth-largest bank in the United States. It provides small business customers with a variety of financial products, including credit cards, commercial bank accounts, and a variety of financing choices, including business lines of credit.
Wells Fargo’s unsecured business line of credit has a credit maximum of $100,000. The first year’s annual charge is waived. After the first year, though, the fee is $95 for credit limits up to $25,000 and $175 for credit limits over that amount. Moreover, if the account holder uses an ATM or a BusinessLine Mastercard to access their funds, they will be charged a 4% cash advance fee. According to the company’s website, this cost is not charged for checks, online and phone transfers, or online bill payments.
To be eligible, a company should have been in operation for at least two years. A personal guarantee is required from all business owners who own 25% or more of the company.
It’s important to note that startups can get an unsecured business line of credit from Wells Fargo. The bank also offers the SBA-backed Wells Fargo Small Business Advantage Line of Credit. It’s best for businesses that haven’t been around for more than two years. To be eligible, the startup must be a for-profit company that meets the SBA’s requirements.
Chase is currently the biggest commercial bank in the U.S., and it is well-known for providing a number of business credit card options to small business owners. However, Chase also offers business lines of credit up to $500,000.
When it comes to rates and costs, Chase isn’t as upfront online as some other lenders. The APR is determined by factors such as the applicant’s relationship with the bank, credit history, and whether any collateral is put up, according to the bank’s website. There is an annual charge for the account, but it is waived automatically if the average LOC utilization is 40% or greater.
Bank of America
Bank of America is another major bank that provides small businesses with business credit cards, commercial bank accounts, and merchant services. Bank of America also offers up to $100,000 in business lines of credit.
A personal FICO credit score of at least 670 is required to qualify for a Bank of America Business Advantage Credit Line. The company must also have been in operation for at least two years under the present owner and generate at least $100,000 in annual revenue.
New accounts generally have a $150 origination fee, though the bank periodically offers limited-time deals.
Applicants should note that Bank of America’s funding process is quite slow. Once qualified, applicants may have to wait up to ten business days to get their funding.
A business line of credit is a type of revolving loan that functions similarly to a credit card. For example, if a borrower is given $100,000 in credit, then they can use it whenever they want and will only be charged interest on the balance they owe. The business can then use $10,000 of this credit to pay, for example, for equipment to help with product development. This means that the business still has $90,000 leftover to use at a later point. This is why revolving loans are quite popular among businesses that qualify.
Borrowers will be able to withdraw the funds that they need, which gives them immediate access to cash, unlike with a credit card. Many short-term capital needs, which might range from project costs to inventory purchases, may be met using lines of credit.
Most banks provide a business line of credit. However, it’s important to remember that applying for a business line of credit is already challenging, and applying via a bank makes it even more difficult.
Though many types of loans aren’t available to newer businesses, there are ways to find the right business line of credit for a startup. Instead, they may consider applying for a business line of credit from an alternative lender. These lenders usually have less stringent requirements and easier application processes. Banks, on the other hand, may require collateral or have stringent criteria that need to be met. The only way for a startup to find the best deal is to weigh all of its options.