New and small businesses face serious challenges in getting unsecured business lines of credit. In many cases, these are challenges that are impossible to overcome. Most lenders want to secure all business assets for loans or credit lines.
However, the need for working capital never takes a day off. Even the world’s largest corporations sometimes face cash shortages that create the need for financing. Small businesses constantly face this challenge. First, understand some typical requirements to get an approval for unsecured business lines of credit.
Typical Unsecured Credit Line Minimum Approval Criteria
Operating business for at least one year (preferably two). Since 75 to 80 percent of all new businesses fail in the first two years of existence, lenders know the huge risk involved in unsecured lending to start up companies.
Minimum credit score of 680 or higher. While it’s easy to argue that too many loan decisions are based on credit scores, being right will not get you the unsecured business credit lines you crave. Lenders use scores, depend on them and believe credit scores make their approval/rejection decisions easier to jusstify.
Overall good personal credit history. Since most small business owners must personally guarantee financing, applicants need a sparkling credit history. Serious credit problems in the recent past (around two years) will disqualify most small business applicants from access to unsecured lines of credit.
These common requirements deliver a chilling statistic: Almost 90 percent of all unsecured business lines of credit are rejected by most commercial lenders, be they banks or other lending sources. There are a few workable alternatives, however.
Alternatives to Unsecured Business Lines of Credit
Short-term bank loans. Although not a long-term solution to working capital needs, these loans, typically written for between three months and three years, can be effective alternatives to bridge a dangerous gap in cash flow. Hopefully, owners can show some good cash flow history, even if the business suffers periodic shortfalls. Lenders often do not require pledging business assets to secure short-term financing.
Secured business lines of credit. A better alternative to short-term financing, offering business assets as security can mean the critical difference in approval versus rejection. The simple reason: Lender comfort. Pledging some or all business assets immediately moves most lenders into their “comfort zone.”
Sale/Leaseback of business equipment. Selling valuable business equipment to lenders for cash and then leasing it back can be a good alternative to hard-to-obtain unsecured financing. Once popular during the “rock ‘n’ roll” lending days of the 1980s and early 2000s, sale/leaseback programs are enjoying a renaissance in this difficult economic environment.
Merchant account cash advances. If a business depends on strong VISA/MasterCard sales, this recent (in the past five years) financing source can be a lifesaver. Businesses with a minimum six-month track record with card processors can obtain cash advances, based on typical monthly volume of charges, to provide working capital without collateral.
Getting unsecured business lines of credit remains challenging, often impossible. However, these alternatives can provide the working capital small companies need to meet expenses, expand or take advantage of profit opportunities. When a business does not qualify for unsecured financing, these options can solve the problem.