If you need working capital to make sure that your daily operations go smoothly, an alternative to loans is a line of credit. This is when you are allowed to borrow a certain amount of money, but you only take the money you really need and leave the rest in your credit line until such time you’ll need it. This saves you from having to pay interest on money you didn’t need or didn’t use. After all, why borrow $100,000 when you only need $50,000 for your working capital? Of course, it is even better if you can actually get unsecured working capital lines—meaning you don’t have to put up any asset as collateral.
Unsecured Bank Lines of Credit (UBLs)
Of all the working capital lines of credit a company can get, the unsecured bank line is perhaps the most sought after, and is also the most difficult to get. Most banks offer lines of credit, but very rarely do they offer them without asking for some form of security. The terms of these UBLs usually range from 1% to 6% above the prime rate.
The requirements for unsecured bank lines may differ depending on the bank, although there are some common requirements. All part owners with at least a 20% share of the company must have spectacular personal credit. The company must be in business for 2 years, although most banks may require companies to be in business for a lot longer. You may also need to have revenues ranging from $400K to $500K in your last taxable year.
Some industries are considered high risk, which makes them virtually ineligible for UBLs. These include real estate companies and retail shops. Restaurants are also considered high risk by banks, so much so that getting a bank loan or a line of credit for a restaurant is difficult even when you offer collateral.
Once you get your UBL, the line of credit cap is usually about ten to fifteen per cent of your gross revenues, and very rarely does the cap exceed $100,000.
Credit cards are actually a form of unsecured lines of credit, and they can also be used for working capital. Credit card financing is a much more expensive than UBLs, but if you use them as unsecured working capital lines the right way you may be better off than not having them at all.
Here are some tips to keep in mind:
· Keep your business and personal credit separate. This helps you build your company’s credit rating, and it also doesn’t out your own personal credit rating at risk.
· Don’t use your credit card frequently. Excessive credit card use can have negative effects on your company’s business score, and that can hurt your future financing options.
· Try to get a lot of available credit. This protects you and your company, and it also gives you more options for obtaining financing.
· Your company’s credit rating is an asset, so make sure you take care of it just like any asset you have.