To add to capital for growing a business, many entrepreneurs apply for financial loans. Unsecured business loans or line of credit is offered by a variety of lenders, if you are able to pass their requirements.
Unsecured business lines of credit, financial loans usually offered by big-time lenders like banks, is a credit line which does not involve any collateral, but the interest rates will be higher compared to secured loans that are backed with some asset. Unsecured business loans are suitable for entrepreneurs who have a clear opportunity at hand, with attractive profit potential, and higher interest rates can easily be serviced, provided the loan capital comes rapidly.
The interest rates are lower with Secured Loans where the bank/lender asks you to pledge an asset as security for the loan. Such assets can be residential or commercial property, equipment, receivables from clients, etc.
Unsecured Loans pose high risk to lenders since they don’t have any security if the borrower fails to pay back, which is the main reason for very strict application requirements and heavy penalty for loan default like downgrading of credit score, making it impossible to raise any loans in future, and also making it expensive or impossible to continue using credit cards or mainstream banking facilities. Therefore, Unsecured Loans must be treated very carefully by the borrower.
Here are some steps to get your started on a successful application of an unsecured business credit line:
1. Start Your Business
First off, you need to establish an independent business existence for the venture. Your business must be registered as an LLC or a corporation with at least 2 years of successful operation. The reason why lenders prefer the operation time of 2 or more years is because of the risk of bankruptcy attributed to new small business ventures. Also, you need to include a proper address of your business, and not a P.O. Box address. An standard communication setup like phone and fax number registered under the name of your enterprise maybe needed as well. All legal documents about your business should be ready. This includes permits, licenses, contracts, tax documents, and financial statements like balance sheets, income statements, and so on. Some financial institutions/lenders might request personal information such as driver’s license, verification of personal and business-related bank accounts, personal income statements, and tax returns. Be sure to have these ready when the lender requests for them.
2. Register Your Venture With Credit Rating Agencies
You need to have a credit profile first before you apply for a loan. There are plenty of agencies that offer such services such as Dun & Bradstreet. Credit agencies are also a requirement, since they can keep tabs on credit scores and rate them to be used with financial institutions when you apply for an unsecured business line of credit. You also need to have a credit account registered under the name of your business venture, which provides reports to credit agencies, financial institutions, banks, and other lenders regarding payment records of certain companies or business enterprises.
3. Presenting Your Application
Aside from the requirements above, you need to have a decent proposal at the ready regarding your unsecured business line of credit. You need to state in detail why you need the amount, and where you plan to use it. This is also very important in establishing your credit scores as well. In truth, the lender is putting you in trust of the borrowed money, and is expecting you to use it wisely, and to make prompt payments according to your agreement.