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Using Unsecured Business Lines of Credit for working capital Pt 3

Posted by Thomas Gazaway

Jul 1, 2013 9:28:39 AM

As a follow up to Part 2 of this series, we're talking about obtaining your working capital through unsecured business lines of credit or UBL's. There are 3 kinds of UBL's.

The second type of Unsecured Business Line of Credit are what we call either traditional UBL's or unsecured bank draft lines of credit - UBD's. These are your larger UBL's that tend to normally be between $50,000 - $100,000 and can sometimes go as high as $250,000. I've never seen a business line of credit go above $250,000 without collater. Keep in mind, LOTS of people will say they offer these for over $100,000 or over $250,000 but what they are going to get you will come with a UCC filing. A UCC is a lien just like a mortgage is a lien. If you had a mortgage or a lien on a property would you say you own it free and clear or that you obtained the loan "unsecured?" Any business loan or business line of credit that comes with a UCC filing is not unsecured. That doesn't mean it's bad, it just means it's not unsecured.

unsecured business lines of credit, working capital, small business

Here are some characteristics about unsecured bank draft lines of credit aka traditional UBL's:

  • Very difficult to obtain but also the most sought-after form of the 3 kinds of UBL's
  • Terms are usually anywhere from Prime + 1% to Prime + 6%
  • The number of banks who offer unsecured business lines of credit in the form of what we call a  UBD are limited. Almost all banks will offer business lines of credit. It's whether they will do them without requiring collateral or not.
  • You will need to be in business for at least 2 years, the longer the better.
  • You probably need to have revenues of $400-500k in your last taxable year - meaning those tax returns need to have already been filed - in order for these to even be possible.
  • In most cases you'll need to submit full financial packages to the lender or lenders.
  • You cannot be in high-risk industries like restaurants, real estate development, or retail in nature.
  • Upon approval the banks will issue you a book of checks and attach your unsecured business line of credit to your checking account. You can draw on the money as needed for working capital, financing receivables, or a variety of other business needs as they arise.
  • Most lenders, when originating these business lines of credit without collateral, will go "up to" 10-15% of your gross revenues and will limit the total amount of the line of credit to a cap. Caps are most of the time between $50,000 - $100,000.
  • These are probably the #1 product in small business banking portfolios that get reviewed or taken away when a bank is in trouble or looking to clean up their balance sheet
  • All owners of the business who own at least 20% of the business will probably need to have very good personal credit.

These UBD or traditional unsecured business lines of credit are the most difficult to obtain due to the combination of only a minimal number of banks offering them and the revenue/seasoning requirements. Keep in mind that only about 11% of the 25-30 million small businesses in the U.S. have done over $300,000 in annual revenues. Then when you pull out the small business owners who do not have good personal credit and the high risk industries and you can see that this is only for a chosen few.

There are 2 big reasons, in order, why many people cannot get these $100,000 lines of credit:*Most common is because they have not grown their business to the revenue levels required*Next most common reason is that they allowed their credit to be damaged or they did not treat their credit as an asset while they built the business. This will surely get your loan request denied.

Let's draw some takeaways or conclusions. There are few business owners who could not or would not benefit from having a working capital line of credit or working capital lines of credit. These are perhaps the most sought-after lending product for savvy small business owners. If you grow your business and you're not in a high-risk industry and you treat your credit like an asset then you should be able to get an unsecured business line of credit like this. It may not be now if you don't have the characteristics above but why can't you get there?

In the last and final installment of this series we will talk about the most widely used of the 3 types of UBL's and how you can use them to grow your business and how they will help you obtain these larger traditional bank draft lines of credit. Stay tuned for Part 4 of the series.

Topics: working capital, Unsecured Business Lines of Credit, small business

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