Published By Faith Stewart at July 21st, 2020
The COVID-19 pandemic has quite literally turned the economy on its head. Businesses are suffering, and recession is imminent. Not only that, but aside from the influx of federal funds to the SBA, banks are not going to keep lending so freely for much longer. The time to get funding to help your business survive the recession is now. Still, is it even possible to get an unsecured business line of credit in a recession?
Even during a recession, it is almost impossible to run a business without financing. At some point you will need a large supply of cash that you do not have. Even if you do have sizeable cash reserves, it is typically not a good idea to deplete them all at once. A line of credit can be a huge help, because the credit line is revolving. This means you do not have to continually apply for it. It is just there to use as needed. The problem is, small business lending drastically decreases during a recession. How do businesses survive then? How can you get an unsecured business line of credit in a recession?
Before the how, know the why. An unsecured business line of credit in a recession can help you make repairs, cover a cash gap, or just take advantage of an awesome wholesale promotion without reapplying for credit. You are likely not going to have all the cash on hand. This is especially during a recession.
Even if you do, a business line of credit is a great way to build business credit and manage cash flow. If you use it properly. The question then becomes not “if” you need business financing, but rather “what type” of business financing do you need.
The options are many. Which one is best for your business will depend on multiple factors. There are both unsecured and secured lines of credit, term loans, various types of invoice lending, credit cards and more. During hard economic times, some financing options are more available than others. The greatest cutbacks on lending are in the larger banks. Typically, traditional term loans are squeezed the hardest.
Therefore, finding an unsecured line of credit in a recession isn’t impossible. It may not be as easy to come by as during an economic boom, but it is possible. You are likely to have better luck at the smaller banks.
Under each lending option there are sub options for specific types of borrowers, specific borrower needs, secured, unsecured, and even options with cash back and other rewards.
The best way to make a decision is to learn as much as you can about each one. Do this before you need financing. Then when the time comes, you already know what you need.
The unsecured line of credit is one option that is often misunderstood. It can be difficult to determine why you would choose this option over a secured line of credit or a term loan, and if you do, what are the benefits?
The best way to explain this is to line up the unsecured line of credit head to head with the most commonly used other options.
Besides the fact that it is much harder to get a term loan during a recession, the answer here is pretty straight forward. If you need cash occasionally for various reasons, a line of credit is your best bet. If you have a large, specific purchase or project, then a term loan could work better depending on a number of variables.
Consider the following scenarios:
One company is beginning to see cash gaps due to a lag in customer payments. The recession is hitting everyone hard, and while no one has completely stopped paying, the average time receivables stay on the books has increased. In this situation, a line of credit is the best option. You will have the financing to use from month to month. Also, you can take only what you need, and pay it back once the invoices are paid.
The next company needs to add another truck to its fleet to handle the shipping for increased orders. This kind of growth is fortunate given the recession, but they need to finance the truck. In this situation, a term loan would be best. It may be difficult to find given the slow economy, but the smaller banks may just come through.
A credit card is very similar to a line of credit. Most often the glaring difference is the use of a card, though some business lines of credit offer a card for access in addition to checks. Similar to how some credit cards offer checks for access as well as a card.
Another difference is that sometimes you can use your lending institution’s online banking option to make direct transfers from a line of credit to a checking account, if the accounts are at the same institution. Also, if you need cash, there is no cash withdrawal fee usually with a line of credit. Credit card cash advance fees can expensive.
Credit cards tend to have higher interest rates than business lines of credit also, though unsecured lines of credit in a recession can have very high interest rates as well.
What if there were an option that allowed you to have an even better interest rate than a secured loan, and yet get the money faster and easier than any type of traditional funding. What if you could get business funding similar to an unsecured business line of credit without having to supply any bank statements or check stubs? Imagine that you could get funding in a few days rather than weeks without supplying any collateral or documents? This is exactly what the credit line hybrid allows you to do.
A credit line hybrid is basically revolving, unsecured financing. It allows you to fund your business without putting up collateral, and you only pay back what you use.
How hard is it to qualify? Not as hard as you may think. You do need good personal credit. That is, your personal credit score should be at least 685. In addition, you can’t have any liens, judgments, bankruptcies or late payments. Also, in the past 6 months, you should have less than 5 credit inquiries, and you should have less than a 45% balance on all business and personal credit cards. It’s also preferred that you have established business credit as well as personal credit.
If you do not meet all of the requirements, all is not lost. You can take on a credit partner that meets each of these requirements. Many business owners work with a friend or relative to fund their business. If a relative or a friend meets all of these requirements, they can partner with you to allow you to tap into their credit to access funding.
Now that you can see the benefit of using a line of credit over other financing options in certain situations, you need to know when and why to choose an unsecured line of credit.
The fact is, an unsecured line of credit in a recession, or in times of a strong economy, is harder to get. It typically has the higher interest rate of the two as well.
This is due to increased risk to the lender. A secured business line of credit has collateral. If you don’t pay, the lender can still use the collateral to recover some if not all of the loss.
Some business owners either do not have collateral to offer, or they have no interest in tying up their assets with financing. In these cases, they may be able to get line of credit without security.
An unsecured line of credit in a recession typically has strict approval guidelines and qualifications. Due to the increased credit risk, it will likely have higher interest rates and less favorable repayment terms as well.
As a general rule, the same places you could any other time. Not all lenders offer this as a product, but there are options available at many traditional and alternative type lenders. Which one you go with depends, again, on your specific situation. During an economic downturn, alternative lenders may be your best bet.
Traditional lenders offer the lowest interest rates, but their repayment terms may be less flexible. They will also have qualifications that are harder to meet and a longer approval process. In addition, it can take several days after approval to have access to the funds.
An alternative lender will usually have easier to meet qualifications and more flexible repayment terms, but the interest rates are much higher. The approval process is much faster though, and usually takes place all online. In some cases, you can have access to funds in as little as 24 hours.
The items you need to apply for an unsecured line of credit in a recession are the same as what you would need for any other time. It will vary from lender to lender, but a general list includes:
Some lenders will check your business credit score, and sometimes even your personal credit score as well. A score of 620 is usually the minimum requirement for approval, but some alternative lenders do not require a minimum score. Some traditional lenders may require a higher score for an unsecured business line of credit in a recession than it would otherwise.
They are looking for minimum annual revenue as well. Traditional banks are more likely to grant approval at $180,000 or more of revenue annually. Alternative lenders usually have a lower threshold.
Basically, lenders want to see how long you have been in business and what your annual revenue is, thought exactly what they need to see to grant approval varies from lender to lender.
Seeing exactly what types of products are currently available from real lenders can be helpful in understanding the difference between what traditional and alternative lenders offer. Please note that lenders change product offerings and terms at their leisure, and then a change in economic client with trigger a change. Therefore, there is no guarantee these products have not been adjusted since this writing.
Bank of America
There is currently an unsecured line of credit product available from Bank of American that ranges from $10,000 to $100,000. There is a $50 origination fee if approved. The origination fee is a limited time offer. It is usually $150.
A business must have been in business for two years and have a minimum of $100,000 in annual revenue to qualify.
The unsecured line of credit offered by Fundbox goes up to $100,000. You will also have to have a business bank account.
The interest rate will increase based on annual revenue and time in business.
OnDeck offers an unsecured business line of credit of up to $100,000. You repay it weekly for up to 6 months.
This one ranges from $5,000 to $250,000. The repayment term is from 6 to 12 months.
With repayment terms from 3 to 36 months, this is a good option if you qualify. Amounts start at $5,000 and range up to $150,000. They also offer some specialty products with lower interest rates.
Even if the recession has caused lenders to cut back, an unsecured line of credit in a recession could be an option. It is way better than a term loan during a recession for a number of reasons. The first is that you can control payments.
A term loan requires a set payment each month, while a line of credit requires you only to make payments on the amount you use. If you only use what you need, you will very likely come out with a lower monthly payment.
If you don’t have collateral or do not want to tie up your assets with financing, an unsecured line of credit is an option. The repayment only on what you use may cost less than an unsecured term loan despite the higher interest due to being unsecured.
The bottom line is that an unsecured business line of credit can be more costly than a secured line of credit, but less costly than a term loan. While they are easier to get if you have been in business longer, have higher annual revenue, and have a great credit score, they are not impossible to get without these things. If you are not sure how much you need, or the need could vary, and you do not want to tie up assets or do not have assets to offer as security, then an unsecured business line of credit could be for you.