Small Business Lending Blog

By Tom Gazaway

Hopefully you’ve now learned about evaluating your unsecured business line of credit deal and acquiring the UBL.  In this post, we’ll discuss the next step: Utilization.

At this point you “utilize,” or take advantage of, the business lines of credit for which you’ve been approved.  Let’s discuss the best ways to access your credit line.

Let’s start with a reminder.  There’s really two kinds of UBLs.  One is a traditional business line of credit where you obtain a line from a bank. The UBL is not tied to a credit card and has check writing capabilities.

The second kind of UBL uses a business credit card platform.  At Hawkeye Management, we have a program that utilizes business credit cards. When those business cards are part of an overall credit strategy, it is very different from just having the product.

Lastly, some would argue that there’s a third kind of UBL — a vendor tradeline.  If I get a line of credit from Staples of Office Depot, then that could be called a business line of credit.  But you cannot use a Staples card anywhere in the world or for anything else in the world except to buy supplies and equipment from Staples.  In other words, that line of credit doesn’t compare to a traditional business line or a business credit card that can be converted into cash and used for almost any purpose under the sun.

So let’s talk briefly about the utilization of traditional business lines of credit.  This is pretty basic and simple.

Most business owners would prefer to have a $50,000 or $100,000 traditional business line of credit from a bank. Then you can simply move the funds from the line to your deposit account, or you can write a check off the line to meet your short-term business capital needs.  As good as that sounds, there are some reasons why these traditional lines of credit have decreased dramatically in popularity.

Probably the main reason they’ve fallen out of favor is because that traditional UBLs are very difficult to get. Many banks who offer business lines of credit will not approve traditional lines without collateral, so obviously those are not unsecured business lines of credit.

When you actually find a bank that offers these no collateral loans or lines of credit, there are other hurdles as well.  You’ll need to have a business that’s at least two or three years old.  Your business also needs to not be in a sector lenders consider a “high risk” industry. If you’re in real estate or restaurant, you’re wasting your time, because those are a couple industries that are almost always high risk. Banks usually will not do unsecured lending to these business types.

If you meet all those criteria, you’ll probably also need to provide financials that, among other things, show a minimum of $500,000 in gross revenue.  In 2007 and 2008, many banks went away from offering this product to “stated income” borrowers, which means your gross revenue — as well as your business and personal tax returns — will be closely analyzed.

A second reason why these traditional UBLs have become less popular is because it has become almost standard practice for lenders to evaluate existing lines and close them out or convert them into installment loans.  There have been so many people who have lost their traditional UBL this way.  The other problem when lenders take this kind of action is what I call “budget shock.”  I had someone contact me recently who told me that his traditional line was terminated by the lender less than a year after they opened it.  His new monthly payment was 4.5 times larger than his payment was on the traditional credit line.

Let’s move on to the business credit card model.  At Hawkeye Management, we have an internal document we distribute that gives our clients six different ways to take advantage of the 0% introductory offers that almost all of our lenders offer.  We show people how to take the funds out of the credit line without taking cash advances.  Cash advances are costly if they are utilized for long-term borrowing purposes, and you normally cannot access the entire credit line with cash advances.

If you’re receiving multiple business credit cards from multiple lenders and they are all offering 0% on purchases or balance transfers, then we suggest that you pull those funds out  at 0% interest and place the funds in a high-yield savings account.  High-yield savings accounts are not paying very high yields right now (as of July, 2010), but we actually have a lender that will allow you to fund your new savings account with your 0% business card.

As you utilize these funds, you’ll want to remember if your 0% introductory offers are good on purchases, balance transfers, or both.  That will help you determine the best ways to convert the lines into cash.  It’s also important to remember that once the lines are approved, the clock is ticking on your introductory offers, so it’s best to take advantage of them right away.

We also suggest leaving about a $500 cushion on each line that you access. Then set up each of your lines so that the monthly payment is automatically deducted right out of the high-yield account with which you fund the lines.

Think about it like this: If you have $50,000 of approved business lines and all of them offer 0% into offers then you can pull about $45,000 of that out and deposit it into your high-yield savings account.  Then the minimum monthly payments due to the lender can be paid right from the savings account.  This way you won’t hurt your budget.

How you utilize the business credit lines is an important factor in how much you get out of your credit line.  If you would like to know more, we’ll discuss additional strategies next week in the final post in this series, on managing your UBL.

Photo via Flickr user quaziefoto