The 3 Kinds of Unsecured Business Lines of Credit — Part 1
By Tom Gazaway
Unsecured Business Lines of Credit – or UBL’s – are very popular and sought out by many business owners. After all, if there’s no collateral needed and it’s a line and you only make payments if you use the capital then WHY NOT get a UBL or UBL’s? Why not obtain some unsecured business credit? The other side of the story is that they can be difficult to obtain and often mis-represented by the companies that offer and peddle them. So let’s talk about the 3 type’s of UBL’s so you can clearly know what you’re getting into and how to interview/screen any companies you’re looking to work with in obtaining these UBL’s. Remember that unsecured business credit is not always in the form of a “line of credit” but that’s the focus of this article.
1 – The first type of UBL is what I call a Traditional unsecured business line of credit. This is probably what you think of when you think of a UBL. It’s typically (but not always) a $25-100k business line of credit where it’s tied to your deposit account at the bank where you obtained the UBL from and you have check writing capability as well as the ability to move the funds back and forth to your operating account. These have certainly been very popular in the past and they are probably what most people think about or think they want when they look for a UBL. They are great…however (here it comes)…there are also 2 major reasons why these UBL’s are not nearly as well liked or as popular as they used to be. One reason is just because of how difficult and elusive they are. Many banks who used to offer these Traditional UBL’s will no longer offer them without collateral. In other words, almost any bank will tell you that they offer Business Lines of Credit but whether you can get it without collateral is another story alltogether. The banks that still offer the Traditional UBL’s are out there but there’s not as many of them and they are more difficult than ever to obtain. The sheer challenge of finding these banks and then being able to get your deal through underwriting and actually approved and funded is so elusive that many have thrown in the towel or decided that they are not worth the effort. The second reason these Traditional UBL’s are not so popular anymore is because of what’s happened to those who were fortunate to actually obtain them. This product (the Traditional UBL) is the target of many banks as they evaluate their portfolios and many banks have either closed, taken away, or termed out the UBL’s of their existing clients. In other words, how would you feel if you obtained a UBL from a bank and then 6 months or a year later they contacted you and told you that they re-evaluated their portfolio and no longer want the risk exposure involved with your line of credit? If you want to keep it all you need to do is give them the last 2-3 years of tax returns showing revenue growth, profitability, and – oh yeah – some collateral too. How do you think that goes? Yeah, not so great. The result is that you no longer have the UBL and if you had an existing balance then it’s either due in full or the loan is turned into a term loan. If you had a balance of $100,000 that means your monthly payment was probably less than $300 and now that it’s termed out you’re probably looking at a new monthly payment of between $2,000 – $2,500. Ouch. There’s no typo’s in there…did you catch that? Yeah, there’s been a lot of problems with these UBL’s in the last 18-24 months so be careful what you wish for! One other important footnote…although those of you who have been around the block a few times in the world of business finance will already know this I want to mention one other important factor. Banks have never been crazy about approving these types of UBL’s for high risk businesses such as real estate investors. So if you’re a real estate investor or have a business that the banks would classify as “high risk” then you will not be a good candidate for a traditional UBL. Remember, we’re talking about unsecured solutions so I’m not saying that a real estate investor or a business that is in a high risk industry can’t get a business line of credit (with collateral)…what I am saying is that it’s VERY – one more time – VERY difficult and certainly not duplicatable for most of us to think these UBL’s (Traditional Unsecured business credit lines) are obtainable in todays lending environment.
2 – The second type of UBL is…(stay tuned it’s coming soon)…
