If you are a small business owner you are going to need credit at some point in time. An unsecured line of credit may be just what you need to keep your business afloat. When you have an unsecured line of credit there are some problems you will encounter such as less-than-favorable terms and conditions. You can use this credit line to meet payroll, purchase supplies and pay vendors. A business owner may be required to meet stringent conditions for approval.
High Interest
An unsecured line of credit is riskier for lenders because there is no collateral or security for the loan. The rate of interest will be higher for this type of loan, which means you pay more in finance charges over the term of the loan. The longer your term, the more you pay in finance charges. Additional loan payments can help pay the loan off faster and save you money in finance charges.
Limited Funding
When you are approved for an unsecured line of credit your credit limit will be very conservative, therefore you won't receive as much money. If you are looking to make a large purchase for equipment, an unsecured line of credit may not be sufficient to get the job done. A limited credit limit is one way lenders have of limiting their risk and exposure. If a business owner is looking to expand the business they may not be able to because of the limited amount of funds received.
Business History
To get approved for an unsecured line of credit a business needs to have a sufficient business history and credit history. A lot of businesses don't have this type of history--which makes approval difficult. You must have a history of making on time payments with other creditors that is sufficient for a lender to consider for credit approval. A lender will look at the longevity of a business as another determinant of its creditworthiness.
Recession
Whenever there is a recession it becomes more difficult to get approval for an unsecured line of credit. If there is a slowdown in economic activity, a lot of lenders have a fear of delinquencies and default; therefore they are very hesitant to extend credit to small businesses. Without the necessary lines of credit, many businesses cannot continue to operate because they are unable to meet their everyday expenditures.
Bankruptcy
Another problem for a lender is bankruptcy. If a business owner files a petition for bankruptcy and the lender has no collateral. Chances are they will receive nothing from the business owner. Many lenders are making the requirements a little stricter by asking for income verification or tax returns in situations where they may not have made this a requirement.
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