Unsecured Business Line of Credit No Doc | SMB Compass
Ezra Cabrera | August 13, 2021
Business lines of credit are among the most popular business financing options because of their flexibility. With one, their company can have additional cash to spend on almost any business expense, including working capital, inventory reordering, or creating a safety net for emergencies.
However, the loan business line of credit application can be overwhelming for many. Aside from meeting the lender’s requirements (which are often stringent), the company has to submit a long list of documents, including business plans and articles of organization, which can be time-consuming. Plus, a lack of collateral can sometimes hinder the business from qualifying for financing.
For that reason, companies often turn to unsecured business lines of credit with no documentation (no doc) requirements to make the process less complicated.
Business Lines of Credit (LOC) Overview
Business lines of credit (LOC) are financing options that open a credit line to small business owners. Once approved, they can draw money from it as needed. It’s a revolving credit, which means that businesses can borrow cash, repay it, and then reuse the funds again.
A business line of credit can provide businesses between $10,000 to $5 million in funding, and the repayment period can go up to 10 years. However, the financing terms will depend on the lender and your business’ eligibility (i.e., credit history, revenue, cash flow, etc.). Most of the time, companies with excellent financial and credit backgrounds tend to get approved for flexible financing terms.
With a line of credit, you’ll be able to cover any business expenses. This includes, but is not limited to:
Replenishing inventory
Staff hiring
Equipment purchase
Bridging temporary/seasonal cash flow gaps
Building an emergency fund
Buying office or store supplies or fixtures
A business line of credit can be secured or unsecured. A secured line of credit requires collateral for security, whereas unsecured lines of credit do not. In terms of risk, an unsecured line of credit tends to carry more risk due to the lack of collateral that the lender can seize in the event of nonpayment.
In general, traditional lenders offer the best financing rates, but you’d have to be creditworthy to qualify for the financing from them. That means newer companies, by nature, will have lesser chances of getting approved for traditional financing. On the other hand, alternative lenders might be willing to work with startups and businesses with a poor financial or credit background.
What is a ‘No Doc’ Unsecured Business Line of Credit?
No doc business loans are designed to cut through the red tape. They take a different approach than traditional loans because lenders don't require extensive documentation. While most lenders still ask for some records, the key here is that you won't be drowning in paperwork.
In the case of a ‘no doc’ unsecured business line of credit, lenders will require a few or, in some cases, zero documentation. Plus, since it’s unsecured, borrowers won’t need to present collateral for security.
Business owners apply for an unsecured business line of credit with no doc requirements for many reasons. It could include the following:
They were declined for a conventional loan because of an issue with their documents.
The business can’t produce the required documents because of delays in accounting or other financial problems.
The business owners are in a hurry to get funding and don’t have enough time to procure the required documents.
They cannot present collateral to secure the loan.
Unsecured Business Loans vs. Unsecured Business Lines of Credit: Which is Better?
Both unsecured business loans and unsecured business lines of credit work to provide additional cash to business owners so they can invest and grow their company. They do have differences that make one a better choice than the other.
For one, unsecured business loans provide borrowers with a lump sum of cash. The borrowers will have to use and pay for the entire loan amount granted to them, plus the interest. Additionally, unsecured business loans are not revolving. Once you’ve paid off the loan within the established time frame, you won’t be able to draw money from it again. You’ll have to go through another application process for more funding.
With unsecured business lines of credit, the borrowers are not obliged to use the entire credit amount. They can take what they need and repay that amount (plus interest) within the agreed time. It’s also a revolving credit, so once the businesses pay the money back, their credit limit goes up, and they can access the same funds again if needed.
So, which of the two is the better choice?
Ultimately, deciding which type of loan best fits you would depend on your needs. If you’re looking to invest in a big, one-time opportunity, an unsecured business loan will make a good choice. However, if you’re looking for a financing option that lets you draw money whenever needed but don’t want to pledge collateral or go through an extensive documentation process, a ‘no doc’ unsecured business line of credit would make more sense.
Pros and Cons of No Doc Unsecured Business Lines of Credit
As with other financing options, no doc unsecured business lines of credit come with their own pros and cons. It’s important to know what these are so you’ll be better informed when deciding whether it’s the best financing for your company or not.
Pros
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1. Helps build business credit
Startups or companies with a poor credit history can apply for an unsecured business line of credit to help establish their credit history. With no documentation requirements, the application will be much faster, and they can start building their credit as soon as the funds reach their account. You can establish a good credit record as long as you repay the loan on time.
Once you’ve established a good credit history, your business will be better positioned to qualify for comprehensive business. Moreover, if your credit score reaches an excellent point (between 670 and 850), lenders will be more willing to extend credit with flexible terms to you
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2. No need for collateral
Lack of collateral often hinders businesses from qualifying for traditional business loans. Even if a business has enough assets, the operators may not be comfortable putting a valuable resource that the bank can seize if the company cannot pay off the loan.
With no doc loans, you won’t have to present any collateral to the lenders. You can be assured that your personal assets will stay safe.
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3. Earn rewards on purchases
Like business credit cards, some lenders can offer cash back and rewards for their lines of credit. Borrowers can earn points and rewards by using the card with the credit line for any business expenses. For instance, if you’re traveling for business, using the credit line to purchase your ticket may qualify you for an equivalent number of points.
Once you’ve accumulated enough points, you can convert them into travel miles or use them elsewhere (i.e., shopping discounts or cashback). The offering(s) will vary from one lender to the next.
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4. Little to No Documents Needed
Unlike traditional loans, most lenders that offer no doc business loans may not require the business to submit a lot of paperwork. It wouldn’t be as extensive as when applying for a traditional business loan if they do. At the very least, they would need the applicants to submit only the following requirements:
Driver’s license
Bank statements
Voided business checks (if any)
Credit score
Copy of personal tax returns
That said, you won’t have to go back and forth to fulfill the documents the lenders need. This makes no doc unsecured business line of credit one of the most convenient financing options.
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5. Faster approval
Most lenders that offer no doc unsecured business lines of credit are online lenders, and they’re known for their fast approval process. This is because they have the technology and algorithms that underwrite the loan. The applicants only have to sync their bank accounts or accounting software to the lender’s technology.
After submitting your application and syncing your accounts, their system will automatically start working and evaluate your eligibility. Borrowers can expect to hear from the lenders within a day or two after applying. If approved, the lenders can have the credit line up and running within 24 hours, and the borrowers can use it immediately.
Cons
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1. It can be more expensive than other financing options
Lenders face a more considerable risk with no doc unsecured lines of credit because they will have little evidence of your repayment behavior or capability. They won’t have a good sense of your revenue, cash flow, or financial stability. They’re just taking your word that you’ll be able to repay the loan.
That said, they will be more inclined to charge a higher rate to offset the risk and ensure that they won’t lose too much if the borrowers cannot fulfill the repayments. On top of that, they will charge additional fees, increasing the loan's overall costs.
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2. Shorter repayment periods
Borrowers who apply for an unsecured line of credit without documentation can expect a shorter repayment period for the financing. Unlike SBA loans or traditional bank financing, which can go as long as 25 years, the repayment period for unsecured business lines of credit with no doc business loan requirements could only be as short as a couple of months to a few years.
With that, if you’re looking for long-term financing, you may have to look at other options. But then again, you’d probably have to go through the tedious process of gathering documents and meeting the lender’s requirements (six-figure revenue, at least a few years of business history, etc.).
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3. Lower credit limit
Aside from charging higher rates and shorter repayment periods, the lenders also mitigate the risk by offering lower loan amounts. They will base your credit limit on your credit history and the nature of your business. If both lenders find these factors risky, you’ll likely be eligible for a lower loan amount.
The simplest explanation is that a business line of credit functions in the same way as a non-physical business credit card. When a company qualifies for a line of credit (LOC), it is granted access to a credit limit. Because a LOC is a revolving loan, the company will only have to repay the amount it spends and will only have to pay interest depending on the amount borrowed. A business can use a business line of credit to borrow cash and repay it as needed, given that the outstanding balance does not exceed the credit limit.
Alternatives to No Doc Unsecured Business Lines of Credit
If you're considering a no-doc business loan but want to explore other options, here are some alternatives to consider:
Short-Term Business Loans
Online or alternative lenders offer term loans with a shorter repayment period, typically ranging from a few months to a few years. They are commonly used for covering working capital, purchasing inventory, or fulfilling short-term financial requirements. The application process is simple, requiring minimal documentation, and the funds are disbursed quickly.
Invoice Factoring
Businesses with outstanding invoices can benefit from invoice financing. The lender provides a loan based on the value of these invoices, allowing businesses to access immediate cash instead of waiting for customers to pay. It's an effective way to improve cash flow, cover expenses, or invest in growth. Invoice financing is especially useful for businesses with many outstanding invoices.
Merchant Cash Advances
This type of financing is ideal for businesses that receive a significant portion of their sales through credit card transactions. With a merchant cash advance, the lender provides a lump sum in exchange for a percentage of future credit card sales. Repayment is made by deducting a predetermined percentage from each credit card sale, offering flexibility aligned with the business's cash flow.
Understanding the different types of no-doc business loans enables business owners to choose the most suitable option based on their financial needs. Whether it's for short-term goals, credit card sales, outstanding invoices, or flexible access to funds, there is a no-doc business loan that can help businesses thrive.
Final Thoughts
An unsecured business line of credit with no documentation requirement offers accessible funding for small businesses without the hassle of extensive documentation. This type of credit line provides flexibility and convenience, allowing you to access funds quickly and efficiently whenever you need them.
By opting for an unsecured business line of credit, you can access funds without collateral, reducing the risk associated with traditional bank loans. This makes it an attractive option for businesses that may not have significant assets to pledge as security. Additionally, the revolving nature of a line of credit means that funds can be borrowed, repaid, and borrowed again, providing ongoing financial support for various business needs.
Common Questions. Straight Answers.
The quick answer is no. A business line of credit is a revolving loan that allows small business owners to borrow a specific amount of money regularly. The funds may then be used to meet immediate business needs. Businesses typically use a line of credit to cover short-term working capital needs such as inventory purchases, marketing campaigns, and equipment maintenance. It may also be used to bridge seasonal cash flow deficits.
Business credit cards also allow business owners to access additional capital, and they, too, are considered revolving loans. The main difference is that business credit cards offer much lower credit limits than a business LOC.
That said, some business owners prefer a business credit card because it lets them track their spending better. Certain business credit cards will also come with rewards programs to help entrepreneurs save when paying for common business expenses such as office supplies. Furthermore, some offer 0% APR for first-time users, while others have more flexible repayment terms. However, many of them have high interest rates.
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