The following terms should help you understand the alternative funding space for unsecured business credit lines:
Loans: Typically a lump sum debt is originated with a single full-sized payment incurred at the onset of an agreement. Repayment involves closed-ended (installment) or fixed term with and end date, fixed payment amount with fixed interest rate or variable payment amount with variable interest rate. Payoff expected to extend new credit.
Lines (also referred to as Credit Lines or Lines of Credit): Whether unsecured or secured, a line of credit is a source of credit, usually backed by a bank, convertible to cash, with no interest charged on the unused part of the credit line. Lines can be used with checks, credit cards or converted to cash. Usually open-ended (revolving) like a credit card with a flexible payment amount, potentially 0% interest for six to 24 months, easily expanded with credit increases.
Loans vs. Lines: Usually summarized as certainty (loans) compared to flexibility (lines). Your preference will depend on your plans for the money and how disciplined you are at handling available cash or repaying debt. Due to their antithetical nature, business loans and business lines (credit lines or lines of credit) share few characteristics except they are both debt instruments. Both serve a purpose. For small businesses, lines are preferred over loans because flexibility is needed after small business owners make the many budgeting errors they will make. (See ‘Criteria’ for other advantages to Lines.)
Unsecured Business Credit Lines: As the name suggests, these are credit lines used by businesses that are unsecured, or not personally guaranteed by the applicant. The beneifts of this product are flexibility, the lowest rates (for a specific period), no business plan, no financial projections, no tax returns, no time in business, no collateral and no down payment. Because the programs we recommend require above average to excellent credit scores for the highest credit limits, we refer to this debt instrument as a “No Doc-No Strings” product. This product does incur a front end or backend fee. (See ‘Fees’ for more information)
No Doc-No Strings: This is a colloquial phrase describing an unsecured debt instrument that requires only an above average to excellent credit score qualification for maximum credit limits and the lowest interest rates, usually 0% for a specific period of time. This product offers flexibility, no business plan, no financial projections, no tax returns, no time in business, no personal guarantees, no collateral and no down payment. While this product does have a frontend or backend fee (See Fees for more information), it is highly recommended for entrepreneurs due to its expansion capabilities and liability protection for applicants.
Mid-Doc: This reference describes debt instrument qualifications for a particular program issued by an alternative funding source compared to the qualifications of a bank lender. A bank typically requires a full-doc submission, including a detailed business plan, 3 years financial projections, 2 years tax returns, 2 years time in business, 120% of collateral, 10% down payment, and service companies are typically not accepted. One alternative funding source does not require the business plan, financial projections, collateral or down payment regardless of business type.
Criteria: Requirements to be met by applicants seeking credit. Business Loans made by banks and credit unions traditionally require a detailed business plan, 3 years financial projections, 2 years tax returns, 2 years time in business, 120% of collateral, 10% down payment, and service companies are typically not accepted. Conversely, alternative unsecured business credit lines today require an above average to excellent credit score.
Funding: Accessing capital from any number of sources for the purpose of capitalizing an enterprise.
Bank Cards (Also referred to as ‘Credit Cards’): Despite the many definitions available to describe a bank card, its intended definition is a plastic card issued by a financial institution that allows its user to borrow pre-approved funds at the point of sale in order to complete a purchase. Examples include Visa, Mastercard, American Express, Discover, etc. These cards are widely accepted at any retail outlet or for any kind of purchase that accepts credit cards.
Corporate Cards: Despite the many references made to describe a corporate card, its intended definition is a credit card issued by a retailer to be used only at that retailer’s locations. Examples include Home Depot, Lowe’s, Office Depot, Staples, Macy’s, etc.
Amounts: Funding amounts range from $20,000 to $250,000 using “No Doc-No Strings” criteria. For $250,000 to $5,000,000, Mid Doc criteria is used. Depending on the applicant’s credit score, the average size of alternative unsecured business credit lines is $100,000 with a credit score of no less than 720, but including many factors which contribute to the calculation of that score. (see ‘Credit Scores’ for more information.)
Credit Bureaus: The 3 main credit bureaus for personal reporting are Experian, Equifax and TransUnion. For business reporting, the 3 main credit bureaus are Experian, Equifax and Dun & Bradstreet/TransUnion.
Credit Scores: Each personal credit bureau produces credit scores created by FICO (Fair Isaac Corporation), who uses algorithms to calculate weighted percentages for Amount Owed (30%), Payment History (35%), Type of Credit in Use (10%), Length of Credit History (15%) and New Credit (10%). FICO scores range from 300-850. Scores above 720 are considered excellent, but the highest credit limits, longest 0% interest periods and lowest loan rates are reserved for 800+ credit score applicants.
Inquiries: Among the most misunderstood credit score variables is an inquiry. According to FICO, who writes the rules on their own credit scoring system, “if you apply for several credit cards within a short period of time, multiple inquiries will appear on your report. Looking for new credit can equate with higher risk, but most Credit Scores are not affected by multiple inquiries from auto, mortgage or student loan lenders within a short period of time.” Experian says, “While credit inquiries may have a negative impact on credit scores, inquiries alone will never cause you to be declined.” Well, that’s only partially true. Every alternative funding source has a policy restricting the number of allowable inquiries. While we can debate the extent of damage inquiries will create, damage to credit scores will decrease over time until the inquiries fall off credit reports completely. Please note: Personal inquiries for business credit (credit in your business’ name without personal guarantees) can be removed because business credit is not in your personal name or personally guaranteed.
Credit Repair: This industry is highly controversial due to the number of organizations making false claims about what they can do legally to repair a credit report. The Fair Credit Reporting Act provides consumers the opportunity to start again over time. Credit damage can last up to 10 years (Ch. 7 bankruptcy), though usually for 7 years (Ch. 13, slow pays, etc.). Despite the Credit Repair Organizations Act prohibiting a variety of false and misleading statements as well as fraud by credit repair organizations, abuses continues to cast a dark cloud over the industry. Unfortunately, you get what you pay for in this industry. Any consumer willing to learn can duplicate what inexpensive services do. Respectable companies know the law and persist. That level of service costs more.
Interest Rates: No Doc-No Strings programs focus on 0% interest business credit, typically credit cards, for 6 months up to 24 months. The average is 12 months, though occasionally 15 or 18 months. After those rates expire, new rates may begin anywhere from 2.99% up. Mid-Doc program interest rates depend on the quality of the applicant’s credit. The better the cash flow, the better the collateral, the better the rate.
Term: The length of a loan in months or years.
Terms: Describes the repayment details of a debt instrument.
Repayment: Loan repayment is typically monthly, though daily, weekly, quarterly, semi-annually and annually are occasionally available depending on the type and term of the loan. Amounts can be fixed or variable depending on whether your interest rate is fixed or variable. Line repayment offers greater flexibility because you only repay what you use, though monthly payments are customary. In addition, a rule of thumb is never to only pay the minimum. Pay at least twice the minimum monthly payment if possible, even higher if you can. Banks love to see big payments. That means you have solid cash flow and you make an excellent credit risk for future credit limit increases should you need more credit.
Turnaround Time: Funding distributions of unsecured business credit lines following client applications vary depending on credit scores, which determine programs. For credit scores above 720, expect funding distributions in 2-4 weeks. For credit scores below 720, the actual distribution time is impossible to guarantee. A number of factors determine a credit score. (See ‘Credit Scores’ for more information.)
Fees: The cost of each program is either front-loaded vs. back-loaded. Front-loaded programs require payment in advance of services or “up front” fees. Eligibility for these programs results from sub-720 credit scores from all 3 credit bureaus. Back-loaded programs offer “pay-as-you-go” fees by percentage of money raised over a finite period, usually over 2-4 weeks. Eligibility for these programs results from an applicant having 720 or higher credit scores from all 3 credit bureaus. Because we are funding brokers, we do not dictate the fees or the fee structure. We offer our service at no additional cost to you.
Documents: Sources providing alternative funding solutions require much less documentation than a bank. Qualified applicants can receive funding from $20,000 to $250,000 “No Doc-No Strings” programs and $250,000 to $5,000,000 Mid-Doc programs, deemed much easier to qualify for than a bank loan. (See ‘No Doc-No Strings’ and ‘Mid-Doc’ for more information)