An unsecured business line of credit is a revolving loan that allows you to withdraw funds up to a certain credit limit. You can get quick access to funds by drawing upon the line in any amount you may need, receiving the funds in your account, and paying back the drawn funds over time.
What differentiates an unsecured business line of credit from other lines of credit is that no physical collateral is pledged to secure the loan. In turn, they typically have higher interest rates and fees to compensate for the lack of collateral in the case of default. Regardless, they can be a useful financial tool that can be utilized by small and startup businesses to access short-term financing to support their operations.
- How Unsecured Business Lines of Credit Work
- Rates & Terms of Unsecured Business Lines of Credit
- Pros & Cons of an Unsecured Business Lines of Credit
- Who an Unsecured Business Line of Credit Is Right For
- How To Qualify for an Unsecured Business Line of Credit
- How To Apply for an Unsecured Business Line of Credit
- Where To Get an Unsecured Business Line of Credit
- Alternatives to an Unsecured Business Line of Credit
- Frequently Asked Questions (FAQs)
- Bottom Line
How Unsecured Business Lines of Credit Work
An unsecured business line of credit is a type of loan that provides funds on a revolving basis. Essentially, the loan has a credit limit in which a maximum amount of funds can be borrowed, and those funds can be drawn upon at any time. They are then deposited into an account of choice, usually within 24 to 48 hours, to be used as cash to finance business purchases or expenses. These funds are to be paid back within a defined timeframe and can be drawn upon repeatedly.
Payments on the loan are made only when the line has a balance, with the amount dependent on what you’ve borrowed. Interest will vary, as lines of credit typically have variable interest rates. Notably, unsecured business lines of credit usually have higher interest rates, as lenders see unsecured lines as more of a risk, and in turn, have higher rates and fees tied to the loan.
These lines of credit are offered by banks, online lenders, and some SBA programs. The application process is relatively straightforward and usually involves various qualifications requirements that are defined by the lender. Unsecured business lines of credit aren’t secured by physical collateral yet often require a personal guarantee to mitigate risk in the event of default, which can put your personal assets at risk.
Rates & Terms of Unsecured Business Lines of Credit
| Standard Unsecured Business Line of Credit | |
|---|---|
| Interest Rates | Varies greatly among lenders, from 3% to 60% |
| Loan Amount | Up to $250,000 |
| Repayment Period | Varies, 3 months to 5 years |
| Disbursement Time | 24 to 48 hours after draw request |
| Fees | Varies |
| Collateral | None |
In determining an interest rate, it varies heavily depending on the lender, loan terms, and your personal financials. Unsecured lines of credit are subject to higher rates overall since they’re considered more risk to the lender.
Your credit limit should be based on what you can afford to borrow and are offered in amounts generally anywhere from $10,000 to $250,000. Depending on how much you borrow, your defined repayment period will vary, but you can expect anywhere from three months to five years.
There are a variety of fees that can be applicable to an unsecured business line of credit. These include an origination fee, an annual renewal fee, draw fees, inactivity fees, and prepayment penalties.
Pros & Cons of an Unsecured Business Lines of Credit
| Pros | Cons |
|---|---|
| Offers quick and flexible access to funds to help cover various business expenses | Has applicable fees that can become costly over time |
| Doesn’t require collateral to secure the loan | Is typically structured with a high variable interest rate |
| Doesn’t require collateral to secure the loan | Puts you at personal risk if you were to default on the loan |
Who an Unsecured Business Line of Credit Is Right For
Many businesses can benefit from utilizing an unsecured business line of credit. Like a working capital loan, they’re available to both new and long-standing businesses and can apply to a variety of expenses.
You should consider an unsecured business line of credit if you:
- Seek short-term financing: Repayment periods are shorter, usually just a few months in comparison to years like a traditional small business loan. This is beneficial if you need funds for inventory, travel, or other business expenses that don’t require long-term financing.
- Have limited collateral to offer: If you’re a new small or startup business, chances are you might not yet have a strong financial portfolio. An unsecured line of credit can bridge the gap and provide financial security, without having to pledge collateral upfront.
- Need quick and flexible access to funds: There are limited restrictions on how you can use the funds from the line, as long as they apply to your business. Since funds can be drawn quickly, the line is useful in the case of emergencies, repairs, cash shortages, and other unplanned expenses.
How To Qualify for an Unsecured Business Line of Credit
Approval requirements will be defined by the lender who will evaluate your personal and business credit history. Prepare to supply information for both, including your personal income along with records of operating history and financial statements of your business.
| General Requirements of an Unsecured Business Line of Credit | |
|---|---|
| Credit Score | Usually a minimum of 600 and above; varies by lender |
| Time in Business | Generally 6-plus months |
| Business Revenue | Varies; starts at $100,000 annually or $10,000 per month |
| Personal Finances | Varies |
- Credit score: Generally, a minimum credit score of 600 is required to obtain an unsecured line of credit, as lenders look for a strong payment history and overall creditworthiness. For approval, lenders may take into consideration both your personal credit history and business credit score.
- Time in business: There’s more risk involved with newer businesses, as they may have limited credit history. Lenders may have requirements as to how long you’ve been in business, usually looking for at least six months.
- Business revenue: To ensure can make payments on the loan, some lenders may have revenue requirements. Whether it be a monthly or an annual amount, the minimum generally starts at $100,000 annually or $10,000 per month; however, it will vary depending on the lender.
- Personal finances: Since the line is unsecured by physical collateral, your personal income and credit history can increase your chances of approval, as it shows your financial strength in the case you were to default on the loan. Lenders may request a personal guarantee for added security; however, it is not always necessary.
How To Apply for an Unsecured Business Line of Credit
When applying for an unsecured business line of credit, here are a few general steps to follow:
- Step 1: Shop around for loan terms. When beginning the application process, be sure to shop around for loan terms that match your needs before applying.
- Step 2: Apply with a lender. Supplementary documentation such as personal and business financial statements are usually a requirement of lenders to assist in their approval decisions. They may also request that you provide documents such as tax returns, cash flow statements, profit & loss statements, and balance sheets.
- Step 3: Await your approval decision. After providing your necessary documents, the lender will use them to evaluate your information and determine your eligibility. Filling out an application is usually a quick process, along with the decision timeline. You can expect to hear if you’ve been approved within 30 to 60 days, oftentimes faster.
- Step 4: Draft an agreement. Upon approval, a loan agreement will be drafted. It will outline the proposed terms and conditions of the loan. This is a chance to review and have a discussion with the lender as to any applicable fees or unclear terms before signing the agreement.
- Step 5: Draw on the line of credit. When the line of credit has been established by the lender, you are then able to utilize the loan and draw funds on a revolving, as-needed basis. After a draw request, funds are disbursed usually within 24 to 48 hours and will be deposited into an account of your choosing.
- Step 6: Begin repayment. Until you incur a balance on the line, no payments will be necessary. Otherwise, any funds you borrow will be repaid in monthly installments, along with the applicable interest, and paid in full according to the allocated repayment timeline.
Where To Get an Unsecured Business Line of Credit
Many lenders can facilitate an unsecured business line of credit. Each offers a variety of terms, rates, and loan amounts that can be tailored to meet your business needs.
Depending on your preferences, you can work with a local bank or credit union, go with an online lender, or partake in one of the SBA’s loan programs. Check out our roundup of the best small business lines of credit to get started.
Each lender has differing eligibility requirements, so be sure to find one that works for you. For instance, Bluevine is a highly-rated loan provider that has business lines of credit. It requires a minimum credit score of 625, one year of time in business, and $120,000 in annual revenue. To learn more or to submit an application, visit Bluevine.
Alternatives to an Unsecured Business Line of Credit
If you are ineligible for an unsecured line of credit or are simply researching all of your options, there are a few alternatives available:
- Small business credit cards: Similar to an unsecured line of credit, no collateral is necessary to use a small business credit card. You can simply use the card to make a purchase and pay it back over time. This may be a suitable option if you don’t need as high a credit limit offered by unsecured lines. For our recommendations, see our list of the best small business credit cards.
- Small business loans: In the case of making a larger purchase, you may not have the ability to pay off the expense in a short time frame. A traditional small business loan can help you finance such purchases, usually with a fixed rate and a longer repayment period. Check out our article on how to get a small business loan for guidance.
- SBA loans: There are various types of SBA loans, which are designed to provide small businesses that have a strong credit history with loans that are government-backed and have low interest rates. Our guide on SBA loans goes over types, rates, and requirements.
Frequently Asked Questions (FAQs)
Are unsecured business lines of credit offered to new businesses?
Yes. While six or more months of time in business is recommended, an unsecured business line of credit can be accessible to businesses with minimal assets and capital.
What’s the typical maximum loan amount for unsecured lines of credit?
Unsecured business lines of credit can vary depending on the lender and your qualifications. Generally, however, loan amounts are anywhere from $10,000 to $250,000.
What credit score do you need to get an unsecured business line of credit?
Credit score requirements are determined by the lender. However, 600 and above is recommended because of the higher-risk nature of the loan.
Bottom Line
Unsecured business lines of credit provide working capital to small or startup businesses that may not have the resources to offer collateral on a loan. With payments based upon the drawn balance and set repayment period, they offer flexible financing to support business needs.
While interest rates typically are higher since lenders may factor more risk with no collateral, unsecured business lines of credit can act as a financial safety net for purchases or expenses applicable to your business.
