How To Qualify for an Unsecured Business Line of Credit
This article is part of a larger series on Business Financing.
To get an unsecured business line of credit, you’ll generally need a credit score of at least 600, six months’ time in business, and $10,000 in monthly revenue. However, specific requirements will vary depending on the lender. In some cases, having other strengths in your loan application can allow a lender to be more flexible, such as an additional source of personal income or a significant amount of cash in a bank account.
For example, Bluevine, one of our leading providers for lines of credit, requires a slightly higher credit score of 625. Otherwise, you can qualify with 24 months’ time in business and $40,000 in monthly revenue. You can get a decision in as quick as five minutes for a credit line as high as $250,000.
How an Unsecured Business Line of Credit Works
An unsecured business line of credit allows you to turn its available credit limit into cash just by making a transfer to a bank account. You can draw funds on an as-needed basis, with required payment amounts based only on what you draw. As the balance is paid down, your available credit goes back up allowing you to draw more funds.
These loans are usually best for short-term expenses or emergencies, as repayment periods tend to be less than 24 months and rates also tend to be higher than other types of loans. This is because unsecured loans don’t require collateral to be pledged for the loan, so it’s riskier for lenders since they cannot recoup their losses by repossessing your business assets if you default.
Qualification Requirements for an Unsecured Business Line of Credit
To get approved for an unsecured business line of credit, you’ll need to meet a lender’s loan requirements, which will vary based on the lender you choose. They typically involve a review of the following items:
- Credit score: A high credit score, usually 680 or higher, tells lenders you aren’t likely to miss a payment. Credit scores tell lenders how you’ve handled credit in the past, and they use that information to determine the chances of you continuing that same behavior. Lenders may look at both your personal and business credit scores.
- Personal income: Having a strong income outside of your business can improve your chances of getting approved as it demonstrates you have additional means to repay the loan.
- Business revenue: Many lenders will require your business to have a minimum amount of monthly or annual gross sales to be eligible for their unsecured business line of credit. You may be asked to provide financial documents, such as bank statements, tax returns, or a cash flow and profit and loss statement.
- Time in business: The longer your business has been operating, the less likely it is to fail. Many lenders view businesses with at least a two-year history to be lower risk.
How To Get Unsecured Business Lines of Credit
In most cases, you can get an unsecured business line of credit in as little as two to three business days. Here are the steps involved:
In choosing a lender, you should think about what is most important to you. Major areas to focus on include customer service, rates and fees, loan amounts offered, funding speed, loan terms, and flexibility of approval criteria. Consider different types of lenders, such as credit unions, banks, and online providers. Remember to also shop around and get quotes from several different companies.
To find a lender, You can check out our list of the best business lines of credit as a starting point.
Most lenders have a quick online application process that can be completed in under five minutes. You’ll provide basic information about you and your business and the type and amount of the loan you need.
You’ll need to provide the lender with documentation to support the information on your loan application. This can include information about your personal and business debts, income, and credit. Be prepared to provide tax returns, bank statements, and other financial documents. Lenders will need these to determine if you meet the criteria for the type of loan you’re seeking and can also affect the terms of the loan that you are offered.
If the lender issues a loan approval, it will provide written disclosures with the exact terms and conditions. Terms will include your loan amount, interest rate, and fees.
If a lender is not able to issue an approval, it will discuss the reasons with you to determine if other options are available. This can sometimes involve clarifying certain items about your business or offering a lower loan amount. Lenders can also try to see if you qualify for a different type of small business line of credit, such as one that is secured by some form of collateral.
After your loan has been approved by the lender and you have signed the disclosures, your line of credit will be opened and typically available for use within 24 to 48 hours.
Many unsecured business lines of credit are reviewed annually by the lender. Part of the review may require you to submit updated financial documents as proof that you are still in a position to repay the loan. Depending on how well your business has done, this review can sometimes result in changes to the terms of your loan.
When To Apply for an Unsecured Business Line of Credit
You can time your application to improve your chances of not only landing an approval but also getting the best terms possible.
- When you don’t need it: This may seem counterintuitive but applying for credit when you don’t need it gives you time to shop lenders without being crunched for time. Lenders are also more likely to issue loans to businesses that don’t demonstrate a strong need for credit.
- When you have high credit scores: Having a high credit score is an indicator that you pay your bills in a timely manner. This shows lenders you’re low risk and unlikely to default on a loan.
- When your business revenue is trending up: If your business has income that has been trending upward over the past two to three years, lenders will be able to calculate a higher amount of income as a basis for repaying the loan. This means you’ll be more likely to qualify your business for a larger loan amount.
- When you hit a milestone: Hitting a major milestone such as reaching a business anniversary or landing a new client will reflect well on your business. Lenders look favorably upon businesses that continue to grow because they’re lower risk and tend to offer better terms.
- When you have filed tax returns or had your financials audited: Lenders consider recently filed tax returns and audited financial statements to provide the most accurate picture of how your business is doing. This can be particularly helpful if your business finances have recently improved.
- When you have lots of cash reserves: Having lots of cash demonstrates to lenders that you can repay borrowed funds if needed. This means that you have a lower risk of defaulting on the loan, and lenders are more likely to give you better terms.
What an Unsecured Business Line of Credit Can Be Used For
You can typically use an unsecured business line of credit for any business-related expense. It can even be used as a working capital loan. However, you should read the terms and conditions of your specific loan to ensure there are no restrictions. Some lenders may have disclosures prohibiting you from making certain types of purchases.
Common expenses a business line of credit can be used for include:
- Payroll expenses
- Repairs or upgrades to business equipment
- Rent
- Utilities
- Marketing expenses
- Computer software fees
- Business meals
- Travel expenses
- Legal fees
- Inventory or business equipment
Pros & Cons of an Unsecured Business Line of Credit
| PROS | CONS |
|---|---|
| Provides quick access to cash when needed to help with intermittent cash flow shortages or emergencies | Can have a monthly or annual fee even if you never use it |
| Lets you draw funds on an as-needed basis | Usually has a variable interest rate |
| Has monthly payments required only based on what you draw | Has interest rates that can be higher than other types of loans |
| Typically comes with no restrictions on what the funds can be used for | Puts you at risk of losing your personal assets if you default on the loan |
| Doesn’t require you to pledge business assets as collateral for the loan | Requires funds to be repaid within six to 12 months, depending on the provider |
Alternatives To an Unsecured Business Line of Credit
An unsecured business line of credit can offer quick access to cash, but the rates and fees can often be higher than other types of loans. If you’re not in a rush to open a new loan, then you can consider the following options that can offer better rates and fees:
- Small business credit cards: Many credit card providers offer introductory periods where the rate can be as low as 0%. You can also earn cash back of 1% to 2% on every purchase that’s made.
- Small business loans: There are different types you can choose from, such as equipment loans, working capital loans, and startup loans. Fundbox is one of our highly rated providers as it has low starting rates and easy qualification requirements.
- Small Business Administration (SBA) loans: Businesses with strong financials and good credit can often get approved for a low-rate loan through the SBA. You can choose from several different types of SBA loans.
Frequently Asked Questions (FAQs)
How many business lines of credit can I have?
There’s no limit to the number of lines of credit you can have. However, you’ll need to meet the lender’s requirements for each new loan that you apply for. Even if you don’t currently have a balance or payment on an existing line of credit, lenders may consider what the payments would be if you decided to draw funds from the loan.
Is it hard to get an unsecured business line of credit?
Yes, it can be more difficult to get an unsecured business line of credit, as you’ll typically need a strong credit score or business finances to get an unsecured business line of credit. This is because these are higher-risk loans for lenders as no business property is pledged as collateral. If you default on the loan, lenders cannot recoup their losses by taking possession of your business equipment.
How fast can I access cash from the line of credit?
Many lenders allow you to draw on the line and get access to cash instantly once the unsecured business line of credit is opened. However, if you want to transfer the funds to an account at a different bank, it may take two to four business days for the transaction to be completed.
Bottom Line
An unsecured business line of credit is a useful tool to get quick access to cash, without having to pledge business property for the loan. These loans can help with emergencies or unexpected expenses. However, the interest rates are often higher than other types of loans, making them a better option for businesses intending to pay the loan off in under a year. Before choosing a loan, you should shop rates with multiple lenders and prioritize what’s most important to you, such as fees, customer service, or flexibility of approval criteria.
