Unsecured Business Line of Credit: What It Is & How To Get It
Tom has 15 years of experience helping small businesses evaluate financing and banking options. He shares this expertise in Fit Small Business’s financing and banking content.
This article is part of a larger series on Business Financing.
An unsecured business line of credit is a financing product that allows you to draw and repay borrowed funds on an as-needed basis. The recurring availability of funds is well-suited to businesses that have cyclical revenue, have intermittent cash flow crunches, or need short-term infusions of working capital. An unsecured business line of credit isn’t secured by collateral, making it an attractive option for some businesses as it is backed by the personal guarantee of the borrower.
If an unsecured business line of credit sounds like the financing tool you need, Bluevine offers an unsecured business line of credit of up to $250,000. Interest rates start at 10%, with a six-month repayment term. If your business generates $120,000 in annual revenue and has been operational for at least six months, you can get prequalified online in minutes.
How an Unsecured Business Line of Credit Works
Perhaps you own a lakeside restaurant that’s open year-round. During the summer, your business operates at full capacity as everyone enjoys the sunshine and summer weather. However, as the weather changes and fall moves into winter, your business slows down. A line of credit would allow you to draw funds during these slow times to supplement your working capital, which you can repay gradually as your revenue picks back up.
An unsecured business line of credit acts in the same manner as a secured line of credit. However, unsecured credit lines don’t have collateral backing them. Generally, lenders require that you pledge collateral as a security against the value of the loan or line of credit that you receive. With an unsecured business line of credit, there’s no specific asset leveraged against the borrowed funds.
The lender bases their approval on your personal and business creditworthiness and your business’s general profitability. Since the line of credit isn’t backed by collateral, there’s more risk to the lender. As a result, interest rates on unsecured credit lines are higher than the rates for secured credit lines.
Unsecured Business Line of Credit Costs
The standard rates that you can expect with an unsecured business line of credit through an online lender include average annual percentage rates (APRs) of 30% to 50%, which are inclusive of lender origination fees, prepayment penalties, and other lender fees. While these are average APRs, you may be able to get better rates through some lenders, with the lowest rates being available through traditional banks.
The typical costs associated with an unsecured business line of credit are:
- Interest rate (average 12% to 30%): This is the amount of interest as a percentage that the unsecured business line of credit provider charges you on the amount drawn.
- Expected APR (average 20% to 50%): The calculated APR for funds borrowed on your line of credit includes interest charges and any fees charged by the lender.
- Origination fee (average 0% to 5%): This is the fee the lender charges for setting up the unsecured business line of credit.
- Prepayment penalty: This includes any charges or fees associated with paying your loan balance off before the end of the repayment term. If your loan has a prepayment penalty, you may find that it’s less expensive for you to continue to pay on schedule than to pay the loan off early.
- Additional fees: These are any additional fees that the provider may charge for an unsecured business line of credit. Examples of this include an application fee or a loan origination fee.
Traditional banks and credit unions tend to offer lower rates and fees than online lenders. However, online lenders generally have more lenient qualification requirements, such as a lower credit score minimum. If you qualify for an unsecured business line of credit through a traditional lender, it’ll likely have a lower overall cost of capital for you as the business owner.
Unsecured Business Line of Credit Repayment Terms
Online Lender | Traditional Bank | |
|---|---|---|
Loan Amount | $1,000 to $250,000 | $25,000 to $250,000 |
Repayment Term | Six to 12 months | Reviewed annually |
Repayment Schedule | Weekly or monthly | Monthly |
Unsecured business lines of credit through online lenders work a little differently than lines of credit that you might receive from a traditional bank. An unsecured business loan through an online lender operates much like a short-term loan. Each draw that you make results in a mini-loan, with a six- to 12-month fixed payment. As payments are made to the mini-loan, the repaid funds get added back into your line of credit to be borrowed again.
An unsecured business line of credit from a traditional lender or an SBA line of credit is not set up with the same “mini-loan” format that you would get from an online lender. Businesses that receive a line of credit from a traditional lender won’t have a fixed repayment period. Instead, you’ll pay monthly interest-only payments and may need to, at some time during the year, pay the principal balance down to $0 of your own accord. Many lenders will review your line of credit on an annual basis and may make adjustments to the credit limit at that point.
Unsecured Business Line of Credit Requirements
Online Lender | Traditional Bank | |
|---|---|---|
Credit Score | Minimum of 600 | Minimum of 680 |
Time in Business | At least 6 months | At least 2 years |
Annual Revenue | At least $50,000 | At least $150,000 |
Personal Guarantee | May be required | May be required |
Blanket Uniform Commercial Code (UCC) Filing | May be required | May be required |
Traditional lenders often have more stringent qualification guidelines than online lenders. However, the cost of borrowing with traditional lenders may be lower. Even though both online and traditional lenders will not require you to collateralize a specific asset to secure the line of credit, they will likely require you to provide a personal guarantee in conjunction with lending you funds. If you default on the loan payments, the lender will require that you use your personal assets to repay the owed balance.
Additionally, a lender may also require the filing of a blanket UCC lien against your business assets such as equipment or your accounts receivable. The UCC lien is filed with the secretary of state in the state where your business is incorporated, providing notice to other potential lenders that there is an outstanding lien on your business. Once your line of credit is repaid and closed out, the UCC will be discharged.
How to Get an Unsecured Business Line of Credit
You can get prequalified online for an unsecured business line of credit with most online lenders within minutes. The business loan provider will typically need to connect to your business checking account to verify your business income. You can often be approved within hours and, in most cases, you can receive funds within one to three business days.
Many traditional lenders allow you to apply for an unsecured business line of credit online, although some may still require that you complete a paper application and deliver it to the bank. The lender will evaluate your financial status and repayment ability by verifying the information provided in your application. The approval and funding process may take a week or more.
We have a list of recommendations for the best business lines of credit based on the time it takes to get approved and funded, interest rates, and credit score minimum.
Pros & Cons of an Unsecured Business Line of Credit
An unsecured business line of credit provides you with quick access to working capital and the flexibility to borrow and repay as your cash flow allows. Additionally, it can allow you to build your business’s credit history. However, the requirement of a personal guarantee can be a dissuading factor for business owners who are already short on working capital and worried that drawing heavily on the line of credit might be burdensome to repay.
| PROS | CONS |
|---|---|
| Quick access to working capital | Potentially higher cost of borrowing |
| Flexible borrowing and repayment | Personal assets at risk since there is no collateral |
| Helps build the business’ credit profile | Borrowed funds must be repaid |
Alternatives to an Unsecured Business Line of Credit
If you are uncertain that an unsecured line of credit meets your financing needs, you may want to consider an alternative. Some alternatives to an unsecured business line of credit are:
- Short-term business loans: If your business needs an influx of working capital and you need slightly longer repayment terms than are offered with an unsecured business line of credit, you may want to consider a short-term working capital loan for your financing needs.
- Accounts receivable (A/R) financing: If you have outstanding customer invoices that are due within 90 days, A/R financing may be ideal for your business. Funding can generally be completed within one to three business days of application. Finding the best invoice financing company for your business can make the process go smoothly and quickly.
- Business credit cards: A business credit card is an alternative line of credit option. If you are interested in earning credit card rewards or are looking for a way to manage employee expenses, a credit card could be the solution. Be sure to do your research and find the best small business credit card for your needs.
Bottom Line
Not all businesses have collateral that they can use to secure financing. In this case, an unsecured line of credit may be ideal. Unsecured business lines of credit offer you borrowing flexibility, allowing you to draw only the funds you need and to borrow again as they are repaid.
The best rates and terms for an unsecured business line of credit will be offered by traditional lenders such as banks and credit unions. However, if you are unable to meet the qualification requirements of a traditional lender or don’t qualify for the amount that you need, consider an online lender. Unsecured business lines of credit through an online lender may have a higher overall cost of capital but generally have more lenient qualification requirements.
