The Ultimate Guide to Finding an Unsecured Business Line of Credit
What Is an Unsecured Business Line of Credit?
An unsecured business line of credit is a debt financing option that offers a revolving credit limit but doesn’t require you to offer up collateral to secure that revolving credit limit. Because unsecured lines of credit won’t require collateral, they will typically come with higher rates, shorter repayment terms, and lower credit limits.
Business lines of credit with no personal guarantee or collateral requirement might be trickier to come by—but that’s where we come in. We’ve pulled together everything you need to know about unsecured business lines of credit into one comprehensive resource.
The Fundamentals of an Unsecured Business Line of Credit
We’re going to start at square one here. To make it clear what exactly an unsecured business line of credit is, we’re going to break down how it’s different from more familiar types of small business loans.
Business Line of Credit vs. Term Loan
With a typical business term loan, you’ll receive the whole amount of the loan at one time. You then have a set period of time (the “term”) in which to pay it off, usually in predetermined increments. In addition to paying off the principal of the business loan (that original amount you borrowed), you’ll also be responsible for paying interest.
If you don’t end up needing all of the money, you’re still responsible for paying it back, plus interest.
Lines of credit, on the other hand, are much more flexible:
You can use them whenever you need and not use them when you don’t need them. They’re a useful, low-maintenance option to keep around.
Of course, you do still have to pay interest on whatever credit you use. Business line of credit rates also tend to be lower than those for term loans—unless you’re late in making your payments, in which case those rates can skyrocket. For a term loan, on the other hand, they’ll stay the same no matter what.
Business Line of Credit vs. Term Loan Case Study
If one business owner had a term loan with a principal amount of $10,000 and a second business owner had a line of credit with a maximum of $10,000, both business owners would be able to use up to $10,000 of financing. But let’s say that they each only ended up needing $5,000. The owner with the term loan would need to pay back the entire $10,000 plus interest anyway, while the one with the line of credit would only need to borrow and pay $5,000 plus interest.
That’s a whole lot of savings.
Business Line of Credit vs. Business Credit Card
The word “card” pretty much sums up the difference: with a business credit card, you’ve got a piece of plastic to use instead of a cash advance.
So if you tap into your business line of credit, you’ll get a deposit into your bank account. With a business credit card, you’ll swipe the card.
Applying for a business credit card depends on your credit score instead of all of the documentation that a business line of credit will require—so it might be a little less of a hassle.
But that doesn’t necessarily mean a business credit card is a better option for you. Credit cards generally need to be paid off monthly, even if only with a minimum payment, while line of credit repayment is more flexible.
And if you need cash to make your purchases, a line of credit is a better bet: cash advance loans from credit cards can be pretty expensive.
Unsecured Business Line of Credit vs. Secured Business Line of Credit
A secured line of credit, like a secured business loan, is more “secure” for the lender because it requires you to post some sort of deposit or collateral.
This could be real estate or some other personal asset that the lender could sell off if you default on the loan, or it could be a cash deposit, like with a secured credit card.
Unsecured business lines of credit, you might have guessed, are… Not secured. No collateral involved, just like unsecured loans.
As a business owner, of course, you’d much rather open unsecured business lines of credit so that you’re not risking any of your personal assets.
But of course, there’s a catch: you often need to have high annual revenue and a high personal credit score in order to access a business line of credit without personal guarantees or collateral necessary (or an unsecured business credit card).
Unsecured Business Lines of Credit
When you measure them against secured business lines of credit, unsecured business lines of credit will typically cost you more and require that your business be more qualified.
Because your business won’t offer up any collateral for an unsecured business line of credit, this product is riskier for the lender. As a result, they will be stricter during their underwriting process by requiring good to excellent personal credit, a longer time in business, and more revenue.
Plus, those who do qualify for an unsecured business line of credit will likely get higher interest rates, lower credit limits, and shorter repayment terms due to the risk that the lender faces thanks to the unsecured nature of this product.
All in all, if you’re able to offer up collateral of any sort for your business’s line of credit, you’ll be more likely to qualify for the product, and you’ll be more likely to access more ideal rates—make sure that unsecured business lines of credit are really worth it for your business.
Secured Business Lines of Credit
Putting up collateral on a line of credit lets small business owners with lower revenues and credit scores get higher credit limits with lower interest rates. But offering up collateral to back your business line of credit doesn’t necessarily mean putting your house or car on the line.
In fact, a secured business line of credit could look very different to what you might expect it to.
A secured line of credit might be backed by invoices or equipment, or it could be a secured credit card, which requires a deposit.
Invoice-Backed Line of Credit
Invoice financing is an excellent choice for businesses that rely on invoicing customers… And have to wait for those invoices to be paid.
If you repeatedly find yourself confronting cash flow problems, you can use invoice financing to cover the gap between the time you issue the invoice and the time you’re paid for it. The lender is helping you to be paid for your invoices right away, in other words, and then when you do receive the money from your customers, you can pay the customer back.
Invoice financing can also provide you with a term loan instead of a line of credit, but the advantage of an invoiced-backed line of credit is that it’s more flexible, so you can borrow more money if you have more invoices due—and vice versa.
Equipment-Backed Line of Credit
An equipment-backed line of credit is just like an equipment-backed loan. If you need financing to buy a piece of equipment, that equipment can serve as your collateral.
(Until you pay the lender back, they have the right to seize that piece of equipment in case of default.)
Inventory-Backed Line of Credit
Inventory-backed lines of credit are exactly the same idea as equipment-backed ones, except they use your inventory as collateral instead of your equipment.
If you need financing to fund inventory purchases, inventory-backed lines of credit will let you get lines of credit with low interest rates.
The catch?
You’ll only be able to use the credit for inventory purchases.
Secured Credit Cards
Secured credit cards aren’t really useful if you need financing, because they require you to put down a deposit that’s usually equal to the limit on the card. If you needed $5,000 to cover your payroll expenses until your customers pay off their bills, forking over $5,000 to get a credit card with a $5,000 limit isn’t going to help you.
What they are good for is building your business credit, which can help you qualify for better lines of credit in the future.
If you have low or no business credit, you can still apply for and receive a secured credit card. After you’ve consistently made payments on time for several months, your credit score might be high enough to move on to a better option.
Top Unsecured Business Line of Credit Providers
If you’ve got a fantastically successful business that’s been up and running for years, a stellar personal credit score, and the patience to gather together lots of paperwork, you can apply for a bank line of credit.
But beware: four out of five small business owners who apply for a bank line of credit are denied, and even the ones who get approved face infamously long wait times.
Unless your business’s finances and qualifications are in absolute pristine condition, consider starting your search with these top alternative lenders:
OnDeck Unsecured Business Lines of Credit
OnDeck offers unsecured business lines of credit of anywhere from $5,000 to $100,000. No matter your credit limit or your APR, your OnDeck unsecured business line of credit will have a 12-month repayment term length and won’t have a prepayment penalty.
In order to access this unsecured business line of credit, though, you’ll need to have a credit score of at least 625, at least 1 year of business, and at least $100,000 in annual revenue.
Lending Club Unsecured Business Lines of Credit
And if you and your business are more traditionally-qualified than OnDeck requires, then you might be able to access a more affordable unsecured business line of credit from the alternative lender Lending Club.
That is, if you have at least one year in business, at least $50,000 in annual revenue, and a personal credit score of at least 620, then you’re eligible to work with this lender.
And you’ll want to seize this opportunity if it’s available to your business—Lending Club unsecured business lines of credit can range anywhere from $5,000 to $300,000 with APRs as low as 5.9% and repayment periods as long as five years. Lending Club can a challenging lender to qualify for, so if your Lending Club loan is denied, try working with short-term lenders.
Applying for an Unsecured Business Line of Credit
Who Typically Qualifies for Unsecured Business Lines of Credit
After all this talk of unsecured business lines of credit, you might be curious about the small business owners who typically qualify for and use them.
75% of Fundera customers who have been approved for a business line of credit have:
- Over a year in business
- An annual revenue of at least $180,000
- A credit score of at least 630
If you’re at or over those benchmarks, you’re probably in pretty good shape to get a business line of credit.
Of course, interest rates and maximum amounts of credit will vary depending on your time in business, credit score, and annual revenue.
Unsecured Business Line of Credit Next Steps
Whether you’re applying for unsecured business lines of credit from a bank or from an alternative lender, apply for a line of credit before you need it!
There’s no downside to taking out a line of credit loan before you need it. And then when you do need it, it’s there immediately. You won’t need to scramble to get your application together or wait for the lender to evaluate and approve your application.
The application process for unsecured business lines of credit will change from lender to lender, but here are a few things that unsecured business line of credit lenders typically request:
- Bank statements: from at least the past three months to show off your positive cash flow.
- Profit and loss statements: to show the lender your revenue and your expenses.
- Essential business identifying info: like how long you’ve been in business, what industry you’re in, and how many owners there are. Banks will want you to have been in business for at least two years, but alternative lenders are willing to work with newer businesses.
- Personal credit score: to get an idea of your borrowing history.
- Personal tax returns: to verify your income.
- Business tax returns: to verify your revenue.
Frequently Asked Questions
The Bottom Line
Unsecured lines of credit are a versatile, easy financing solution that work well for a wide range of businesses and needs. And if you don’t want to sign away your personal assets, no problem: there’s a lot of options out there for unsecured business lines of credit.
Think of an unsecured business line of credit like an insurance policy—cash that’s there for you if and only if you need it.
