If you need financing to grow your small business, upgrade equipment or get through a down time, consider an unsecured business line of credit.
This type of funding is similar to a personal line of credit, without the plastic. Find out how to get an unsecured business line of credit — and see if it’s right for your company.
What Is an Unsecured Business Line of Credit?
An unsecured business line of credit is a type of credit in which you don’t provide any collateral to borrow funds. In other words, the bank can’t collect your house if you default. Because you don’t have to offer up your assets to cover the funding, the risk falls on the lender.
Secured vs. Unsecured Line of Credit
As you might have guessed, a secured line of credit is backed by collateral, such as:
- Real estate
Secured loans are less risky to lenders compared with unsecured loans. Because lenders have less skin in the game, secured loans typically have higher credit limits and lower interest rates. Also, since many lenders require a minimum length of time in business, unsecured business lines of credit for startups aren’t common.
Pros of an Unsecured Business Line of Credit
Clearly, the big advantage of an unsecured business line of credit is that you don’t need to provide collateral. Business lines of credit also generally have lower interest rates than business credit cards.
There are some other benefits, too:
Revolving Credit Limit
If you’re approved for a revolving line of credit, you can use what you need when you need it as often as needed. As you use the funding, your limit goes down. As you pay off your balance, your credit line increases, up to your original approval limit. A line of credit is helpful when you need funds in a pinch.
No Restrictions on Use of Funds
You’re free to use your credit line as you see fit. Some lenders even waive fees for cash advances.
Use your unsecured business line of credit for real-estate purchases, to buy expensive equipment or pay vendors.
You also could use your credit line to:
- Purchase advertising
- Make utility payments
- Make repairs
- Purchase inventory
No Interest on Unused Funds
Once you’re approved for a business line of credit, you’ll only pay interest when you tap into your credit line. It’s a great way to have fund availability in your back pocket in case you need it.
Cons of an Unsecured Business Line of Credit
Unfortunately, there are some drawbacks to this type of financing.
- High revenue: A minimum annual revenue of $100,000 is a good starting point when you’re trying to gauge how much you need to qualify for an unsecured business line of credit. That being said, there are some lenders that will consider businesses with less revenue and some that may require more.
- Higher credit score: Lenders may look for minimum credit scores of 600-620, a range that credit-rating company FICO considers “fair.” As a result, getting approved for an unsecured business line of credit with bad credit may be challenging if not impossible. Also, the lower your credit score, the higher your interest rate will be.
- Minimum time in business: Many lenders require applicants to have been operating their businesses for a certain length of time. Some lenders may require 6 months, while others may require several years. As such, startup owners may find it difficult to obtain unsecured business lines of credit.
- Lower credit limits: Since you don’t provide collateral to obtain an unsecured business line of credit, the risk is on the lender. As a result, credit limits are usually lower than you’d see with a secured business line of credit. However, unsecured business lines of credit may range from a few thousand dollars up to $100,000 or more, depending on the lender. Also, the better your credit and qualifications, the better your odds for approval.
- Shorter repayment windows: The repayment window for a business line of credit is generally shorter than you’d see with a conventional loan or a secured credit line. Some lenders may require repayment in 3, 6 or 12 months, while others may extend your payment terms for a few years.
- Higher interest rates: Unsecured business line of credit rates vary by the lender and the loan. For instance, Bank of America is offering an introductory rate of 4.99% for the first 7 billing cycles (as of October 2019). Wells Fargo, in contrast, is offering unsecured business lines of credit rates at the bank’s prime rate plus 1.75%. As of Aug. 1, 2019, Wells Fargo’s prime rate was reportedly 5.25%. Note that some lenders may also charge an annual fee.
Unsecured Business Line of Credit Lenders
With so many options out there, it might be overwhelming to determine where to turn for your small business financing needs. Should you apply with individual banks? What about an online lending marketplace?
Some things to consider:
- Are you looking for a streamlined process?
- Do you need a quick answer?
- Do you fall short on some of the common qualification requirements?
If you answered yes to one or all of the above questions, an online lending forum may be best for you. Let’s look at each type of lender in more detail.
Keep in mind that banks and credit unions generally have stricter requirements for approval than alternative lenders.
They also likely will require the following documentation:
- Personal and business credit score
- Personal and business tax returns
- Bank statements
- Profit-and-loss statements
Lenders seek this information to get a clear picture of your revenue and expenses, cash flow and creditworthiness.
Many alternative lenders are available online and typically have quicker, easier approval processes. Simply securely connect your bank account to the lender for review.
After reviewing your checking account and financials, the lender can provide you with their decision. This streamlined process allows for faster approvals than you’d see with traditional banks.
Do Some Due Diligence
Be sure to research companies before you apply. The Better Business Bureau can be a useful resource, providing business details, ratings, reviews and more.
Tips to Consider Before Applying
Once you’ve made up your mind that an unsecured business line of credit is best for your company, put yourself in the best position possible.
- Determine how much funding you need
- Gather the applicable documents your prospective lender will require
- Maintain your credit score — or even better, try to raise it
- Avoid applying for new credit 6 months before you apply for your credit line
- Keep your existing credit debt as low as possible
- Don’t miss payments
- Start strategizing how you’ll repay the loan
If you’re a small business owner who’s looking for financing that offers purchase flexibility, low risk and easy access to fund replenishment, consider applying for an unsecured business line of credit. Remember, you’re only charged interest on the amount you actually use.