Unsecured business lines of credit

Unsecured lines of credit provide a safety net for your business, giving you access to quick cash when you need it without having to back your loan with collateral. The benefit of having a line of credit is that there’s no obligation to use it, and you only pay interest on what you borrow. This makes it more flexible than a term loan, which starts accruing interest as soon as it hits your bank account — regardless of when you spend the funds.

Here’s a closer look at the benefits of unsecured business lines of credit, how they work and where to find one that fits your business requirements.

What is an unsecured business line of credit and how does it work?

An unsecured business line of credit is a revolving line of credit (LOC) issued by a bank, credit union or online lender. Unsecured business lines of credit are not backed by collateral like invoices or assets. Amounts can range from $1,000 up to $500,000, with rates between 8% and 80% APR, depending on your creditworthiness and other factors.

With an unsecured line of credit, you draw upon funds as you need them using a check, business credit card, business checking account or mobile app. Unlike a credit card with a grace period, interest typically starts accruing as soon as you draw upon your LOC. Interest on lines of credit can be variable (the prime rate plus a margin) or fixed, with interest typically calculated using the average daily balance method.

Business LOCs’ term lengths — the draw period — are usually between one and two years but may go up to five years. During the draw period, you can draw up to the limit of your line and pay back interest only or make interest and principal payments, depending on your loan agreement. If you pay down the principal, funds become available to draw upon again, minus the interest you paid.

Keep in mind if you pay only interest during the term, you’ll pay more interest over the long run as the accrued interest compounds. You’ll also have to come up with more cash at the end of the term to pay off the loan — so consider your options carefully.

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Advantages of an unsecured business line of credit

Even the most well-managed businesses may face a cash crunch from time to time. Having a line of credit can help you weather any storms with minimal impact on your business and employees. And the main benefit of an unsecured line of credit is that it doesn’t require you to put up collateral to secure the loan.

A line of credit can be used for virtually any expense, including:

• Covering payroll
• Purchasing inventory
• Hiring new employees
• Expanding to a new location
• Marketing campaigns

While a line of credit is not the best choice for longer-term needs like investing in real estate or buying heavy equipment (separate equipment loans are better for this purpose), they’re ideal for smoothing over cash flow, covering worker shortages and making payroll during slow times.

Unsecured vs. secured business lines of credit

The main difference between secured and unsecured lines of credit is that you don’t need to pledge any collateral with an unsecured line of credit. Because there’s less risk to the lender with a secured LOC, you tend to get more favorable rates and terms.

Here’s a breakdown of the main differences:

Secured line of credit	Unsecured line of credit
Collateral required (inventory, accounts receivable, etc.)	Collateral not required
Less strict requirements	More strict requirements (higher credit score, longer time in business, higher revenue, etc.)
Lower interest rates	Higher interest rates
Higher funding amounts	Lower funding amounts

Eligibility requirements for an unsecured business line of credit

Eligibility requirements for an unsecured LOC vary a lot, depending on the lender. Banks and credit unions tend to have stricter requirements than online lenders — requiring higher credit scores and a longer time in business. And since the loan isn’t backed by assets, the lender may also ask for a personal guarantee.

Here are the general minimum requirements to qualify for an unsecured LOC:

• A credit score of at least 600
• At least six months in business
• At least $15,000 in monthly revenue
• Personal loan guarantee in some cases

Keep in mind these are the minimum requirements that you might find with an online business lender. A bank or credit union typically requires a score of 680 and up, at least two years in business and annual revenue of $100,000 or higher.

Where to get an unsecured business line of credit

Unsecured business lines of credit are available at traditional banks like Bank of America and Wells Fargo, local credit unions, online lenders and business loan marketplaces like Lendio or Credibly. Online lenders tend to have fast, streamlined applications and faster turnaround on LOCs than banks, with funding possible as soon as 24 to 48 hours after approval.

But keep in mind that rates may be higher with an online lender than with a bank or credit union, so compare multiple lenders to make sure you’re getting the best deal.

How to apply for an unsecured line of credit

Here are the general steps to apply for an unsecured LOC:

1. Assess your situation. Determine how much you want to borrow, check your personal credit score and tally your business revenue.
2. Compare lenders. To get the best rates and fees, compare at least three or four lenders.
3. Prequalify online. Once you’ve narrowed down your choices, prequalify online or over the phone. This allows you to view your potential rates and fees without doing a hard credit check.
4. Formally apply. Fill out an application form. This generally requires a hard credit check. You’ll also need to provide documentation to the lender or agree to link your financial accounts.
5. Gather your documents. Be prepared to provide:
   • Bank statements
   • Business and personal tax returns
   • Profit and loss statements
   • Balance sheets
6. Wait for approval and funding. Once you’ve provided all the necessary information and documentation, the lender reviews your application and makes a decision.
7. Make payments on time. If approved, read over your loan agreement carefully and make your repayments according to the LOC’s terms.

Factors to consider when choosing an unsecured business line of credit

Here are the most important factors to consider when choosing an unsecured LOC:

• Interest rates. Interest rates on LOCs can vary wildly, depending on the lender and your creditworthiness. Getting a few quotes helps you assess what rates you realistically qualify for, given your credit history and business financials.
• Origination fees. Lenders that loan to lower credit borrowers often charge an origination fee. Compare lenders for origination fees, and if you’re on the hook, you can always try to negotiate them down.
• Credit limit. Your LOC credit limit is primarily determined by your business revenue and credit history. The higher your revenue and personal and business credit scores, the higher the limit you may qualify for.
• Repayment terms. Some LOCs require interest-only payments during the term and others require principal and interest payments. Assess your cash flow when choosing a repayment term.

Who an unsecured business line of credit is best for

An unsecured LOC is best for business owners who don’t want to put up collateral — or don’t have it — and need quick access to capital from time to time.

It may be the right choice for you if:

• Experience seasonal dips in cash flow
• Need to hire seasonal workers or stock up on inventory
• Want a flexible source of cash for emergencies
• Don’t qualify for other types of loans or financing

Because interest rates can run high on unsecured LOCs, they’re best for business owners that need to tap into them from time to time but can pay them down as their cash flow improves.

Alternatives to an unsecured business line of credit

Unsecured lines of credit aren’t your only option for accessing business capital. If you don’t qualify for a low rate due to your credit history or time in business, consider these alternatives:

• Personal loan. While some lenders have restrictions on fund use, some will allow you to use a personal loan for business expenses. They might be easier to qualify for than a business LOC if you have good personal credit and just a short time in business.
• Business credit card. Like a LOC, a business credit card may be a good option to access working capital. With many perks and benefits, they can help build your business credit score while your points or cash back on business expenses.
• Grants. You may be able to find grant opportunities through federal and state government agencies, as well as private corporations — especially if you’re a startup. But processing times can be lengthy, and they can be competitive.
• Crowdfunding. If you’re a startup or newer business thinking of expanding, you might want to look into crowdfunding — it’s a good way to assess interest in your product or service while you drum up funding.