Unsecured business lines of credit

Unsecured lines of credit give your business a safety net, quick access to cash without needing to put up collateral. You only pay interest on what you use, and there’s not pressure to borrow if you don’t need it. That makes it more flexible that a term loan, which starts accruing interest as soon as the funds hit your account.

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

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

An unsecured business line of credit is a flexible, revolving credit line from a bank, credit union or online lender, and it doesn’t require collateral like equipment or invoices. Here’s how it works:

• Credit limits range from $1,000 to $500,000
• APRs can vary widely, roughly 8% to 80%, based on your credit revenue and lender
• No collateral is required, but most lenders still require a personal guarantee

How to access the funds:

With an unsecured line of credit, you only borrow what you need, when you need it. Funds can usually be accessed through a business checking account, card, checks or a mobile app. As you repay what you borrow, that credit becomes available again.

How interest works:

Unlike a credit card, interest usually starts accruing immediately after you draw funds. Rates may be fixed or variable (often tied to the prime rate), and interest is commonly calculated using your average daily balance. If you only make interest payments, you’ll pay more over time and could face a larger payoff at the end of the term. For many businesses, making at least some principal payments helps keep costs predictable and manageable.

Repayment terms to know:

• Most draw periods last 1–2 years (some go up to 5)
• Payments may be interest-only or include both interest and principal
• Paying down the balance frees up your credit limit again

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:

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, but there are lines of credit that don’t require 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. Some LOCs may offer more flexibility, such as LOCs geared towards startups.

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. However, lenders offering no-doc lines of credit may allow you to skip a majority of the paperwork submission.
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. In some scenarios, you may even want to compare hybrid business loans that come in the form of LOCs, these types of LOCs mix fixed and variable interest rates.
• 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.

To make sure you get accurate and helpful information, this guide has been edited by Holly Jennings as part of our fact-checking process.

Written by

Kat Aoki

Writer

Kat Aoki was a personal finance writer at Finder, specializing in consumer and business lending. She’s written thousands of articles to help consumers make better decisions on their home loans, bank accounts, credit cards, cryptocurrency and more. Kat is well versed in working with leading brands in the real estate, mortgage and personal finance industries, and her expertise has been featured on Lifewire and financial comparison sites like iSelect and realestate.com.au. She holds a BS in business administration from California State University, Sacramento and enjoys hiking and yoga in her spare time. See full bio

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