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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.
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:
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.
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.
• 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
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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:
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.
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 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:
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.
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.
Here are the general steps to apply for an unsecured LOC:
Here are the most important factors to consider when choosing an unsecured LOC:
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:
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.
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:
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