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Running a business may be expensive, and it can be challenging to find financing that covers the cost of operation and expansion. In addition to traditional business loans, eligible business owners can address ongoing cash-flow needs with unsecured business lines of credit. These let business owners access cash as needed without having to pledge valuable assets.
However, this financing tool doesn’t make sense for every company, and it’s essential to choose a lender that best fits the business’s financial situation.
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What Is an Unsecured Business Line of Credit?
An unsecured business line of credit is a revolving loan that business owners can use to finance the growth, expansion or day-to-day operations of a small business. This type of financing provides access to cash up to an approved credit limit and can help cover unforeseen costs or provide working capital until more permanent funding becomes available.
Because it does not require collateral, it can be an attractive option for newer businesses without sufficient assets to pledge as collateral.
How Do Unsecured Business Lines of Credit Work?
Unsecured business lines of credit are typically issued by banks, credit unions and online lenders. To obtain a line of credit, a prospective borrower must submit an application that includes detailed financial information about the company. Based on financial documents like tax returns, bank statements and existing loan documents, the lender evaluates the applicant’s creditworthiness and ability to repay the loan on time and in full.
Approval times vary, but verification often takes around two weeks. Once the underwriting process is complete, a borrower can withdraw cash up to their approved limit on an as-needed basis. As payments are made on the outstanding balance, that money becomes available to reuse until the end of the draw period—often one or two years. After the draw period ends, the repayment period begins, when any outstanding balance plus interest and fees are due.
Interest is charged only on the amount you borrow, not the entire credit limit. Some lenders require monthly payments, while others require weekly payments.
Unsecured vs. Secured Business Line of Credit
An unsecured business line of credit differs from a secured business line of credit as it does not require collateral to secure the loan. This structure means the borrower doesn’t need to pledge any valuable assets as part of the lending process. However, this also means that the lender may require a higher credit score, more time in business or higher revenue requirements.
In contrast, a secured business line of credit requires some form of collateral to serve as security in case the borrower defaults on the loan. Acceptable assets may include real estate, inventory, accounts receivable, machinery or other items the lender can liquidate should the borrower fail to repay the loan.
Lenders also charge higher interest rates for unsecured lines of credit than for their secured counterparts because collateral reduces their risk in the case of borrower default.
How to Qualify for Unsecured Business Lines of Credit
Qualifications for an unsecured business line of credit depend on various factors, including the borrower’s credit score and the financial history of their business. Generally speaking, companies should have been in operation for at least six months or one year and have established a positive payment history with vendors and creditors to be considered eligible.
Lenders also want to see that the business has sufficient cash flow to make regular payments on the loan. Available borrowing limits are ultimately based on the borrower’s ability to repay the draws as determined by the lender. Here’s what lenders look at when evaluating applicants for an unsecured business line of credit:
- Credit score. A borrower’s credit score and history are some of the most important factors considered by financial institutions when making lending decisions. Lenders typically look at the business owner’s personal score. Minimum score requirements vary by lender but are usually higher than for secured lines of credit. Borrowers must typically have a score of at least 630 to qualify.
- Business bank account. Many lenders require borrowers to have a business bank account in good standing to qualify for an unsecured line of credit. Prospective borrowers must provide copies of bank statements during application and verification so the lender can evaluate cash flow and cash on hand.
- Financial history. Line of credit applicants are often required to provide additional financial documents, including tax returns, banking documents and other relevant financial statements. In contrast to secured lines of credit, applicants do not have to demonstrate the presence or value of collateral to secure the loan.
- Time in business. Lenders prefer to extend funds to established businesses that have demonstrated their ability to pay bills on time. Many lenders require borrowers to have been in business for at least six months or one year to qualify.
- Annual revenue. As with time in business requirements, lenders often require applicants to demonstrate a minimum monthly or yearly revenue. This number can range from around $25,000 to $250,000 per year.
Where to Get Unsecured Business Lines of Credit
Borrowers can get unsecured business lines of credit from banks, online lenders and other financial institutions. As with other types of financing, unsecured lines of credit may be easier to qualify for with an online lender than with a traditional financial institution. Online lenders may also offer faster funding speeds, though interest rates are often higher.
Ultimately, prospective borrowers should compare offers from multiple lenders. The best business lines of credit feature accessible eligibility requirements, competitive interest rates and flexible repayment terms.
Is an Unsecured Business Lines of Credit Right for Me?
Whether an unsecured business line of credit is right for a company depends on the borrower’s financial situation and needs. If you qualify for a secured line of credit and have adequate assets, it may make more sense to go that route if it comes with a lower rate and more favorable terms. Likewise, if you need a lump sum of cash, rather than a revolving line of credit, consider a small business loan to finance your business’s cash flow needs.
But an unsecured business line of credit may be the right choice if you:
- Need quick access to capital
- Have an established business with a healthy cash flow and good credit history
- Don’t have adequate collateral to secure a loan from a traditional lender
- Want a flexible option for covering day-to-day operating expenses or funding growth initiatives
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