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Updated on Friday, March 29, 2019
Accessing capital as a small business owner can be difficult, especially if you don’t have valuable assets to back a loan or line of credit. Fortunately, an unsecured business line of credit may be an option for business owners who need funding but don’t have much to offer in terms of collateral.
A line of credit allows business owners to withdraw money from a set amount of funding, borrowing only what they need and paying interest on that amount. As soon as the borrowed money is paid back, the full amount becomes available again.
Keeping a line of credit open would give you access to cash on an as-needed basis. And because interest only applies to what you borrow, you wouldn’t have to pay for money you don’t need right away. A line of credit can cover unforeseen costs, such as equipment repairs, as well as other working capital needs.
Business lines of credit can be secured or unsecured, depending on whether any collateral is backing the credit line. In general, an unsecured line of credit is going to carry higher borrowing costs, but it may be your best option compared with high-interest credit cards or small business loans. We’ll walk you through the pros and cons.
What is an unsecured business line of credit?
- Amounts are typically between $10,000 and $100,000.
- Flexible payment options
An unsecured line of credit gives business owners access to funding without the requirement of collateral. Secured lines of credit, on the other hand, require a borrower to offer an asset, such as real estate or equipment, that the lender could seize if the borrower does not repay their debt.
Without collateral, your unsecured line of credit may come with less favorable repayment terms and higher interest rates or spending limits than a secured line of credit. You would still need certain qualifications to be approved for an unsecured line of credit such as a minimum number of years in business and minimum annual sales.
An unsecured line of credit can be considered a non-traditional business financing option because it doesn’t require as much paperwork and documentation as a secured line of credit or loan.
A loan typically requires fixed monthly payments, but you could repay your balance on a line of credit at a pace that works with your financial situation. You could repay the full amount each month, the minimum monthly payment or an amount above the minimum payment.
You may also use an unsecured business line of credit to build your business credit profile. The line of credit would be issued to your company rather than to you personally. Following good financial practices like making timely payments would boost your business credit score, which could help you obtain additional financing in the future.
How to apply for an unsecured business line of credit
Traditional lenders such as banks and credit unions may require you to apply in person for your first line of credit. Alternative business lenders will usually ask you to complete an application online.
All types of lenders will typically look for positive cash flow within your business and a projection of future earnings. Lenders will also review your credit profile, as they prefer to work with business owners who have good credit history. These factors will determine your risk as a borrower, which impacts the interest rate and repayment terms on your line of credit.
A lender may want to review the following documents:
- Business license
- Tax returns
- Two to three months of bank statements
- Business bank account
- Financial statements such as cash flow statements and profit and loss statements
You do not have to offer any assets as collateral when applying for an unsecured business line of credit. But because of the lack of collateral, you may need a strong credit profile to qualify. Depending on your risk as a borrower, the lender may also place a general lien on your assets, which would give the lender rights to those assets if you default on your debt. You could be required to sign a personal guarantee, which legally makes you personally responsible to pay back debt if your business defaults.
Unsecured vs. secured business lines of credit
Both secured and unsecured business lines of credit function the same way – you would have access to funds on an as-needed basis. The difference between the two financing products lies in whether you offer collateral to secure the line of credit.
A secured business line of credit would require you to pledge assets, usually short-term assets like accounts receivable and inventory, to secure the credit line. If you are unable to repay the money you borrow, the lender would claim ownership of those assets.
An unsecured business line of credit does not require specific assets to back the line. However, the lender could still claim your assets through a general lien or a personal guarantee. It may be easier to get business financing through an unsecured line of credit if you don’t have valuable business assets, but interest rates may be higher for an unsecured credit line than they would be for a secured credit line. Credit limits are often smaller for unsecured lines as well.
The bottom line
When you’re in a financial pinch, you likely want access to business financing as soon as possible. Keeping a line of credit open would let you borrow money right when you need it.
Lenders set the repayment terms for individual lines of credit, and you would only have to pay back what you borrow. But try not to withdraw more than you can repay because a lender will typically ask you to pay down your full balance at some point over the course of a year.
Your interest rate and repayment terms would depend on how risky you are as a borrower. When shopping for an unsecured business line of credit, compare lenders to make sure you receive a rate and terms you’re comfortable with. Also, be sure to understand any additional fees and charges lenders may add to your line of credit such as origination or maintenance fees. Once you find a lender offering the amount of money you need with reasonable repayment conditions, you could begin using your unsecured line of credit to cover expenses within your business.