Unsecured Business Line of Credit: What It Is and Best Options

What is an unsecured business line of credit?

Unsecured lines of credit are not backed by physical collateral like real estate, equipment or inventory. Although you don’t need to provide collateral, your lender will likely require a personal guarantee or Uniform Commercial Code lien in order to mitigate the risk of lending to your business.

A personal guarantee holds you personally responsible for the debt if your business can’t pay and your lender can seize your personal assets to recover its losses. Similarly, a UCC lien gives your lender the right to seize your assets in the event of default. UCC liens can be filed for specific assets, or your lender can file a blanket lien, which covers all of your assets.

Not all lenders file liens on their borrowers, but it’s less likely that you’ll find an unsecured business line of credit without a personal guarantee.

How does an unsecured business line of credit work?

An unsecured business line of credit works like any other credit line. You can draw from a set limit of funds and only pay interest on the funds you borrow. Then, you repay what you’ve borrowed over time and can continue to draw on the line — provided you make your payments on time and don’t exceed your credit limit.

Secured vs. unsecured business line of credit

The main difference between a secured and unsecured business line of credit is the use of collateral.

A secured business line of credit is backed by specific collateral, such as property or equipment. Lenders may also require a personal guarantee or UCC lien on secured credit lines — in addition to physical collateral.

Providing collateral, however, helps mitigate the risk a lender takes when issuing you a business line of credit. As a result, secured credit lines tend to have lower interest rates, longer repayment terms and larger borrowing amounts compared with unsecured business lines of credit.

In certain circumstances, secured lines of credit can be easier to qualify for, as lenders can rely on the value of your collateral, even if you’re a startup or don’t have perfect credit.

If you’re trying to get an inventory loan, for example, the lender may prioritize the value of the products you’re looking to purchase when underwriting your application.

For unsecured business lines of credit, on the other hand, lenders often focus on the credit and financial history of your business.

» MORE: Compare the best startup business lines of credit

How to qualify for an unsecured business line of credit

The business line of credit requirements you’ll need to meet will vary based on your lender. In general, however, lenders will consider similar criteria, such as:

• Personal credit score. You’ll typically need to have a minimum credit score of 600 or higher to qualify for an unsecured business line of credit. Although online lenders may accept bad or fair credit scores, banks will likely require good credit.

• Annual revenue. Most lenders have a minimum monthly or annual revenue requirement. This requirement can range anywhere from $50,000 to $250,000 per year, or more.

• Time in business. Lenders want to be able to see that you can successfully manage and sustain your company. You’ll usually need at least six months in business to qualify.

• Financial history. Unsecured business line of credit lenders will use your bank statements, other financial accounts and financial statements (e.g., balance sheets, cash flow statements) to evaluate your ability to repay potential debt. 

If you qualify for a credit line, your lender will also use these factors to determine your credit limit, interest rates and repayment period. The stronger business credentials you have, the more likely you are to receive competitive rates and terms.

Where to get an unsecured business line of credit

Unsecured business lines of credit are available from banks, credit unions and online lenders.

Like many other types of small-business loans, banks and credit unions usually offer the most competitive interest rates and repayment terms, but can have strict qualification requirements. You’ll likely need good credit, strong finances and, in most cases, a few years in business, to get an unsecured credit line from a bank.

If you have a previous relationship with one of these institutions, you might start by contacting it to see what options are available. Smaller, community banks and credit unions can also be a good choice, as they’re more likely to approve loan applications compared with larger banks.

It’s important to keep in mind, however, that these lenders tend to have slow funding processes.

Online lenders, on the other hand, typically offer fast, simple financing. Certain lenders can even approve and fund applications in as little as 24 hours.

These companies often have flexible eligibility criteria, and some are willing to work with startups and/or borrowers with bad credit. As a tradeoff for speed and flexibility, however, online lenders usually charge higher interest rates.

» MORE: How to get a business loan