Should you get an unsecured business line of credit? – Forbes Advisor

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Running a business can be expensive and it can be challenging to find financing that covers the costs of operations and expansion. In addition to traditional business loans, eligible business owners can meet current cash flow needs with unsecured business lines of credit. They allow business owners to access cash as needed without having to pledge valuable assets.

However, this financing tool does not make sense for every company and it is important to choose a lender that best suits the financial situation of the business.

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 expenses or provide working capital until more permanent financing 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, the prospective borrower must submit an application that includes detailed financial information about the company. Based on financial documents such as tax returns, bank statements and existing loan documents, the lender assesses the applicant’s creditworthiness and ability to repay the loan on time and in full.

Approval times vary, but verification often takes about two weeks. Once the underwriting process is complete, the borrower can withdraw cash up to their approved limit as needed. Because payments are made on the outstanding balance, that money becomes available for reuse until the end of the withdrawal period – often one or two years. After the withdrawal period ends, the repayment period begins, when the outstanding balance plus interest and fees is due.

Interest is charged only on the amount you borrow, not on 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 in that it does not require collateral to secure the loan. This structure means that the borrower does not have 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 income requirements.

In contrast, a secured business line of credit requires some form of collateral to serve as collateral in the event the borrower defaults on the loan. Eligible assets can include real estate, inventory, accounts receivable, machinery or other items that the lender can liquidate if the borrower fails to repay the loan.

Lenders also charge higher interest rates for unsecured lines of credit than their secured counterparts because the collateral reduces their risk in the event of borrower default.

How to qualify for unsecured business lines of credit

Qualifications for an unsecured business line of credit depend on a variety of factors, including the borrower’s credit score and the financial history of their business. Generally speaking, companies must have been in business for at least six months or one year and have established a positive payment history with suppliers and creditors to be considered eligible.

Lenders also want to see that the business has sufficient cash flow to make regular loan payments. Available loan limits are ultimately based on the borrower’s ability to repay withdrawals as determined by the lender. Here’s what lenders look for when evaluating applicants for an unsecured business line of credit:

  • Credit rating. A borrower’s credit score and history are some of the most important factors that financial institutions consider when making loan decisions. Lenders usually look at the business owner’s personal score. Minimum score requirements vary by lender, but are generally higher than those for secured lines of credit. Borrowers generally must 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 that the lender can assess cash flow and available cash.
  • Financial history. Applicants for a line of credit are often required to provide additional financial documents, including tax returns, bank statements and other relevant financial statements. Unlike secured lines of credit, applicants do not have to prove the availability or value of collateral to secure the loan.
  • Time in business. Lenders prefer to provide funds to established businesses that have proven 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 income. As with business time requirements, lenders often require applicants to demonstrate minimum monthly or annual income. This figure can range from about $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 apply for with an online lender than with a traditional financial institution. Online lenders may also offer faster funding speeds, although interest rates are often higher.

After all, prospective borrowers must compare offers from different lenders. The best business lines of credit include affordable eligibility requirements, competitive interest rates and flexible repayment terms.

Are unsecured lines of business 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 this 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
  • You have an established business with stable cash flow and good credit history
  • You do not have adequate collateral to secure a loan from a traditional lender
  • You want a flexible option to cover day-to-day operating costs or finance growth initiatives

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