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Unsecured Business Line of Credit: The Good, the Bad, and the Ugly

September 9, 2018
Unsecured Business Line of Credit Credit Suite

Everything You Need to Know Before You Apply for an Unsecured Business Line of Credit

Learn More About An Unsecured Business Line of Credit Than Most Business Owners Know

There is virtually no way to run a business without financing at some point in time. Whether you need to upgrade, purchase new equipment, make repairs, cover a cash gap, or just take advantage of an awesome wholesale promotion, you are likely not going to have all the cash on hand that you need at all times. An unsecured business line of credit could be the solution you need. But read on.

Even if you do have cash on hand, financing is a great way to build business credit and manage cash flow, if used properly. The question then becomes not “if” you need business financing. It is now “what type” of business financing do you need.

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There are a lot of Funding OptionsUnsecured Biz Credit Line Credit Suite

The options are many.  Which one is best for your business will depend on multiple factors. There are term loans, lines of credit, various types of invoice lending, credit cards and more available as financing options for businesses today.

Under each one there are sub options for specific types of borrowers and specific borrower needs. These include secured, unsecured, and even options with cash back and other rewards.

The best way to make a decision is to learn as much as you can about each one before you need financing.

The unsecured line of credit is one option that is often misunderstood. It can be tough to determine why you would choose this option over a secured line of credit or a term loan.  The benefits of one over the other can be even harder to figure out.

How do you find an unsecured line of credit? Do you even qualify? We are going to answer these questions and more.

Why Choose a Line of Credit?

Unsecured Line of Credit vs. Term Loans

The answer here is pretty simple. If you need cash occasionally, of different amounts, but on a recurring basis, then a line of credit could work better than a term loan.

For example, Company 1 and Company 2 are both seasonal businesses. The bulk of their sales come during a specific portion of the year, with significantly less, though steady, sales during the rest of the year.

Because of this, they often see a cash shortage during the months directly before their season begins. They will make it up easily during the busy season.  In the meantime, during the shortage, they need cash to bridge the gap.

Company 1 takes out a term loan for $15,000. Company 2 gets approval for a business line of credit of the same amount. But Company 1 only ends up needing to use $10,000 to bridge the gap. They have to repay the entire $15,000 plus interest, monthly.

Company 2 also ends up only needing $10,000 to bridge the cash gap. They have a line of credit and make a draw on it to put the $10,000 in their account, as needed. They repay only the $10,000 plus interest, not $15,000.

It is easy to see how a business line of credit in this instance fills the need at a significant savings versus a term loan.

Unsecured Line of Credit vs. a Business Credit Card

A credit card is very similar to a line of credit. Most often the glaring different is the use of a card. But some business lines of credit offer a card for access in addition to checks. Some credit cards offer checks for access as well as a card.

Another difference is that sometimes you can use your lending institution’s online banking option to make direct transfers from a line of credit to a checking account. That is, if the accounts are at the same institution. Also, if you need cash, there is no cash withdrawal fee typically with a line of credit. Credit card cash advance fees can be expensive.

Credit cards tend to have higher interest rates than business lines of credit also, though unsecured lines of credit can have very high interest rates as well.

Unsecured Line of Credit vs Secured Line of Credit

Now that you can see the benefit of using a line of credit over other financing options in certain situations, you need to know when and why to choose an unsecured line.

The fact is, an unsecured line of credit is harder to get.  It usually costs more than a secured line of credit too.

The difference is because of the increased risk to the lender. A secured business line of credit has the safety net of collateral. Therefore, if you cannot or do not pay, the lender can still use the collateral to recover.

Some business owners either do not have collateral to offer, or they have no interest in tying up their assets with financing. In these cases, they may be able to get an unsecured line of credit.

An unsecured line of credit typically has strict approval guidelines and qualifications. In addition, they will likely  have higher interest rates and less favorable repayment terms. This is due to the increased risk to the lender.

Where Can You Find an Unsecured Line of Credit?

Not all lenders offer an unsecured line of credit. there are options available at many traditional and alternative type lenders however.  Which one you go with depends, again, on your specific situation.

Traditional lenders charge the lowest interest rates, but their repayment terms may be less flexible. They will also have harder to meet qualifications and a longer approval process. It can take several days after approval to have access to the funds.

An alternative lender will usually have easier to meet qualifications and more flexible repayment terms, but the interest rates are much higher. The approval process is faster however, usually online, and in some cases, you can access to funds in as little as 24 hours.

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Application Preparation

The items you need to apply for an unsecured line of credit are similar to what you would need for any business loan. It will vary from lender to lender, but a general list includes:

  • Bank statements
  • Financial statements
  • Tax returns

Some lenders will check your business credit score. Sometimes  your personal credit score will be pulled as well. A score of 620 is usually the minimum requirement for approval. Some alternative lenders do not require a minimum score.  Some traditional lenders may require a higher score for an unsecured business line of credit.

They are looking for minimum annual revenue as well.  Traditional banks are more likely to grant approval at $180,000 or more of revenue annually.  Alternative lenders usually have a lower threshold.

Basically, lenders are looking for how long you have been in business and what your annual revenue is.  Exactly what they need to see to grant approval varies between lenders.

Examples of Unsecured Line of Credit Options from Real Lenders

Seeing exactly what types of products are currently available from real lenders can be helpful in understanding the difference between what traditional and alternative lenders offer.

Traditional Lenders

  • Wells Fargo

Wells Fargo currently has an unsecured business line of credit available for amounts ranging from $5,000 to $100,000. There may be an annual fee after the first year depending how much you are approved for. The current promotion is no annual fee for the first year. This is a limited time offer.

The interest rate is equal to prime plus 1.75. Eligibility requirements are not listed, but they do require identification of owners, business identifying information, financial statements and more with the application.

  • Bank of America

There is currently an unsecured line of credit product available from Bank of America. It ranges from $10,000 to $100,000.  The interest rate is a 2.99% fixed interest rate for the first 12 billing cycles. This is a promotional offer however and may not last long. There is a $150 origination fee if approved.

A business must have been in business for two years and have a minimum of $100,000 in annual revenue to qualify.

Alternative Lenders

  • Fundbox

The unsecured line of credit offered by Fundbox ranges in amount from $1,000 to $100,000. And there is an APR from 10.1% to 78.8%. The repayment term is 12 weeks, but the minimum time in business required is 12 months. You must have at least $50,000 in annual revenue. Also, there is no minimum credit score requirement.

The interest rate will increase based on annual revenue and time in business.

  • OnDeck

OnDeck offers an unsecured business line of credit of up to $100,000. It has an APR ranging from 11% to 60%. You repay it weekly for up to 6 months.

This one ranges from $5,000 to $250,000 with an APR of 15% to 78%. The repayment term is from 6 to 12 months.

  • StreetShares

With repayment terms from 3 to 36 months, this is a good option if you qualify. The APR ranges from 9% to 40%.  This is on the lower end for alternative lenders. The amount starts at $5,000 and ranges up to $150,000. They also offer some specialty products with lower interest rates.

Learn bank rating secrets with Credit Suite's free, sure-fire guide.

An Unsecured Business Line of Credit Could Work for You

If you don’t have collateral or do not want to tie up your assets with financing, an unsecured line of credit could be an option. The repayment only on what you use may cost less than an unsecured term loan. This is despite the higher interest due to being unsecured.

The bottom line is that an unsecured business line of credit can be more costly than a secured line of credit. It can still be less costly than a term loan however… While they are easier to get if you have been in business longer, have higher annual revenue, and have a great credit score, they are not impossible to get without these things. If you are not sure how much you need, or your needs could vary, and you do not want to tie up assets or do not have assets to offer as security, then an unsecured business line of credit could be for you. If it were all left up to you, how would you improve the process to get an unsecured business line of credit?

About the author 

Faith Stewart

Faith has a BBA with a major in Accounting, and a combined 20 years of experience in the fields of finance and account.

Before switching to writing, she spent 10 years working in various areas of small business and personal finance and accounting, including working as a public auditor at BKD, LLP, Financial Director at Central Arkansas Development Council, and Commercial Credit Analyst at Farmer's Bank and Trust.

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