Unsecured Business Line of Credit: How It Works and Top Options
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An unsecured business line of credit is a way for business owners to borrow money without having to commit to a specific loan term or amount or offer up collateral. The business gets approved for a certain credit limit with the option to borrow as much as you choose and as often as you’d like, as long as you stay within the pre-approved credit limit.
Flexibility makes unsecured lines of credit a popular option, but requirements will vary between the banks, credit unions and online lenders that offer them. We’ll walk you through the options.
What is an unsecured business line of credit?
An unsecured business line of credit is a revolving credit account, meaning that you can access your original credit limit once you’ve repaid your balance in full (like a credit card), and only pay interest on what you borrow. It does not require you to secure the debt with collateral — such as business equipment — the way a secured line of credit or loan would. As a result, this type of credit might require higher interest rates and offer lower credit limits. You also may need to provide a personal guarantee or show a strong personal credit history.
Secured or unsecured, business owners tend to use lines of credit for short-term working capital, managing unexpected costs and dealing with cash flow shortfalls. Here’s a quick look at how a business line of credit differs from a traditional small business loan or business credit card.
|Line of credit||Credit card||Term loan|
|Collateral required||Secured, yes; unsecured, no||No||Secured, yes; unsecured, no|
|Average APRs||8.00%-80.00%||13.12%-19.87%||Bank loans, 4%-13%; Online loans,
|Fees||Annual, draw and inactivity fees possible||Annual, balance transfer, foreign transaction, plus fees for employee cards possible||Origination, application, processing fees possible|
|Set terms||No, but line may be subject to annual review||No||Yes|
Business line of credit vs. business credit card
As we mentioned earlier, a business line of credit works much like a business credit card: get approved for a certain credit limit, and you have the option to borrow as much as you choose, on a flexible, as-needed basis, as long as you stay within that approved credit limit.
But there are key differences. Even though business credit cards tend to have higher credit limits than personal cards, a secured line of credit may offer up to $1 million in capital. An unsecured business line of credit might have borrowing limits as low as $5,000 to as high as $250,000 or more, at rates generally lower than a business credit card. A business credit card also charges fees for cash advances, unlike a line of credit.
Business line of credit vs. term loan
A traditional term loan has fixed monthly payments over a set period of time, usually three to 10 years. There are short-term loans which may be repaid in as little as three months, but they are generally more expensive. The main advantage of a line of credit over a term loan is flexibility — if you’re not sure how much money you may need, you would only pay interest on what you borrow versus receiving a lump sum in a term loan that accrues interest as soon as you receive it.
Business lines of credit: top options
Wide availability is another attractive feature of a business line of credit, but it also means that it’s even more important to shop around and compare rates. Banks tend to offer lower rates, but also may require strong credit or significant business history. Online lenders generally have a more lenient approval process, but may charge higher rates and require a personal guarantee.
Before you sign up for an unsecured business line of credit, make sure you understand the full requirements, APR and other fees. Use a business line of credit calculator to estimate your costs.
Top online lenders
|Rates||1.25%–10.00% monthly fee||Starting at 4.66% for a 12-week repayment plan||APR starting at 10.99%||Starting at 4.80% simple interest||8.00%–39.99% APR|
|Terms||6, 12 or 18 months||1 or 2 months||Up to 12 months||6 or 12 months||3 to 36 months|
|Minimum Credit Score||None||500||600||650||Typically above 700|
Like other online lenders, Kabbage offers fast time to funding, but perhaps one of its most appealing features is the lack of a minimum credit score. However, Kabbage does perform a credit check as part of the application process. It also requires one year in business and a minimum annual revenue of $50,000 per year or $4,200 per month, during the past 3 months.
One significant downside, however, is a confusing rate structure. Use Kabbage’s rate calculator to make sure you understand the full cost of borrowing.
FundBox not only has lenient credit requirements, it also has low time-in-business requirements — two to three months. However, it will want to see activity in your accounting software or business bank account, and you would need to connect one or the other toFundBox‘s platform in order to receive and make payments. Repayment periods are fast (1 or 2 months, with fixed weekly payments), so it’s probably best to borrow from FundBox only if you know you can pay back the line of credit quickly.
OnDeck offers an unsecured business line of credit up to $100,000 at APRs as low as 10.99%, though average APRs are much higher, 35.2%. You can apply in 10 minutes, get approved within one business day and get your funds as soon as that same day. OnDeck’s minimum requirements include a personal FICO score of 600, at least one year in business and minimum annual revenues of $250,000. Like other lenders on this list, you’ll make fixed daily or weekly payments.
BlueVine provides an unsecured line of credit with funding up to $250,000. The application process takes as little as five minutes and once you are approved, funds can be disbursed to your bank account within hours. Each time you borrow money from your line of credit, you repay the funds over a term of 6 to 12 months, with fixed weekly or monthly payments.
StreetShares focuses on lending to veterans, though anyone is welcome to apply for its business line of credit. It looks for at least a year in business (though it says it may allow only six months) and relatively high credit scores compared to others on this list. The upside is potentially lower rates.
Top bank lenders
If you meet the requirements for time in business and established business credit history, getting your unsecured business line of credit from a conventional brick-and-mortar bank might be a lower-cost option. A particular bank might also be a preferred Small Business Administration lender, giving you potential access to the SBA’s line of credit program. Be aware, however, that you might have to be an existing customer in order to apply online with a brick-and-mortar bank — new customers may have to apply in person.
|Wells Fargo Bank||Capital One||Bank of America||PNC Bank|
|Amounts||$5,000–$100,000||Starting at $10,000||$10,000 – $100,000||Up to $100,000|
|APR||As low as 1.00% + prime||Not specified||As low as 4.50%||Varies, based on prime rate|
|Terms||60 months (Small Business Advantage®), no annual review||Not specified||Revolving line, annual renewal||Not specified|
|Minimum Credit Score and Additional Requirements||Less than two years in business permitted for Small Business Advantage®; two or more years for BusinessLine®||Must have been in business for at least two years||670, plus 2 years in business and at least $100,000 in annual revenue||3 or more years in business, and annual revenue of $100,000+|
1. Wells Fargo Bank
Wells Fargo Bank offers two unsecured lines of credit starting as low as $5,000 with APRs starting around prime +1.00% (5%, as of April 17, 2020). The bank charges an annual fee of $95 for lines of credit of between $10,000 and $25,000 and $175 for lines of credit between $25,001 and $100,000.
Businesses that have been in operation for less than two years may be eligible for the Small Business Advantage line of credit that is backed by the SBA. Otherwise, Wells Fargo is looking for at least two years in business and established business credit.
2. Capital One
Capital One offers its Working Capital Line of Credit starting at $10,000 for companies that have been in business at least 2 years. No financial statement is required for credit lines of less than $50,000, but larger amounts may require additional paperwork. Term length, APR and repayment terms will vary depending on the borrower’s application and qualifications.
3. Bank of America
Bank of America’s unsecured business line of credit is available in amounts ranging from $10,000 to $100,000 at APRs of as little as 4.50%. You may qualify for an even lower rate thanks to discounts of up to 0.75% for Preferred Rewards for Business customers. In return for some of the lowest rates on this list, the bank looks for a relatively high credit score and annual revenue. Borrowers may be charged up to a $150 origination fee.
4. PNC Bank
PNC Bank offers a business line of credit of up to $100,000 with no origination fees and no annual fees, though features may depend on your state. You could get a decision on your loan application in as little as one business day. If approved, you may be required to make minimum monthly payments of $100 or 1.5% of the balance, whichever is greater
How to apply for an unsecured business line of credit
Step 1: Make sure you qualify
As you can see above, eligibility criteria for an unsecured business line of credit varies between lenders. Make sure you meet a particular lender’s minimum credit score, number of years in business and annual revenue requirements. Some lenders share more information than others about their minimum requirements and expectations; don’t assume that you will qualify for a loan just because of what you see on a website.
Step 2: Gather financial documents
Some lenders have more extensive requirements than others, but in general, lenders may want to see these types of financial documents and business records:
- Business name, address, phone number and email address
- Type of business, including founding date and industry code.
- Annual sales and/or revenue
- Information about the business owner(s) including name, address, phone number, email address and Social Security number
- Business tax returns
- Balance sheet
- Business profit & loss statement
- Recent transaction activity from business bank account or accounting software
Check with your lender before applying to make sure you have the right documentation ready.
Step 3: Choose a lender and submit your application
If you apply with an online lender, the application process might only take a few minutes. If you want a larger line of credit from a brick-and-mortar bank, you might need to schedule an appointment and go to an in-person meeting. Make sure you understand the process so you can avoid any confusion or delays.
Step 4: Await approval
If you get approved for a business line of credit by an online lender, you will likely be notified quite quickly, perhaps within a few minutes of completing your application. The process can be more time-consuming for brick-and-mortar banks.
Once you get approved, log in to your account and make sure you understand your options for how to withdraw money from your business line of credit.
Alternatives to an unsecured business line of credit
In addition to the secured lines of credit, business credit cards and terms loans discussed earlier, there are other alternatives to an unsecured business line of credit.
Inventory financing is a type of business financing that lets you borrow specifically to buy inventory, using that inventory to secure the loan. For that reason, APRs may be lower than an unsecured business line of credit. If that’s the case and the borrowing amounts are sufficient to fund your inventory purchasing goals, this type of business loan might be the best option.
Equipment loans are another option for business financing that lets you borrow for a specific purpose: in this case, business equipment. These are typically secured loans where the business equipment being purchased is used as collateral to secure the loan. As a secured loan, you should typically qualify for a lower APR than you might get on an unsecured business line of credit.
Another way to access cash is to borrow against your business’s outstanding invoices. This can be done through invoice financing — typically a loan that a lender gives you, using your invoices as collateral. Invoice factoring is similar, but you would typically sell those invoices to a company known as a factor in exchange for an upfront cash advance.