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When you start your own business, you may have trouble getting approved for traditional financing because you haven’t been in business very long or haven’t established business credit. Yet you may still need capital to launch your business, renovate space, or hire employees.
An unsecured business line of credit for startups may be one option worth considering. Be aware that they usually have higher interest rates than some other forms of funding because lenders consider them riskier.
Keep reading to learn what an unsecured business line of credit is, pros and cons, and how your startup may be able to qualify for one.
Key Points
• An unsecured business line of credit for a new business can provide flexible financing that allows them to borrow funds as needed, pay interest only on borrowed amounts during the draw period, and draw again after repayment.
• A business line of credit, unsecured by collateral like property or equipment, may be accessible for new businesses without significant assets to pledge as security.
• Qualification typically requires strong personal credit scores, a solid business plan, financial projections, and often a personal guarantee from the founder promising repayment if the business defaults.
• Compared to secured options, unsecured lines generally feature higher interest rates, lower credit limits, and stricter creditworthiness requirements, since they involve greater risk for lenders without collateral protection.
• Alternative funding sources can include business credit cards, SBA microloans, crowdfunding platforms, equipment financing, peer-to-peer lending, and revenue-based financing arrangements with investors.
What Is an Unsecured Line of Credit?
An unsecured business line of credit (a business line of credit unsecured by any kind of collateral) is a flexible form of financing that allows businesses to borrow funds as they need them. Much as you would with a credit card, you spend what you need (up to your set credit limit), pay it back with interest, and are then free to draw on the funds again. Typically, interest is charged only on the amount borrowed. Unsecured lines of credit do not require collateral, such as property or equipment.
The credit limit on an unsecured business credit line is determined by the lender based on the business’s creditworthiness and financial history. Because startups lack an established financial history, lenders typically require strong personal credit scores, a solid business plan, and sometimes a personal guarantee to offset the risk.
Pros and Cons
An unsecured business line of credit may make it easier for startups to access funds for operational needs or growth opportunities. However, like any form of business financing, they come with pros and cons.
Pros of unsecured business lines of credit for startups include:
• Quick access to cash
• Interest charged only on the amount borrowed
• No collateral required
Cons of unsecured business lines of credit for startups include:
• May require a strong personal credit score
• Interest rates may be higher due to lack of collateral
• Credit line may be low
Recommended: Startup Credit Card Funding
How It Works for Startup Financing
Unsecured business lines of credit can be appealing to startups in need of funding they can turn to for longer-term projects or unexpected emergencies because they don’t necessarily require that businesses have an established credit history or substantial collateral to secure them.
Typically, a small business will apply for an unsecured business credit line, and the potential lender will likely want to see the founder’s credit score and some indicators of the business’s financial status, which may include the business plan or signed contracts. Initial credit lines typically range from $10,000 to $1000,000 but may be increased over time as the company grows.
Generally, if you are approved for a business line of credit, you’ll have a draw period of 12 to 24 months during which you can take out funds up to your limit and pay interest only on what you’ve drawn. That’s generally followed by a repayment period, during which you will pay back principal as well as any remaining interest.
Unsecured vs Secured Business Line of Credit
The difference between secured and unsecured lines of credit is that secured business lines of credit require collateral, whereas unsecured lines do not. Collateral, which can include property, equipment, or inventory, backs the loan and reduces the lender’s risk.
This often results in lower interest rates, higher credit limits, and more favorable terms.
In contrast, an unsecured business line of credit doesn’t require collateral, making it more accessible for businesses without significant assets.
Recommended: Unsecured Business Loans
Key Differences in Risk and Qualification
While both secured and unsecured business loans can be useful to startups, there are differences between them, especially when it comes to the risks they present for lenders and the qualifications required of borrowers as a result. This table summarizes some of the most important.
| Unsecured Business Line of Credit | Secured Business Line of Credit |
|---|---|
| Does not require collateral | Requires collateral |
| Puts the lender at risk of losing money if the borrower defaults | Involves less risk for the lender since it can take possession of the collateral in case of a default |
| Lender is likely to require a personal guarantee, which says that the founder will repay the loan if the business can’t | Lender might not require a personal guarantee, though it’s still possible |
| Interest rate may be higher | Interest rate may be lower |
| Amount of credit line may be lower | Amount of credit line may be higher |
| Higher levels of creditworthiness and more evidence of company financial health may be required | Lenders may be slightly more lenient about credit scores and proof of company financial health |
Requirements to Qualify
For established businesses, lenders look at credit scores, time in business, and annual revenue to assess whether they qualify for an unsecured line of credit. However, startups typically do not have established revenue or a lengthy business history.
Because of that, lenders typically require a strong personal credit score, especially since there is no collateral involved. Startups may also need to provide a solid business plan and financial projections to demonstrate the viability of the business.
Some lenders may also require a personal guarantee, meaning the business owner is personally liable for repayment. Additionally, the startup should be legally registered and in good standing, with a clear use planned for the credit line, such as managing operational costs.
Alternatives to Unsecured Business Line of Credit for Startups
Some startups may find it difficult to qualify for an unsecured line of credit. Here are a few other small business financing options that may be available to startups.
Business Credit Cards
A business credit card can provide new business owners with needed access to cash. It can also be an important tool to help business owners separate their personal finances from their business finances. Credit card issuers will generally review factors like your personal credit score and income to assess whether you qualify. Some options may require collateral or a personal guarantee.
Recommended: Can You Get a Business Credit Card Before You Open a Business?
SBA Microloans
The U.S. Small Business Administration (SBA) has a microloan program that offers loans up to $50,000 to certain eligible small businesses. These small business microloans can be used to finance things like working capital, inventory, furniture, and machinery or equipment. Other SBA loans may also provide eligible small businesses with funding to meet their needs.
Crowdfunding
There are a variety of crowdfunding platforms online that help business owners try to raise money to support their business. This process can allow business owners to fund their business without taking on additional debt.
Equipment Financing
Equipment financing helps businesses that are in need of new or used equipment. With this type of loan, the equipment becomes the loan collateral, which means that lending requirements may be less strict than they would be for unsecured loans.
Peer-to-Peer Lending
Peer-to-peer (P2P) lending involves borrowing money from individual investors. Usually, this process takes place through a dedicated online platform which sets the terms of loans according, in part, to its assessment of risk. If you apply for a P2P loan, you will have to supply the platform with your company’s financial information so that it can assign you a risk level.
Revenue-Based Financing
In this form of funding, investors provide upfront funds to a company in exchange for a set percentage of the company’s revenue when it comes in, up to a predetermined limit. This limit could be in the range of three to five times the original investment, but the fact that it’s paid as revenue comes in can make the repayments feel more flexible than they might for more traditional funding methods.
Recommended: Bad Credit Business Loans
An Unsecured Business Line of Credit Can Give You the Boost You Need
Having access to cash when it’s needed can be tremendously helpful to a startup. It can be used for business growth, managing cash flow, purchasing inventory, covering operational expenses, financing short-term projects, or addressing unexpected costs.
Keep in mind, though, that some lenders will charge more than others — whether that’s in fees, interest, or both — so it’s important to choose a lender that will offer you the best rates and terms for your situation.
Recommended: Business Loan vs. Personal Loan
The Takeaway
An unsecured business line of credit can help you fund and build your venture. The growth of many new businesses depends on their ability to access adequate capital. However, unsecured business lines of credit often have higher interest rates than other forms of funding and you may have to sign a personal guarantee, meaning you will be responsible for paying if the business fails.
If you’re seeking financing for your business, SoFi is here to support you. On SoFi’s marketplace, you can shop and compare financing options for your business in minutes.
FAQ
What is an unsecured line of credit for business?
An unsecured line of credit for business is a revolving credit account that a company can access and draw funds from up to a set limit. It’s a commercial lending product that does not require businesses to pledge any assets as collateral.
How do I get a $250,000 unsecured line of credit for my business?
Each lender has a different cap for lines of credit, so look around to find one that offers $250,000 or more, then review the requirements to see if you might qualify.
How do I qualify for an unsecured line of credit for small business?
Requirements vary from one lender to another, but you will likely need to meet eligibility standards like a minimum time in business. Your business may also need to generate strong annual revenues and meet a minimum level of creditworthiness to qualify for an unsecured line of credit.
What banks give out unsecured lines of credit?
Many major banks offer unsecured lines of credit, including Wells Fargo, Bank of America, and PNC Bank. Credit unions and online lenders also offer unsecured lines of credit. It’s always best to shop around to determine who can offer you the best rate and terms for your situation.
Is an unsecured business line of credit good for startups with no revenue?
An unsecured business line of credit for a new business with no revenues might be useful, especially if the company has a specific funding need that the line of credit would meet. However, it may be difficult for a startup with no revenues to obtain an unsecured line of credit as revenue is likely a factor lenders will consider when they are deciding whether to extend credit. Crowdfunding or equipment financing might be more accessible options.
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