How to qualify for an unsecured business line of credit
Key takeaways
- An unsecured business line of credit is a line of credit that doesn’t have any assets backing it.
- Unsecured business line of credit requirements include strong credit and revenue to show that you can effectively manage the loan.
- Lenders will assess various factors to determine if you qualify, such as your credit score, financial statements and time in business.
Unlike business loans, which are dispersed in a single deposit, a business line of credit allows you to draw from it for business-related expenses, like inventory or payroll, up to your borrowing limit. Unsecured lines of credit don’t require you to offer any collateral to your lender. Because you aren’t offering assets against the loan, lenders may consider them riskier and apply strict approval guidelines.
Although business line of credit requirements vary by lender, you may need a certain business credit score, annual revenue and number of years in business to qualify.
What is an unsecured business line of credit?
Business lines of credit can be secured or unsecured. Secured lines are backed by collateral that the lender can seize should you default. Unsecured lines of credit are not backed by collateral. In other words, a secured line of credit may require you to put up business assets like real estate or equipment against the loan, while an unsecured loan doesn’t.
Because you’re not required to provide collateral for an unsecured line, some lenders may require that you sign a personal guarantee. Signing this type of agreement means that you — as the business owner — will be personally liable for the company’s debt if the line of credit is not repaid as agreed. Many lenders require a personal guarantee for all unsecured loans; others may require it if there are concerns about your business’s age or financial stability.
If your application is ultimately approved, you’ll be issued a credit limit and can begin borrowing money as needed for a certain time period. During the approved borrowing period, you can withdraw as much or as little of the line of credit as you need for your business. As you pay back the loan, you can borrow from the line of credit again during the draw period as many times as you need up to your borrowing limit.
Compare the difference between different types of loans to determine which option is best for you:
| Type of credit | General terms | Collateral required | Offered by |
|---|---|---|---|
| Business credit cards | Borrow against a predetermined limit as needed; tend to have high-interest rates | No | Banks and credit card companies |
| Term loans | Receive a lump sum of money that is paid back over several years; may be secured or unsecured | Sometimes | Banks, credit unions, online lenders |
| Secured business lines of credit | Borrow against a revolving credit line with a set limit | Yes, banks may seize assets if you default on the loan | Banks, credit unions, online lenders |
| Unsecured business lines of credit | Borrow against a revolving line of credit with a set limit | No, but lenders may require a personal guarantee | Banks, credit unions, online lenders |
How to qualify for an unsecured business line of credit
When you apply for an unsecured business line of credit, a lender will review information associated with your business and possibly your personal finances. Each lender sets business line of credit requirements, which they’ll measure your business against, including the following.
Time in business
Lenders generally want to see that your business has been operating for a fixed amount of time. Longer is better, as longevity is a sign of stability. Many businesses fail within just one to five years of opening their doors, so lenders want reassurance that your business will generate revenue for as long as it lends to you.
Often, the minimum amount of time required is two years in business. Some lenders may approve a line of credit for businesses that have been established for as little as six months.
Credit score and history
Banks and other lenders mainly consider personal FICO scores when reviewing an application for a loan, including when you’re applying for an unsecured line of credit for your business. FICO scores range from 300 to 850. Generally, higher scores like 670 or higher indicate you are less of a risk, which makes lenders feel more comfortable about providing a loan.
On the other hand, low scores like 500 to 600 are a red flag for lenders. They indicate you may have had financial challenges in the past. You’ll have even more trouble if you’ve previously defaulted on a loan. If you have poor credit, you may have to look into bad credit business lenders to get approved for a loan. If lenders do extend funds, they may charge a steeper interest rate to offset any risk you pose.
Some lenders, particularly banks, may also want to check your business credit score. This is especially common if you’re applying for a significant credit line.
The major business credit bureaus include Dun & Bradstreet, Equifax, and Experian. FICO also offers its own small business credit score, known as the FICO Small Business Scoring Service. Building business credit is a good idea if you want to qualify for larger loan amounts.
Annual revenue
Lenders also consider your business’s annual revenue during the application process. A strong, steady revenue reassures lenders that you’ll be able to repay any money you borrow from a credit line.
Lenders will likely want to review your business bank accounts and will look to see a consistent income stream.
While the specific requirements vary by lender, it’s not unusual for a lender to require an annual revenue of $100,000 to $200,000. However, you can shop around with different lenders, especially online lenders, since some require far less revenue. American Express, for instance, offers business lines of credit to businesses with just $3,000 per month in revenue.
Financial history
Many lenders require businesses applying for unsecured business lines of credit to show a financial history of two or more years. This helps assure the lender that the business can continue operating without folding.
Businesses can demonstrate their financial history by providing income tax returns, banking documents, balance sheets, profit and loss statements, cash flow history and projections and other financial statements.
Lenders will assess whether your business has strong income as well as profitability to see whether it should grant you an unsecured line of credit. They rely more heavily on these financial statements when approving an unsecured line of credit versus a secured line of credit.
Bank account
An open business bank account in good standing is one of the main unsecured business line of credit requirements.
In addition to the overall status of the account, lenders look at its average daily balance. Lenders tend to look negatively at businesses that frequently overdraw their accounts or bounce checks.
Lenders prefer business accounts with positive cash flow, as this helps assure them that the business regularly shows a profit and effectively manages its cash flow.
Business plan
Lenders want to know that you’ll have the cash flow to successfully keep up with loan payments. To that end, they may require you to submit a detailed business plan explaining how you make money and how you’ll use the loan funds. In addition, prepare to offer information on your business’s financial projections, the outlook for your industry and your business goals.
A solid outlook may give lenders confidence when it comes to an unsecured loan, given that they won’t have collateral to leverage for repayment.
Where to find unsecured business lines of credit
You can get a business line of credit from various institutions, including:
- Banks and credit unions: Traditional banks tend to offer the lowest interest rates but may require strong credit and revenue to qualify.
- Online or fintech lenders: Online lenders typically have less strict eligibility requirements and faster funding speeds than traditional lenders, though they may have higher interest rates.
Bottom line
The requirements for unsecured business lines of credit include assessing your business’s credit history, revenue, financial statements and projections and your business plan. Since unsecured lines of credit aren’t backed by assets, lenders will rely on the strength of your business’s profitability to determine whether it can lend to you.
You may need to consider multiple lenders to get approved for the best loan offer available to you. To find a line of credit that best matches your company’s needs, compare rates, repayment terms, average funding speeds and eligibility requirements from multiple lenders.
Frequently asked questions
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Unsecured business lines of credit are offered by a wide variety of banks, online lenders and credit unions — all with their own approval guidelines. You can increase your chances of an approved application by having a few years in business, creating a detailed business plan and having a minimum credit score in the high 600s.
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No. An unsecured loan or line of credit doesn’t require collateral. You may be required to sign a personal guarantee, making you personally liable for the business debt.
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Depending on the lender, it may take between a few days to several weeks to be approved for a line of credit and begin to draw money. Big banks with an internal underwriting process may take longer than online lenders. Online lenders often provide fast funding within 24 to 48 hours, though they may charge higher interest rates than traditional lenders.
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