How to qualify for an unsecured business line of credit
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 eligibility 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?
An unsecured business line of credit functions like a business credit card. Businesses can use the funds made available through a line of credit as needed — in contrast to a term loan, which provides funds in a lump sum. And with a business line of credit, you’re only required to pay interest on the amount of money that’s actually used.
Both online lenders and traditional banks extend lines of credit, with borrowing limits ranging from $2,000 to over $250,000.
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 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.
And because you’re not being required to provide collateral, some lenders may require that you take the extra step of signing 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. Withdrawals might be made through an app, a card or a checking account.
Repayment terms associated with business lines of credit vary, but you typically repay what you owe in monthly or weekly installments.
| 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; requires collateral that the bank may seize if you default. | Yes | Banks, credit unions, online lenders |
| Unsecured business lines of credit | Borrow against a revolving line of credit with a set limit; no collateral is required. | No | 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 loan requirements, which they’ll measure your business against.
This review may include the amount of time your business has been operating, as well as your personal and business credit score and your business’s cash flow.
Many newer businesses might only qualify for a small line of credit until they establish positive credit histories. Your lender may allow you to increase your limit over time. Line of credit amounts depend on factors such as the business’s revenue, expenses and age.
Time in business
Lenders put a lot of weight on the amount of time your business has been operating. Generally, they 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 a year of opening their doors.
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 indicate you are less of a risk, which makes lenders feel more comfortable about providing a loan.
Lower scores, on the other hand, 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 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. There are several different business credit reporting bureaus and each uses its own scale.
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.
Bank account
An open business bank account in good standing is one of the main requirements for applying for an unsecured business line of credit.
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 will be a better investment.
Annual revenue
Your business’s annual revenue is another important consideration in 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 more than $200,000. Though some lenders 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.
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 more 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, credit unions and online lenders. Online lenders typically have less strict eligibility requirements and faster funding speeds than traditional lenders, though they may have higher interest rates.
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 waiting until you have 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, however.
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Depending on the lender, it may take between a few days and 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 direct lenders.
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