Oftentimes, lenders may require you to put up collateral in order to minimize risk on their end. Unsecured financing refers to business loans and lines of credit that don’t require collateral – as opposed to asset-backed financing.
Entrepreneurs commonly ask, “What is an unsecured business line of credit?” and “What is an unsecured credit line?” during their search for the right option. In short, the specifics come down to whether or not you’ll offer collateral to “secure” your financing.
Collateral can be any asset you own that is of value, such as real estate, business equipment, unpaid invoices, investments, and more.
Not every lender or financing product will require collateral, but for younger small businesses, those with less than great credit, or applications for large funding amounts – you may be expected to put up your assets.
So how do you know whether you qualify for unsecured financing? In this guide, we’re going over all the ins and outs of unsecured business loans and unsecured business lines of credit.
What Is an Unsecured Business Loan?
One of the fastest and most convenient funding examples is an unsecured business loan. It works the same as a typical business loan, except there’s no need to put down your assets as collateral.
With no collateral requirements, you don’t run the risk of losing your car, home, or business. Instead, lenders will assess your application based on your ability to repay your loan and your credit score.
What Is an Unsecured Business Line of Credit?
An unsecured business line of credit (LOC) is a financing solution that provides access to credit without any form of collateral. Unlike a business loan, you can draw funds from your total credit limit as needed and only pay interest on the amount drawn.
funding option that gives you access to a line of credit without any form of collateral. As opposed to its secured alternative, since it isn’t backed by collateral, it often has higher interest rates and shorter repayment terms.
Business lines of credit give you access to a reservoir of funds you can withdraw from up until a set maximum amount. You’ll be able to withdraw at any time and won’t have to make any payments unless you actually use your line of credit.
Some business lines of credit are revolving, which means that as you make payments toward your balance, those funds will once again be available to use.
For those with limited personal or business assets or those more at risk of foreclosure, unsecured business loans and lines of credit are the ideal choices for financing.
What Is an Unsecured Revolving Line of Credit?
An unsecured revolving line of credit is a business credit line that doesn’t require collateral, allowing you to withdraw funds up to a set capital limit that will immediately be added back towards your credit line once you’ve repaid the initial amount you borrowed.
If you’re confused about how a revolving, unsecured business line of credit works – don’t worry. We’ve illustrated the process to make things easy. Take a look at this example scenario of a business owner using an unsecured business line of credit:
- You, the business owner, receive an unsecured business line of credit with a set capital limit. You can draw however much you want, at any time, up until the credit limit. With National, this amount typically caps off anywhere between $10,000 and $5 million.
- Once you take out a certain amount of capital from your unsecured credit line, you only have to repay the capital you’ve borrowed for that exact amount. For example, if you have a $100,000 credit maximum and you take out $10,000, you’ll only be obligated to pay back the $10,000. Your payment terms may also vary and depend on the unique payment cycle you qualify for, which is a key differentiator between an unsecured small business loan and an unsecured business credit line.
- You’ll repay the borrowed amount, and the funds will immediately become available within your account, allowing you to draw the same funds again if you need them. For example, if you take out $10,000 from your $100,000 credit line, $90,000 will be left for available withdrawal. Once the $10,000 is repaid, it will automatically be added back into the line of credit, restoring your full balance of $100,000.
What Are the Benefits of Unsecured Loans?
Small business owners who seek to use an unsecured business line of credit and unsecured business loans do so for a variety of reasons.
- Quick and easy application
- Fast funding
- Ability to access capital without collateral requirements (less risk)
- Potential to build credit history with consistent, timely payments
The lack of a collateral requirement reduces the amount of paperwork, which – in turn – speeds up the application and funding process. It also diminishes the risk for the borrower, as they won’t lose a critical business or personal asset if they end up defaulting on the financing. Still, the lender has to mitigate their risk in some way, so they’ll offer higher interest rates and shorter repayment schedules as a result.
What Is the Difference Between an Unsecured Business Loan and an Unsecured Business Line of Credit?
The main difference between an unsecured business loan and an unsecured business line of credit is that, while both are financing options that are not backed by collateral, business lines of credit are generally the more flexible option, allowing borrowers to only pay for what they use.
|Type of Financing||Description|
|Unsecured Business Loan||
|Unsecured Line of Credit||
Requirements for each option will depend on your business, the amount you’re seeking, the lender you’re working with, and the economic conditions surrounding your transaction. If you want to compare multiple options without filling out unnecessary paperwork, consider working with National Business Capital and their 75+ lender marketplace.
How Does an Unsecured Business Line of Credit Compare to Other Financing Options?
Wondering if an unsecured business line of credit is the best option for your business?
If you want easy access to working capital and don’t have collateral (or would prefer not to put your assets up), then it’s a no-brainer. With a line of credit, you only pay for what you withdraw, so you’re not committing to paying interest on funds you haven’t used.
An unsecured business line of credit gives you access to a large amount – without putting up any assets – which you can draw from as you need. You can use it to fund growth, cover sudden expenses, make payroll, and more. If you need more cash, simply draw from it.
If you’re unsure how much cash you’ll need or use, and flexibility is a priority, then a line of credit is definitely the way to go.
If not, you can still get financing through other alternatives. The best financing option isn’t always straightforward. Instead, you need to take into consideration exactly what your goals are and the conditions you’re most comfortable with.
What Is the Difference Between an Unsecured Business Line of Credit and a Business Credit Card?
The main difference between an unsecured business line of credit and a business credit card is the flexibility of the two financing products, as well as the spending limit that each one of them has.
While you can use both to pay for expenses without cash upfront, an unsecured business line of credit gives you more freedom and higher spending limits, which are better for covering long-term business projects. For example, credit card limits average around $56,000, whereas a line of credit can extend up to $5 million – potentially further, with the right qualifications.
As opposed to business lines of credit rates, credit card rates are usually much higher and have higher annual fees. Cash advances, which allow you to obtain cash immediately, can be incredibly expensive on a credit card, so much so that they might not be worth it for your bottom line.
Lines of credit are generally the better option, but if you aren’t able to qualify for one reason or another, business credit cards are still great resources for investing in growth.
What Is the Difference Between an Unsecured Line of Credit and a Term Loan?
Comparing an unsecured line of credit to a term loan comes down to flexibility and your preferred repayment structure.
|Type of Financing||Description|
|Term Loan||Unlike a line of credit, a term loan grants you the entire amount upfront as cash. You’re responsible for paying that back based on a set, pre-determined schedule. And, if you need additional capital at any point during your repayment, you’ll have to take out additional financing and go through the application process again.
Because of this, term loans are ideal when your upcoming expenses are planned, like purchasing real estate or a piece of equipment with a set price. Term loans are also a good option if you need a large funding amount and you can demonstrate the potential payoff of your project to the lender.
|Unsecured Line of Credit||On the other hand, an unsecured business line of credit is a better fit if you are looking to cover consistent, ongoing expenses – such as payroll or operating costs. The increased flexibility allows you to do much more and manage the payments over time, which is priceless for a growing business managing its cash flow.|
Which Type of Unsecured Business Line of Credit Is Best for You?
For small businesses seeking financing, there are two main types of unsecured business lines of credit: traditional and non-traditional (alternative). So how do you determine which is the best choice for your business?
Traditional Unsecured Business Line of Credit
Traditional unsecured business lines of credit are issued by a bank. Banks tend to be more conservative lenders and will usually require a substantial amount of documentation from borrowers.
This can include financial statements, personal tax returns, business tax returns, bank account information, business registration documents, a business plan, and more, depending on the lender.
Once a traditional business credit line has been issued, an annual financial review is required to maintain the line of credit. Traditional business lines of credit are difficult to be approved for and maintain. However, they come with various benefits, such as lower interest rates.
Alternative Unsecured BLOCs
The alternative unsecured business line of credit is a type of product that’s offered by alternative lenders. An alternative lender is any financial institution that’s not a traditional bank.
National, for example, is a FinTech marketplace and also an alternative lender. Therefore, National is able to provide business financing without the rigid restrictions traditional banks require.
At National, our lending criteria is more “user-friendly,” and our loan approval and processing is fast (applicants typically receive unsecured funds in as little as 24 hours).
How is this possible? While traditional lenders look at your assets and credit score to determine your eligibility, at National, we consider the entire picture and place emphasis on your business’s potential for growth.
A non-traditional unsecured small business line of credit can be an essential funding tool for any business to have in its financial arsenal.
What Are the Risks of Unsecured Business Financing?
Unsecured business financing tends to be more risky for lenders and less risky for borrowers. That’s because collateral gives lenders an additional guarantee. If borrowers are unable to repay what they’ve borrowed, a lender can simply claim the asset, sell it off, and recover their losses.
However, there are still some risks that the borrower assumes when taking out unsecured financing. If you default, you may:
- Damage your credit
- Have difficulty taking out financing in the future
- Lost credibility with that specific lender and other lenders they have relationships with
- Find applying for any form of credit more challenging
Borrowers have a distinct advantage when it comes to an unsecured business line of credit. That’s because there’s no collateral requirement, and you don’t have to pledge anything – meaning your assets are safe in the event of a default.
However, expect lenders to mitigate their risk in some way. They may offer a higher interest rate, require a personal guarantee, or reduce your repayment term, but in any case, consistent and timely payments will ensure you don’t find yourself in hot financial water.
Why Should You Apply for an Unsecured Line of Credit Instead of a Secured Option?
Still deciding between an unsecured vs. secured business line of credit? We’ve laid out 4 reasons why small business owners should go the unsecured route.
- You don’t have enough collateral. The biggest reason why an unsecured line of credit may be the preferred option is if you don’t have enough collateral to satisfy a lender. By definition, a secure line of credit requires collateral, so without enough assets to get approved, an unsecured line of credit can be a great alternative to get the funding you need.
- You don’t want to pledge your personal and/or business assets. For a variety of valid reasons, you may not want to pledge your personal and/or business assets – which means that an unsecured line of credit is a better fit.
- You don’t want to have your assets undervalued by a lender. Banks that offer secured lines of credit (as well as secured business loans) are notorious for undervaluing collateral. For example, industrial equipment that’s worth $50,000 in the marketplace might be valued at only $40,000 or even as low as $30,000 in some cases. Banks do this to reduce their risk threshold even further. For borrowers, however, it means that they need to pledge even more assets – which increases the risk on your part.
- You want a line of credit quickly. Last but not least: secured lines of credit can take months to materialize. The application has to go through multiple loan officers and managers – plus the collateral evaluation process is notoriously time-consuming. An unsecured line of credit application is much simpler to process, and the approval is significantly speedier.
How Can You Use Your Unsecured Business Line of Credit Funds?
For many small business owners, an unsecured line of credit is just the thing they need to accomplish their goals and take their business to the next level. Here’s what you can do with an unsecured line.
- Hire more staff
- Replace or upgrade a key piece of equipment
- Expand or relocate your building
- Make spontaneous and ongoing purchases to take advantage of unexpected opportunities
- Resolve issues in cash flow due to seasonal dips in sales or slow customer payments (this is especially useful for manufacturers, distributors, retailers, and even medical/healthcare and dental practices).
- Purchase real estate or a new headquarters.
You can use your funds for almost any business purpose. Borrowers don’t have to inform their lender of their plans, either, which reduces the red tape and allows you to grow on your schedule (while strategically managing your repayment).
What are the Requirements for Unsecured Business Lines of Credit?
Getting an unsecured business line of credit doesn’t have to be complicated. In fact, National makes it easy. The application process takes about a minute, and funding takes hours. Here’s what you’ll need to qualify for an unsecured business line of credit from National.
- 3+ Months in Business
We offer business credit lines to all companies that have been in business for over 3 months.
- $120,000 in Annual Gross Sales
Whether you do $120,000 or $12,000,000 in sales, we got your back!
- No Minimum FICO Required
You don’t need to have amazing credit to qualify for a business line of credit— at National, we offer solutions for all types of credit profiles.
Can I Get an Unsecured Business Line of Credit With Bad Credit?
Yes! Some non-bank lenders don’t uphold credit score requirements, whereas most banks need to see 700+ FICO scores. Still, these lenders need to mitigate their risk of financial loss in some way, so expect to receive higher interest rates.
The lack of a credit score requirement on unsecured financing transfers a majority of the risk from the borrower to the lender. In addition to higher interest rates, you may have to deal with shorter repayment periods, more frequent payment schedules, and other fees/contingencies.
Most importantly, you’ll have to work with the right lender. At National, we streamline your search.
Our 75+ lender marketplace combines all the lenders into one place. We have options for all credit profiles, allowing you to find the best options you qualify for without filling out multiple applications.
Why Choose National for Unsecured Financing?
At National, we seek to establish long-term financial relationships with each of our clients. We know that to stay in business you must grow your business and that tomorrow’s success is founded on today’s financial business relationships. We make sure you can depend on us for funding whenever you need to take your enterprise to the next level.
National’s business lines of credit are flexible, fast, and dependable. If you could benefit from an unsecured business line of credit, know that we can provide not only the funding you require but also the resources and expert business advice you can depend on.
Choosing National means you will have no application fees, lightning-fast 24-hour approval, and efficient service delivered with a personal touch. The approval process for unsecured business finance is based on the overall picture and your potential for growth; financial setbacks are not grounds for immediate loan disqualification.
Apply for an Unsecured Business Credit Line
Banks and credit unions tend to have longer, more formal application processes, whereas non-bank lenders offer speed and efficiency without sacrificing security. At National, we’ve streamlined the process to best fit the needs of busy entrepreneurs.
- Apply Securely Within Minutes – Move through our streamlined application within minutes and upload your business documents with zero risk.
- Review Your Offers – Compare your offers with expert advice from our team and select the best one for your specific circumstances.
- Get Funded – With your money in hand, you can take advantage of opportunities and tackle challenges with confidence.
Fill out our 1-minute application to get started, or give us a call at (877) 482-3008. We’re happy to provide more information on unsecured business lines of credit and unsecured business loans and walk you through the process.