An unsecured business line of credit lets businesses borrow money without collateral up to a certain limit. Because it’s unsecured, the business doesn’t have to put any of its assets, like equipment or real estate, as security for the loan. A line of credit can be ideal for businesses that need flexible financing or short-term financing for operating expenses, unexpected expenses or business opportunities. 

Like a credit card, an unsecured business line of credit is a revolving line of credit. The borrower can borrow up to the limit and pay it back over the course of the agreement. For example, you could borrow $2,000 for one expense, pay it back, and borrow $3,500 later under the same plan if the term hasn’t ended yet and you are under your credit limit.

Like all financing options, unsecured business lines of credit carry some risks. Business owners should compare offers and evaluate all their financing options to pick the right option. Llama Loan is here to simplify your options and make comparisons easy.

Benefits of using an unsecured business line of credit

An unsecured business line of credit has several advantages:

• Bank deposit: In most cases, you can have what you borrow deposited to your bank account. This is helpful when you have expenses that don’t accept payments from a credit card.
• Fast access to funds: Unsecured lines of credit can often be approved and funded more quickly than secured loans. The money you borrow can often be deposited to your bank in one business day and doesn’t come with cash advance fees.
• Flexibility: An unsecured line of credit gives a business the flexibility to borrow money as needed, up to a certain limit. This can be useful for businesses that need short-term financing. It can also be a helpful way to borrow smaller amounts and repay them over time instead of needing to borrow a larger amount upfront.
• No collateral required: Because an unsecured line of credit does not require collateral, businesses do not have to pledge any assets to secure the loan. This is ideal for businesses that do not have any assets to pledge or do not want to risk their assets.
• No prepayment penalties: Many business loans have a penalty if you pay your loan off early. With an unsecured business line of credit, you can borrow amounts up to your credit limit and repay them over the term.
• Potential to improve credit: By responsibly managing an unsecured line of credit, a business may improve its credit score and creditworthiness. Building credit can make it easier to get financing in the future if needed.

What you can use an unsecured line of credit for

You can use your credit for almost anything your business needs. Common uses include:

• Equipment and equipment repair
• Inventory
• Marketing
• Payroll and hiring staff
• Renovations
• Rent and utilities

One major advantage of a business line of credit is that you don’t have to decide immediately what you will use the money for. For example, you could use $3,000 to stock up on inventory and then six months later use $30,000 for a needed renovation.

Drawbacks of using an unsecured business line of credit

Like with any financing, an unsecured business line of credit involves a few risks:

• Credit limits: If the business needs more funding than the credit limit allows, it may need to find more funding elsewhere.
• Higher interest rates: Unsecured lines of credit generally have higher interest rates than secured loans. The lender is taking on more risk without collateral to back the loan, which means the business may pay more interest.
• Personal liability: In some cases, the owner of a small business may be personally liable for the business’s unsecured line of credit. The owner’s personal assets, like their home or savings, could be at risk if the business cannot pay the loan.
• Risk of default: If the business cannot make payments on the unsecured line of credit, it may default on the loan. This could result in late fees and damage the business’s credit score. The lender could also sue the business.

Business owners should carefully consider before getting an unsecured line of credit and compare offers from multiple lenders to find the best deal. Business owners should also make sure they can repay the loan on time.

Unsecured business line of credit vs. a business loan

If you need financing, you may also be considering a business loan. These options have several important differences to be aware of: 

• Approval process: Business loans may require more documentation and may take longer to be approved and funded than unsecured lines of credit.
• Collateral: A business loan may require collateral, such as equipment, real estate or inventory, to secure the loan. An unsecured line of credit does not require collateral.
• Credit limit: An unsecured line of credit has a credit limit the business cannot exceed. A business loan has a fixed amount of money the business borrows and must pay back.
• Repayment terms: A business loan has a fixed repayment schedule with regular payments. An unsecured line of credit allows the business to borrow money as needed and make payments when the business has the funds available.

Note that there are many types of business loans with varying ranges of requirements and interest rates, so it can be difficult to do a comparison without identifying the kind of business loan that is best for your business. Llama Lloan can help compare these options to make the benefits of each type easier to see.

How to qualify for an unsecured business line of credit

To qualify for an unsecured business line of credit, a business typically needs to meet certain requirements set by the lender. These requirements can vary, but may include the following:

• Business plan: Lenders may want to see your business plan to see how the line of credit will be used to achieve business goals.
• Financials: Lenders may look at the business’s financial statements to assess the business’s financial health and ability to repay the loan.
• Good credit: A business with a strong credit score and a history of timely payments is more likely to be approved for an unsecured line of credit. Sometimes the business owner’s information can be used instead.
• Length of time in business: Some lenders may prefer to work with businesses that have been in operation for a longer period of time. These businesses have a longer track record of being financially stable enough to repay a loan.

Llama Lloan is here to make comparing options and applying for an unsecured business line of credit fast and simple. We’ll help you find the options you are eligible for and walk you through the application process. Contact us to get started.