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 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 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.
What Is an Unsecured Line of Credit?
An unsecured business line of credit is a flexible form of financing that allows businesses to borrow funds as they need them. Similar to a credit card, you spend what you need (up to your credit limit), pay it back with interest, and are free to use the funds again. Unsecured lines of credit do not require collateral, such as property or equipment.
The credit limit on an unsecured line of credit is determined by the business’s creditworthiness and financial history, with interest charged only on the amount borrowed. 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 need a strong personal credit score
• Interest rates may be higher due to lack of collateral
• Credit line may be low
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 includes property, equipment, or inventory, which 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.
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Requirements to Qualify
For established businesses, lenders look at credit scores, time in business, and annual revenue to 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 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 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
Business credit cards can provide new business owners with needed access to cash. They can also be an important tool to help business owners separate their personal finances from their business finances. Credit card issuers will generally review things like your personal credit score and income. 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 allow business owners to raise money to support their business. This process allows business owners to raise money for 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 for unsecured loans.
Recommended: Bad Credit Business Loans
An Unsecured Business Line of Credit Can Give You the Boost You Need
Having access to cash when you need it 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.
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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 have higher interest rates 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, U.S. Bank, and Citibank. 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.
Photo credit: iStock/Erdark
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