A Comprehensive Guide To Unsecured Business Lines of Credit

Camino Financial08 Jan 2024
A Comprehensive Guide To Unsecured Business Lines of Credit
An unsecured business line of credit can be invaluable. It acts as a financial safety net because it provides the flexibility to access funds as needed, without the need for collateral. Whether it's seizing a new business opportunity, buying inventory, or tackling unexpected expenses, this financial instrument keeps your business prepared for every circumstance. And the best part? You only pay interest on the funds you actually use. Let's delve deeper into the world of unsecured business lines of credit and discover how they can help your business thrive.

Best Unsecured Business Lines Of Credit

Bank Of America

bank of america logo One of the most prominent names in the banking industry, Bank of America offers a well-regarded line of credit for business. They offer a flexible option for both small and large businesses.
  • Amount: $10,000 to $100,000
  • Interest rates: competitive APRs
  • Min credit score: 680
  • What sets them apart: Bank of America offers relationship-based discounts to existing customers.

Wells Fargo

wells fargo logo A go-to choice for many business owners, Wells Fargo is another one of the banks that offer unsecured personal lines of credit. Their product is more accessible for startups or businesses with less-than-perfect credit.
  • Amount: $5,000 to $100,000
  • Interest rates:
  • Min credit score: 660
  • What sets them apart: Wells Fargo offers comprehensive financial education resources to aid borrowers in making informed decisions.

BlueVine

bluevine logo The small business line of credit offered by BlueVine supports the growth of startups and small businesses.
  • Amount: up to $250,000
  • Interest rates:
  • Min credit score: 660
  • What sets them apart: They provide quick funding, usually within 24 hours, perfect for businesses in need of fast cash.

OnDeck

ondeck logo For businesses with a credit score of at least 600, OnDeck offers an unsecured line of credit loan.
  • Amount: $6,000 to $100,000
  • Interest rates:
  • Min credit score: 6
  • What sets them apart: OnDeck provides a dedicated loan advisor to guide businesses through the lending process, ensuring a smooth and hassle-free experience.

Fundbox

fundbox logo Fundbox caters to businesses that might struggle with traditional banking requirements. Offering a line of credit for bad credit, making it an ideal choice for startups or smaller ventures.
  • Amount: $1,000 to $150,000
  • Interest rates:
  • Min credit score: 500
  • What sets them apart: Fundbox doesn't require a long business history, giving newer businesses a chance to grow.

How To Choose An Unsecured Business Line Of Credit

Selecting an unsecured line of credit for your business can seem like a daunting task, given the multitude of options available. Here are some things to consider:
  • Understand Your Business Needs. The first step is understanding what your business needs from a line of credit. Are you a new business looking for startup credit? Or an established business looking to expand?
  • Evaluate the Loan Amount. Consider the maximum amount of funds your business might need. A lender offering a higher limit might be more appealing for growing businesses.
  • Consider the APR. This refers to the total cost of borrowing per year, including interest and fees. A lower APR generally means less cost to you.
  • Check the Minimum Credit Score Requirement. Not all lenders have the same credit score requirements. If you have less-than-perfect credit, consider options like a lender that accepts bad credit.
  • Research the Lender's Reputation. Look at reviews and customer testimonials. How does the lender treat its customers? Are they transparent about their fees and terms?

Most Common Requirements For An Unsecured Business Line Of Credit

  • Credit Score. Your personal and business credit scores play a crucial role. While some lenders offer unsecured lines of credit for bad credit, a higher credit score can provide access to better terms and lower interest rates.
  • Business Bank Account. Lenders usually require borrowers to have a dedicated business bank account. This ensures a clear separation between personal and business finances and provides a transparent record of cash flow.
  • Financial History. Your business's financial history is a critical factor. Lenders often look at income statements, balance sheets, and cash flow statements to assess your business's financial health and repayment capacity.
  • Business Plan. A solid business plan can improve your chances of getting approved. Lenders want to see that you have a clear plan for growth and a strategy to repay the loan.
  • Time In Business. The longer your business has been operating, the better. Established businesses are generally seen as less risky. However, options are available for startups, like the small business unsecured line of credit.
  • Annual Revenue. Your business's annual revenue gives lenders an idea of your repayment capacity. Higher revenue can lead to better loan terms.

How To Get A Credit Line: Step By Step

  1. Assess Your Business Needs. Determine the amount of credit your business needs and can afford to repay.
  2. Check Your Credit Score. Know both your personal and business credit scores before applying.
  3. Gather Necessary Documentation. This typically includes financial statements, your business plan, and proof of time in business and annual revenue.
  4. Compare Lenders. Review several lenders, considering factors like loan amount, APR, and credit score requirements.
  5. Apply. Once you've chosen a lender, apply for the business line of credit. You can often do this online.
  6. Use Funds Wisely. Once approved, use your funds wisely. Remember, the goal is to grow your business, not create unmanageable debt.

What Is An Unsecured Line of Credit?

An unsecured business line of credit is a revolving loan that provides businesses with access to funds as needed, up to a predetermined limit. Unlike a traditional loan, you only pay interest on the amount you use. It's known as "unsecured" because it does not require any collateral to secure it.

Secured vs. Unsecured Line Of Credit

A secured line of credit requires collateral or a personal guarantee from the borrower. If the borrower fails to repay the loan, the lender can seize this collateral as repayment or make the small business owner liable (and not the business). Some examples of collateral are business equipment, inventory, or real estate. On the other hand, an unsecured line of credit doesn't require any collateral, making it a less risky option for the borrower. However, this lack of security usually means a higher interest rate compared to secured loans.

Pros And Cons Of Business Lines Of Credit

Pros:
  • flexibility
  • only paying interest on the amount used
  • doesn't require collateral
Cons:
  • potentially higher interest rates than term loans
  • maintenance or draw fees
  • it creates the temptation to spend

Average Unsecured Line Of Credit Rates, Terms, And Fees

The cost of an unsecured business line of credit can vary widely based on the lender, your credit score, and your business's financial health. However, here are some general figures to keep in mind:
  • Interest Rates. These can range from 7% to 25% per year for an unsecured line of credit. The rate is typically variable, meaning it can change over the life of the line of credit.
  • Origination Fees. Some lenders charge an origination fee, typically a percentage of the total credit line, to cover the cost of processing the loan. They usually are 1% to 5% of the total amount.
  • Maintenance Fees. There can be annual or monthly fees for maintaining the line of credit, even if you're not actively using it.
  • Draw Fees. Some lenders charge a fee every time you draw from the line of credit. They usually are 1% to 2% of the withdrawn amount.
Given these potential costs, it's crucial to read and understand all the terms before accepting a business line of credit.

How Much Will A Business Line Of Credit Cost? An Example

Imagine you obtained an unsecured business line of credit of $50,000 with an annual interest rate of 10%. In the first month, you used $10,000 from this line of credit. The monthly interest is the annual rate divided by 12, which is approximately 0.83%. This rate applied to the borrowed $10,000 results in a first-month interest cost of $83. Potential additional costs include an origination fee of 1% to 5% of the credit limit and a draw fee of 1% to 2% per withdrawal. In this scenario, the origination fee could range from $500 to $2,500, and the draw fee for a $10,000 withdrawal would be $100 to $200.

Where Can You Get An Unsecured Business Line Of Credit?

Small business owners have many places to look for business lines of credit:
  • Banks. Places like Wells Fargo or Bank of America have many options for you. They might need more from you before you can get a loan. But they can offer lower rates and larger loans if you have a strong application.
  • Credit Unions. They often offer good rates for their members. You should check this out if you're part of a credit union.
  • Small Business Administration. The SBA has a program called CAPLine. They offer lines of credit to small businesses to help with short-term needs.
  • Online Lenders. Online lenders like OnDeck, BlueVine, and Fundbox are easier to work with. They can also get you the money faster. This can help businesses that are just starting, have less-than-perfect credit, or need money right away.
  • Other Financial Institutions. Some lenders and fintech companies offer solutions that they can customize for certain industries.
Before you pick a lender, make sure to check out different offers. That way, you can find the one that works best for your business.

Is An Unsecured Business Line Of Credit The Right Choice For Me?

Choosing the right financial solution requires understanding the unique needs of your business. An unsecured business line of credit might be a suitable choice for your business if:
  • You Need Flexible Access to Capital. Does your business encounter unexpected expenses? Do you want the security of having funds available for unforeseen opportunities? A line of credit provides flexible access to funds when you need them. This is different from a traditional term loan, which provides a lump sum upfront.
  • Your Business Has Variable Costs. Businesses with fluctuating operational costs can benefit from the flexible nature of a line of credit. It allows you to borrow exactly what you need when you need it. This helps you manage uneven cash flow.
  • You Can Manage Interest Costs. They can seem a more affordable option because interest is only paid on the amount drawn and not the total. Businesses that diligently manage their draws can control the associated costs.
#CaminoTip While these products offer flexibility, they also require discipline to avoid over-borrowing. You need to ensure that the drawn amounts are repaid promptly to minimize interest costs.

When Should You Consider A Term Loan Instead?

An unsecured business line of credit can be very flexible. But sometimes, a term loan might be better. If your business requires a large amount of capital for a significant, one-time expense, a term loan might be more suitable. Small business loans are more suited to long-term investments that will generate revenue over time. If you want to know exactly how much you'll be paying each month and when the loan will be completely repaid, a term loan could be the better option. This is because they offer a more predictable repayment schedule with regular payments over a specified term. In terms of interest rates, term loans often have lower rates than lines of credit, particularly for businesses with good credit ratings. For large, one-time investments, a term loan can be more cost-effective. Finally, if you're planning a long-term project with costs that are predictable, a term loan may be a better fit. With it, you receive the entire loan amount upfront, allowing you to cover the full cost of the project.

FAQs

What is a line of credit?

A line of credit is a flexible loan from a bank or financial institution that provides a business or individual with access to funds up to a set limit, as needed.

How do lines of credit work?

With a line of credit, you can draw funds up to your credit limit. You only pay interest on the amount you've used, not the total limit. Once you repay what you've drawn, the amount is available for you to use again.

What are the differences between a business line of credit and a business credit card?

A business line of credit and a business credit card are both types of revolving credit. A line of credit typically has lower interest rates, you can use it for various expenses and may have a more flexible repayment schedule and higher credit limits. A business credit card typically has higher interest rates and usually comes with rewards and benefits.

What are the most common uses for a business line of credit?

A business line of credit is commonly used for:
  • managing cash flow,
  • financing short-term working capital needs,
  • handling unexpected expenses,
  • purchasing inventory,
  • and taking advantage of business opportunities.

What is an unsecured personal line of credit?

An unsecured personal line of credit is a flexible loan from a bank or other financial institution that doesn't require any collateral. The borrower can use the money as needed, up to the credit limit.

What is an unsecured business line of credit?

An unsecured business line of credit is a revolving loan that provides businesses with access to funds as needed, up to a predetermined limit, without requiring any collateral.

Can you get a business line of credit without collateral?

Yes, you can. This is what's known as an unsecured line of credit, as it doesn't require any collateral. However, because the risk is higher for the lender, the interest rates may be higher compared to secured loans.

Is it hard to get an unsecured business loan?

The difficulty in obtaining an unsecured business loan largely depends on your personal credit score, business credit score, financials, and the lender's requirements. It can be more challenging to get than a secured loan since the lender takes on more risk.

Can a line of credit be "unsecured"?

Absolutely, a line of credit can be either unsecured or secured. An unsecured line of credit does not require collateral, but it typically comes with a higher interest rate due to the increased risk to the lender.
 
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