An unsecured business line of credit allows business owners to borrow money as needed to cover a wide array of short-term expenses like payroll or inventory or to take advantage of new business opportunities. This type of credit line doesn’t require you to pledge any collateral, such as machinery or accounts receivable.

Although eligibility requirements vary by lender, you may need a certain business credit score, the number of years in business and number of years in business to qualify. Keep reading to learn more about unsecured business lines of credit.

What is an unsecured business line of credit?

Many lending institutions extend a line of credit in the form of a loan, with approval dependent on the type of unsecured business line of credit sought. These are the two main types of unsecured business lines of credit:

  • Traditional: A traditional unsecured business line of credit requires a large amount of documentation by the business. Some common forms of documentation required include personal tax returns, business tax returns, any bank account information for the business and any documentation used in the registration of the business. The business must also complete an annual review to maintain the traditional unsecured credit line.
  • Nontraditional: Nontraditional unsecured business lines of credit include credit cards in the business’s name. A business credit card gives a company fast access to the money it needs and payment flexibility. Qualification for a nontraditional unsecured business line of credit is based on your business’s FICO score, requires much less documentation and does not require a yearly review.

How an unsecured business line of credit works

When you apply for an unsecured line of credit, you will enter information about the business on your application. Depending on the lender or the kind of unsecured line of credit you are applying for, you may also need to enter some of your personal information.

If your application is approved, you’ll be issued a credit limit you can borrow against as needed for a certain time period. You can withdraw as much or as little of the line of credit as you need for your business — often by using a business checking account or small business credit card.

Unlike a traditional small business loan, you’ll only pay interest on the amount you borrow. Repayment terms vary, but you typically repay what you owe in monthly or weekly installments.

Secured vs. unsecured line of credit

Collateral, or the lack thereof, is the main difference between a secured and unsecured business line of credit.

Unlike a secured line of credit, an unsecured line does not require the business to put up any collateral. The business’s creditworthiness plays a big part in determining whether it can qualify for an unsecured business line of credit.

Many newer businesses might only qualify for a small line of credit at first until they establish positive credit histories. Line of credit amounts depend on factors such as the business’s revenue, expenses and age.

How to qualify for an unsecured business line of credit

When you apply for an unsecured business line of credit, a lender will look at several areas about the business and possibly you personally.

Credit report

A good FICO score and business credit score are the primary determining factors when you’re applying for an unsecured business line of credit.

Two of the most popular types of business credit scores range from zero to 100 and take into account any business-to-business credit. The creditworthiness of a business determines the type of loan you can apply for, with scores of 75 or more considered excellent.

The elements of a business credit report also include applications for loans and loan payment history.

Depending on the type of line of credit you’re applying for, your personal credit score may also play a role in what kind of terms you are eligible for. A low score does not mean you cannot get a line of credit, only that you might have to secure it with collateral until you build your business credit.

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.

Financial history

Many lenders require businesses applying for unsecured business lines of credit to show the financial history of two or more years. This helps assure the lender that the business can continue operating without folding.

Businesses can prove financial history by providing income tax returns, banking documents and financial statements.

Where to find the best unsecured business line of credit lenders

You can get a business line of credit from various places, 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.

To find a line of credit that best matches your company’s needs, compare rates, repayment terms, average funding speeds and eligibility requirements from multiple lenders.

Next steps

Business owners need more than business plans and employees. They also need the working capital that an unsecured business line of credit provides. If you’re considering applying for an unsecured business line of credit, the first step will be to make sure that it’s right for your business.

Then, make sure your financial documentation is all in order. That will save you time as you begin the application process. After your documents are in order, you can start contacting lenders to find the business line of credit that is best for you and your business.