Unsecured Business Line of Credit: What Is It & How It Works

An unsecured business line of credit is a loan that requires no collateral or guarantee in case the borrower can not repay the funds. For this reason the risk is higher for the lender and as a result the interest payments are sometimes higher. This loan differs from other traditional loans in that the borrower is under no obligation to use the loan and if he does, interest is only paid on what was used, not the entire amount. 

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What is an Unsecured Business Line of Credit?

An unsecured business line of credit is also called a LOC (Line Of Credit) and a revolving line of credit. With a business line of credit, you can borrow up to a predetermined sum of money. This sum is called your credit limit. 

Here are key facts about how a LOC works: 

• You only pay interest on the amount of money you borrow
• You don’t pay prepayment penalties, but there is no interest-free grace period
• You could incur monthly or annual fees, including when you are not actively lending money against your business line of credit
• LOC can be deposited straight into your bank account, permitting you to work with a creditor that doesn’t work with credit cards
• Typically, there are no fees for cash-advance
• You might have to wait one business day for the LOC money lender to deposit the money into your account

Unsecured vs. Secured Business Line of Credit: What’s the difference?

There are major differences between a secured and unsecured business line of credit, including fees, requirements for approval, and interest rates.

An unsecured line of credit - also referred to as a revolving line of credit, or simply LOC. A business does not have to put up any collateral for approval. However, it likely means a higher interest rate.

A secured line of credit - you need to provide collateral for lenders to approve you, meaning the lender can take your collateral in the event of non-payment. Collateral is something given as security for the repayment of a loan, which is handed over if loan payments are not made. Common collateral requirements might include real estate, equipment, or vehicles.  

Since the loan does not require a guarantee the lender will check your business financial history...  

How does an Unsecured Business Line of Credit Work?

Here are two key features of an unsecured business line of credit:

• You pay interest on the amount you use and not on the sum available
• The loan automatically reverse to the original loan amount, in keeping with the amount you payback

Here is an example of how this works: 

If a lender grants you a $200,000 line of credit, and you use $100,000 and return $20,000 each month, then at the initial month of repayment, you will have $120,000 to use, and the following month, $140,000 the trend continues. 

Unsecured Business Line of Credit Requirements

The process of applying for an unsecured business line of credit involves submitting documentation, answering questions about the business, and possibly providing personal information. Once approved, a business can borrow against the credit line and pay back the amount with interest and fees. 

Each lender has a specific set of business line of credit requirements for both the application and approval process. Generally, it involves a detailed snapshot of the business history and financials. 

Here are details lenders will look at:

The date you established the business - although each lender is different, most require your business to have been established for at least six months. 

Credit scores - including the business credit score, personal, or a mix of both. 

Annual business revenue - a lender may ask you to verify your business earnings via tax documents or other financial statements.

Review of credit reports - these will be used to determine the creditworthiness of your business. 

Business bank account - provides lenders with information, including if you have bounced checks, positive or negative cash flow, and the average daily balance.

You don't have to use an unsecured business line of credit, however, having it available in case you do is good business practice....

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