Unsecured business line of credit.

Also known as a revolving line of credit or LOC, an unsecured business line of credit lets small business owners borrow money in a flexible way. Instead of receiving a lump sum of money upfront, a lender will let you withdraw as much or as little as you need to, up to a set credit limit, which is usually based on factors like your credit score, annual revenue, and time in business.

If you’re interested in an unsecured business line of credit, follow these steps.

• Shop Around: Not all unsecured business lines of credit are created equal. That’s why it’s in your best interest to do your research and explore your options. Compare interest rates, terms, fees, and qualification criteria.
• Gather Your Documents: Once you find a lender that checks all your boxes, collect all of the documents you’ll need to apply. These may include an ID, tax returns, and financial statements.
• Apply: Most lenders will allow you to apply online, from the comfort of your own home or office. Be sure to fill out your application accurately to avoid delays with approval and funding.

Get Approved and Funded: Upon approval, you can start to withdraw funds from your business line of credit, right away. You may do so through a special credit card, online transfers, or checks, depending on the lender.

There are two types of business lines of credit: unsecured and secured. An unsecured business line of credit doesn’t require collateral or a valuable asset your business owns. A secured business line of credit, on the other hand, does. This means you’ll need to secure your loan to collateral such as commercial real estate, inventory, equipment, invoices, or financial securities.

If you default on your payments, the lender may repossess your collateral. Since a secured business line of credit is less risky for a lender than an unsecured business line of credit, it’s easier to qualify for. The good news, however, is that you can still get approved for an unsecured business line of credit even if you’re a newer business or don’t have the best credit score. Some lenders have more lenient requirements and are willing to look beyond your credit score.

Collateral is something valuable that you own, like your commercial vehicle, equipment, or inventory. Some loans require collateral to reduce risk for the lender. If you fail to make your payments, the lender will have the right to seize the collateral. Fortunately, a business unsecured line of credit doesn’t involve collateral, so you can take one out without putting any of your business assets on the line.

A personal guarantee is a provision lenders include in business loan agreements to require owners to be personally responsible for their business debt in the event of default. Oftentimes, lenders ask for personal guarantees if they are hesitant to lend to you because of your business age, credit history, or financial stability.

If you commit to a loan with a personal guarantee, you’ll essentially act as a cosigner and pledge to pay back the debt if your business does not. Some lenders who offer business unsecured lines of credit may ask for a personal guarantee, so it’s important to read the fine print and make sure you accept this responsibility before you move forward.

Once approved, you’ll receive access to the full credit limit from which you can then draw when you need it. You’ll pay interest only on the amount you borrow, rather than the entire amount you’ve been approved for. In addition to interest, note that some lenders charge fees, like origination fees to process your application, a monthly or annual account maintenance fee, a withdrawal fee each time you draw on your credit line, and an inactivity fee (if you don’t use your line of credit within a certain period).

Depending on the lender and the terms in your agreement, you’ll repay the funds on a weekly or monthly basis. You might also be able to pay them back early without a prepayment penalty to save on interest fees. As long as you make your payments on time and don’t go over your credit limit, you can continue to withdraw on your business line of credit.

Technically, business credit cards are unsecured business lines of credit. But there are some noteworthy differences between the two products. Business lines of credit tend to offer higher credit limits than credit cards. The advantage of business credit cards, however, is that they usually come with cash back, travel points, and other rewards you can use to save on business expenses. While business credit cards are ideal for smaller, day-to-day expenses, business lines of credit make more sense for larger, continuous expenses and more established ventures.