A line of credit is one of the most diverse and powerful financing tools a business owner can use. The problem is that sometimes, an unsecured business line of credit is hard to find. Of course, providing collateral can make getting any loan much easier. But you are likely reading this because you don’t think putting an asset at risk is worth it.
If you don’t want the risk of a secured line of credit, there are several things you should know. Let’s go over the factors that make collateral necessary and go over how you can avoid needing it.
The Problems With Collateral
First of all, why is an unsecured business line of credit so much better?
Secured business lines of credit have the potential to ruin a business. They are usually only provided by business owners that have little choice in the matter. The thing is, should you fail to make timely payments, the lender has the right to seize any asset you used to secure your loan.
Collateral has always been something business borrowers have tried to avoid. But since the 2008 financial crisis, banks have gained a strong preference for lines of credit secured with collateral. You can now avoid collateral by going to alternative lenders that you can find online. These lenders charge more than banks in interest, but you can easily find one that doesn’t ask for collateral.
With an unsecured business line of credit, you don’t need to worry about losing assets if you fail to pay your lender back as per the terms of the loan. Without that risk, you can focus on your business without the stress of potentially losing more than you bargained for.
Quickly explore unsecured business loans:
| Lender | Minimum Revenue | Time in Business | Minimum Credit | Next Steps |
|---|---|---|---|---|
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$10,000/mo | 1 year | n/a | See if you qualify |
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$15,000/mo | 6 months | n/a | See if you qualify |
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$100,000/yr | 1 year | 500+ | See if you qualify |
When Do Lenders Require Collateral?
Traditional lenders require collateral most of the time. The 2008 financial crisis was a shock for the financial world, and banks tend to keep their interest rates low. To protect themselves, most bank-financed business loans will have to be secured.
This doesn’t mean that all alternative lenders will give an unsecured business line of credit. If your credit score is very low or your business has a history of financial instability, an alternative lender might reject you. In other cases, they will be willing to provide a line of credit, again, with collateral. Similar things can be said of banks.
If you want to avoid collateral, it’s best to keep your credit score higher. If that’s not immediately possible, you can still find many alternative lenders who will give you an unsecured business line of credit. The catch is that you can expect high interest rates if you take an unsecured line of credit when your credit score is low.
Collateral vs Personal Guarantees
As an alternative to collateral, many alternative lenders will ask you for a personal guarantee. This allows them to advertise their loans as “unsecured”. In a way, they are. So, what’s a personal guarantee?
A personal guarantee allows a business lender to legally pursue your personal assets if you default on a business loan. This just means that the business is no longer solely responsible for a defaulted loan, but the business owner is as well. When a personal guarantee is required for a Small Business Administration loan, for example, every owner of at least 20% of the business must sign a personal guarantee.
This may sound like it is only a few steps better than a secured line of credit. That’s because it is. Make sure you watch out and account for personal guarantees when you are looking for an unsecured business line of credit.
MainStreet Finance Group
MainStreet finance group offers a blend of financial products including a line of credit. If you don’t qualify, you might qualify for a merchant cash advance, long-term loan, SBA loan, or equipment financing. If you have a lot of debt, they offer debt consolidation loans as well.
Kabbage’s Unsecured Business Line of Credit
Kabbage offers an unsecured business line of credit. If you have a credit score of over 560 and an annual revenue of at least $50,000, you can qualify for one. Kabbage provides business lines of credit of up to $250,000 for qualifying borrowers.
OnDeck Secured & Unsecured Lines
OnDeck offers both secured and unsecured business lines of credit. As you would expect, their unsecured option has a higher credit score requirement. Furthermore, the interest rate will likely be higher if you don’t want to provide collateral.
The Last Word on Unsecured Business Lines of Credit
Unsecured loans of any kind are difficult to come by. This is especially true of business lines of credit. Fortunately, many alternative lenders will offer unsecured business lines of credit. Just keep in mind they will be more likely to offer them to you if you have a higher credit score. You will also likely pay higher rates for the privilege of not risking any collateral.