Unsecured Business Lines of Credit for Small Businesses

As your small business moves from a start-up to the next growth stage, healthy working capital and good cash flow are what keeps your journey on track. Every new development brings new challenges so flexible funding options like an unsecured business line of credit can be extremely handy.

In this guide we examine the benefits of using an unsecured line of credit for SMEs, how it differs from other relevant forms of business finance and the key factors to consider.

What is an unsecured business line of credit?

An unsecured business line of credit is a short-term finance agreement that allows companies to borrow capital up to an agreed credit limit without providing collateral, only paying interest on the amount used.

It’s an attractive finance option for small businesses, as it offers more control and cost-efficiency than many other funding solutions. As long as you don’t exceed the line of credit limit, you can dip into it when needed, much like a business credit card. Plus, you can repay the borrowed amount early, free of charge.

What is the difference between a secured and unsecured line of credit?

The main difference is that a secured line of credit requires businesses to provide collateral as security, such as equipment or property, while an unsecured line relies on your creditworthiness and factors like your business plan and future projections. However, increased lender risk means providers typically offer higher interest rates and lower credit limits for unsecured lines of credit.

How does an unsecured business line of credit work?

An unsecured business line of credit is an agreed pot of capital to draw down from, only being charged interest on what you use. As it’s unsecured, you don’t need to put up collateral – which can be great for new businesses without many assets.

When the line of credit expires, it can be extended, and many lenders offer a revolving credit facility that automatically renews, meaning you don’t have to reapply for funding.

Here are a couple of examples of how businesses in different industries can use an unsecured line of credit: 

• Construction: A construction business in high demand doesn’t have available capital to purchase materials to carry out new jobs due to pending client payments. A line of credit with an agreed timeframe helps cover material costs for new projects, with the company paying funds back when invoice payments hit the bank.
• Retail: A retailer preparing for peak sales periods has cash flow issues preventing them from investing adequate funds into marketing campaigns and purchasing stock required to meet demand. Fast access to funds gives the company the cash needed to boost inventory, fuel promotional efforts and cover other expenses, such as hiring additional staff. When back in business-as-usual mode, the money borrowed can be repaid easily without racking up lots of interest.

Key benefits of an unsecured business line of credit

1. No collateral needed

Companies don’t need to provide collateral as part of the finance agreement – useful for new and small businesses without many assets to use as security.

2. Flexible and cost-efficient funding

A line of credit offers small businesses flexible repayments and credit limits, and funds can be used for various operational expenses. Also, only being charged interest on what you use saves costs and early repayment doesn’t incur frustrating fees.

3. Fast access to capital to ease cash flow

Business lines of credit are generally quick and easy to apply for, compared with business credit cards or bank loans. You usually get approval within 24 hours and funds may be available on the same day.

This fast access to funding enables businesses to:

• Increase stock levels ahead of peak seasons
• Boost promotional efforts
• Repair or upgrade equipment and systems
• Bridge cash flow gaps in tough sales periods or when dealing with delayed client payments

4. Revolving credit

Most lines of credit let you top up as and when required or get a revolving credit facility, whether you used a proportion of the original limit or the full amount.

Xero’s Money Matters report found that 72% of small business owners admitted experiencing problems with cash flow, with 28% unable to pay company bills and overheads due to cash flow issues.

Use cases of an unsecured line of credit

There are various ways to use a line of credit to your advantage as a small business but it’s primarily used as a form of working capital finance.

The main uses of an unsecured small business line of credit are:

• Investing in inventory – if you need to purchase in bulk for cost-savings or increase stock levels ahead of and during peak seasons 
• Short-term working capital needs – supporting equipment repairs, system upgrades or other areas requiring a short-term cash injection
• Plugging cash flow gaps – helping SMEs cover operational expenses or seasonal cash flow gaps when revenue is inconsistent or unexpected costs cause liquidity issues
• Business expansion – allowing you to ramp up promotions, hire staff or manage new supply lines when moving into new markets

Who can qualify for an unsecured business line of credit?

Small businesses are ideally suited to this kind of finance, but companies of all sizes can apply with most unsecured business line of credit lenders. However, your chances of approval are heightened if you have a good business credit score and steady revenue streams.

Can a start-up qualify for an unsecured business line of credit?

Various UK lenders offer unsecured start-up business lines of credit but they assess personal credit histories and sometimes request additional guarantees if you lack previous track records and collateral.

Many alternative finance lenders, like iwoca, serve the needs of new businesses, start-ups and those with adverse credit, putting less onus on credit scores and considering other factors like cash flow, business plans and revenue potential.

How to apply for an unsecured business line of credit

If you want to know how to get an unsecured line of credit, you can apply online through banks, credit unions or independent lenders. A responsible UK lender, authorised by the FCA, will ask for various business and personal information, such as how much you need, credit history, plus documentation like balance sheets, tax returns and cash flow statements

Before applying, here are some things to consider:

• Get a clear view of your financial situation and check your business credit score to determine your viability and how much you need
• Compare the limits and interest rates offered by different lenders 
• Use business finance calculators and comparison websites to gauge likely repayments and costs
• Scope out eligibility criteria outlined by the lenders to see what might rule you in or out
• Compile and collate key financial documentation in preparation

Unsecured business line of credit vs similar financing options

So, how does an unsecured line of credit compare to other business finance options? We’ve created a comparison table to show how they differ across several suitability factors:

Financing solutions comparison table

Unsecured business line of credit rates and costs

Business lines of credit interest rates vary, depending on the lender, your company’s creditworthiness and other criteria, such as lender risk appetite. However, interest rates for an unsecured business line of credit in the UK typically range from 6% to 20% annually. The key perk is that interest is only charged on the amount drawn down.

Certain lenders charge additional fees for their services, such as draw down fees, annual maintenance fees and penalties for late payments, so check with prospective providers for an idea of the total cost of borrowing.

You may get lower interest rates with traditional banks, however, applications typically take longer (due to more stringent checks) with stricter eligibility criteria and often have less flexible repayment terms than private lenders. So, do your research to find the best unsecured business line of credit and compare different finance lenders.

Introducing iwoca’s Flexi-Loans

iwoca is a leading UK finance provider, offering small business loans and flexible funding solutions. We give you the best of both worlds; short-term loan agreements that act like a working capital line of credit, as you only pay interest on the funds you use. 

You can borrow between £1,000 and £1,000,000 for as little as a day and up to 60 months. Applying won’t affect your credit score and we don’t charge for early repayments. Apply online in minutes and get approval decisions within 24 hours.

Unsecured line of credit FAQs

Do I need a good credit score to apply for an unsecured line of credit?

A good credit score can improve your chances of getting approved and help you get higher credit amounts and favourable terms. However, some lenders consider a wider range of factors, like cash flow, business plans and revenue potential, especially as many new businesses lack significant credit histories to back up their applications.

How fast can I get approved for a line of credit?

Applying online via lender websites is usually quick and easy, with fast borrowing decisions. Approval for lines of credit can take just a few hours (or days), depending on the lender, your financial circumstances and the documentation provided. 

Can I increase my credit limit over time?

Many lenders that offer revolving credit facilities can review and extend your credit line and provide larger credit limits, especially if you demonstrate solid debt management and improve your company’s financial health.

What are the risks involved with unsecured business credit lines?

The main risks to consider are the higher interest rates from unsecured lines of credit and potential issues resulting from over-borrowing. If you struggle to manage repayments your credit rating will take a hit. So, assess the affordability of the financial product – aligning repayments with your cash flow.

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Sources:

• Guide to Business Lines of Credit [iwoca Finance Explained Knowledge Base]
• Money Matters Report on UK Small Business Cash Flow [Xero]
• What is a Business Line of Credit & How Does it Work? [British Business Bank]‍
• Working Capital Line of Credit: What It Is and Best Options [NerdWallet]‍
• Business Lines of Credit (What You Need to Know) [Taxoo]‍
• Top Unsecured Business Loans [Merchant Savvy]

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