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Key takeaways
- Secured lines of credit require collateral.
- Unsecured business lines of credit do not require collateral, but a personal guarantee may be needed.
- Consider business needs, qualifications, credit score and assets when choosing a line of credit.
According to the 2024 Small Business Credit Survey, 40 percent of small businesses applied for a business line of credit, making it the most commonly sought form of financing.
Business lines of credit work similar to a credit card, providing a credit limit you can access as needed, only paying interest on the amount you borrowed. You can choose from a secured and unsecured line of credit. If you have collateral, or business assets, such as real estate, equipment or cash reserves, you may qualify for a secured business line of credit with a lower interest rate or higher borrowing limit. An unsecured line of credit is what lenders offer if you don’t have collateral. Both options can be revolving or non-revolving, depending on whether the credit line replenishes as you repay.
Compare secured vs. unsecured lines of credit
| Secured lines of credit | Unsecured lines of credit | |
| Collateral requirement | Requires collateral, such as property or other assets of significant value. | Collateral is not required, so approval is largely based on the business owner’s creditworthiness and income. |
| Lender default options | The lender can seize business assets used as collateral if borrowed funds are not repaid. | A personal guarantee may be required, making the business owner personally responsible for repaying the line of credit if the business cannot keep up with payments. |
| Interest rate | Typically, lower interest rate, ranging from 7.25% to 8.17% | Typically, higher interest rate, ranging from 6.00% to 57.00% |
| Credit limit | Higher credit limit of up to $5 million if you can provide enough collateral to secure it | Lower credit limit, usually between $5,000 and $500,000 |
| Repayment time | Longer terms, typically ranging from 12 to 120 months | Shorter terms, usually between 3 and 24 months |
| Time to process loan | Can take days or weeks for collateral appraisal and loan setup | Often approved within days |
Secured business lines of credit
If you choose a secured business line of credit, you agree to offer up assets to repay the loan if you default. Common types of business collateral include vehicles, real estate, inventory, or equipment. Your collateral’s total value should match the borrowed amount so the lender can fully recoup the funds.
Typically, with a secured business line of credit and other secured business loans, you’ll receive lower interest rates and higher borrowing limits since your lender assumes minimal risk.
Pros
- Lower interest rate: Loan approval isn’t based solely on your credit score or income. Your assets’ value matters too. Lenders may feel more comfortable charging lower interest rates.
- Higher loan amount: Depending on your assets’ value, you can access a higher loan amount than you would with an unsecured business loan.
- Increases odds of approval: Since the loan is secured with collateral equal to the loan’s value, lenders are more likely to approve borrowers with poor or fair credit.
Cons
- Loss of collateral: If the borrowed funds are not repaid, the lender can seize the assets, which may harm the business if the asset is vital to its operation.
- Lengthy application process: Lenders have to get the collateral appraised to ensure it is of value, and this can slow down the process of securing the loan.
- Risk of overspending: A high credit limit can tempt you to spend more than you can afford, leaving you struggling to repay what you’ve borrowed.
Unsecured business lines of credit
The biggest difference between a secured and unsecured business line of credit is that collateral isn’t required. Even with an unsecured line of credit, you’re not completely off the hook if you don’t repay what you borrow. A personal guarantee is what an unsecured line of credit lender will usually require in lieu of business collateral.
Qualifying for an unsecured business line of credit may be challenging, especially when you are a startup or have little to no business credit. You may have better luck getting approved with an online lender, but you risk paying higher interest.
Pros
- No risk to business assets: With unsecured loans, there’s no collateral for the lender to seize if you default.
- Faster funding timeline: Underwriting is typically faster with unsecured loans because the lender can skip the collateral appraisal step.
Cons
- Harder to qualify: Because lenders can’t offset their risk by requiring collateral, they’ll typically set other creditworthy requirements higher.
- Higher interest rates: Unless you have truly outstanding credit, you’ll likely see higher
- May require a personal guarantee: With a personal guarantee, you may lose your own assets instead of the business’s if you hit hard times and can’t repay the loan.
Does an unsecured business line of credit require a personal guarantee?
An unsecured business line of credit may require a personal guarantee, but it depends on the lender and your financial situation. If you don’t provide a personal guarantee, it will usually limit the credit amount and come with stricter eligibility requirements because the lender is taking on more risk.
Secured vs. unsecured line of credit: Which is better?
If you’re uncertain about which type of line of credit is better, start by assessing the needs and qualifications of your business. Consider:
- Do you have assets that you can and want to use to back the line of credit?
- How much do you need to borrow?
- Will the credit limit increase for a secured line of credit vs. unsecured?
- Do I meet the qualifications for this type of line of credit?
- Will the line of credit require a personal guarantee?
- Does the secured line of credit offer lower interest rates than an unsecured line?
If you’re an established business with assets you’re willing to put on the line, a secured line of credit is likely a better fit. Startups without the finances to guarantee the credit funding may have to settle for an unsecured line of credit.
Alternatives to business lines of credit
Business lines of credit are just one way to get funds. Here are other financing options to consider:
- Business credit cards offer revolving credit for smaller expenses and usually come with lower credit limits and higher variable interest rates.
- Term loans provide a lump sum to cover larger expenses, such as equipment or real estate, and are repaid over time with interest.
- Crowdfunding raises capital from individuals or groups. Funds may be donations, loans, rewards-based, or in exchange for equity.
- Business grants are non-repayable funds ideal for businesses looking to avoid debt, though they are highly competitive.
- Merchant cash advances offer quick access to funds based on future debit and credit card sales.
The bottom line
Considering your business’s financial health, assets and funding needs can help you determine whether a secured and unsecured business line of credit is the right fit to fund your goals. While secured credit lines offer higher limits and lower interest rates, they require collateral — something not every small business has or can afford to risk.
On the other hand, unsecured credit lines don’t need collateral but may come with stricter approval requirements and higher interest rates. The right line of credit can offer flexible access to cash when you need it most. Weighing your options is the first step to getting a business line of credit.
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