A business line of credit is a flexible financing option that gives you access to a set amount of funds to draw from as needed. It’s ideal for managing cash flow, funding growth, covering emergencies and meeting short-term business needs.

There are two main types of business lines of credit: secured and unsecured. Businesses with valuable assets may qualify for better terms through a secured line of credit, while companies without qualifying assets or needing quick access to cash often turn to unsecured lines of credit.

With rising costs and ongoing economic uncertainty, more small business owners are turning to lines of credit for financial stability. According to the 2024 Small Business Credit Survey, it was the most common type of financing option applied for in the prior 12 months, and 34 percent of employer firms reported using lines of credit regularly.

Understanding how the two types of business lines of credit differ, what a business line of credit can be used for and the pros and cons of each can help you determine which type is right for your business.

Secured business lines of credit

A secured line of credit requires the borrower to pledge collateral, such as business inventory, equipment or accounts receivable, in exchange for access to funds. When you secure a loan or line of credit, the lender places a lien on the collateral. This is a legal notice that gives the lender the right to take your asset if you stop making payments. The lender can then sell it to recover any debt you owe.

Putting up some collateral for your business line of credit can make it easier to get approved. This makes them more accessible to business owners with poor credit, startups and other business owners that may not qualify for an unsecured line of credit. Securing the line of credit with collateral can also lead to more favorable terms, like a lower interest rate, increased loan limit or better repayment terms.

Business owners should carefully consider which assets they’re willing to risk to secure a line of credit, as those assets could be seized in the event of default. The collateral you could use for this type of credit line includes:

• Commercial or personal real estate
• Company equipment or vehicles
• Inventory
• Cash
• Investments (such as bonds or stocks)
• Outstanding invoices
• Future sales or contracts
• Personal assets
• Blanket lien on all business assets

How a secured business line of credit works

With a secured line of credit, you’re approved for a maximum credit limit based on the value of the collateral you offer. You can draw from the credit line as needed, only paying interest on the amount you use. Once repaid, the credit usually becomes available again, similar to a credit card. If the business defaults, the lender can seize the collateral to recover the debt.

Pros and cons of a secured business line of credit

Pros

• Easier to get approved
• Lower interest rates
• Higher credit limits

Cons

• Requires collateral
• Risk of losing valuable asset
• Can take longer to receive funding while asset is appraised

Requirements for a secured business line of credit

Most lenders will ask for the following documents to get secured credit lines for business:

• Business and applicant’s personal credit history
• Financial statements, such as balance sheets and profit and loss statements
• Business tax returns
• Proof of cash flow and revenue
• Business bank statements
• Proof of collateral value, such as an appraisal

How to estimate the cost of a secured business line of credit

You can use a business loan calculator to estimate the cost of a secured line of credit by entering the draw amount, interest rate and fees associated with the loan. Some lenders charge a draw fee each time you access funds, and you may pay an origination fee to open the line and a monthly or annual maintenance fee to keep the credit line open. You may also incur appraisal fees or legal costs to determine the value of the collateral.

Unsecured business lines of credit

The second type of business line of credit is an unsecured line, which doesn’t need collateral to back the loan. That makes it riskier for the lender, which is why business lines of credit usually come with a higher interest rate and lower lending limits than secured lines of credit.

Even though you don’t have to put up collateral, the lender may require you to sign a personal guarantee. This means you are still responsible for paying back the debt, and the lender can sue you for any unpaid balance. Even if you establish your business as a limited liability company, you are still liable for the debt once you sign a personal guarantee.

On top of all of this, an unsecured business line of credit can be harder to qualify for than a secured one. Because it heightens the risk for the lender, you generally need to show good credit and that your business has been operating for a while with a steady annual revenue.

How an unsecured business line of credit works

Since no collateral is involved in an unsecured line of credit, your business is approved for a maximum credit limit based on your credit score, income, time in business and the company’s performance. Once the line is established, you can draw from the balance when needed and only pay interest on the amount you use. The credit line usually replenishes as you repay it, allowing for ongoing access.

Pros and Cons of an Unsecured Business Line of Credit

Pros

• No collateral required
• Faster funding timeline than secured credit line
• Less risk for the borrower

Cons

• Higher interest rate than secured credit line
• Lower lending limits
• Stricter qualification requirements

Requirements for an unsecured business line of credit

Lenders typically have the following document requirements when applying for an unsecured business credit line:

• Personal identification, such as a driver’s license or passport
• The applicant’s Social Security number
• Personal bank statements and tax returns
• Business financial statements
• Business tax returns
• A business plan and revenue projections

How to estimate the cost of an unsecured business line of credit

You can use the same methods to estimate the cost of unsecured credit lines for business as you would for secured funding options. Comparing the interest rates and other fees and costs for both types of business lines of credit can help you determine which aligns best with your business’s needs, goals and budget.

Why choosing the right type of business line of credit matters

Selecting the right type of business line of credit can significantly impact your business’s financial health. The right option helps you manage cash flow efficiently, access funds when needed and minimize costs. Choosing incorrectly could mean higher interest rates, limited access to capital or risking valuable assets.

Understanding your business’s needs, revenue projections and risk tolerance can help you choose the credit line that is easy to manage and supports growth without creating unnecessary financial strain.

Bottom line

If your company needs short-term financing, a business line of credit offers you an option somewhere between a business loan and a business credit card.

The types of lines of credit you can choose are either unsecured or secured by business assets. Secured lines help you get approved with bad credit or for favorable terms, while unsecured lines pose less risk that you’ll lose valuable assets if you miss payments.

You’ll pay more in interest than you would with an unsecured line, but you’ll have an easier, faster time securing funding.

Frequently asked questions

• What are the best alternatives to a business line of credit?
  

  The best alternatives to a business line of credit include:

• Does a business line of credit affect your personal credit score?
  

  A business line of credit can boost your personal credit score if you make timely payments and the lender reports to the credit bureaus. If you fail to make payments or default on the credit line, it can damage your credit score.

• Is a business line of credit better than a business card?
  

  It depends on your specific financial needs. If you only need access to funds for a specific time period and want a better interest rate, you should consider a business line of credit, especially if you have assets to offer as collateral. A business credit card may be better if you want to make smaller, infrequent or everyday purchases and can afford to pay the balance in full to avoid higher interest rates.

• Is a business line of credit better than a term loan?
  

  Determining whether a business line of credit is better than a business loan really depends on your funding needs. A business line of credit is typically more suited for ongoing business expenses and needs while a term loan is better for significant one-time expenses or projects.