Secured vs. Unsecured Line of Credit: A Small Business Guide

Choosing a secured vs. unsecured line of credit can affect how fast a small business receives funding. This is particularly crucial during times of slow cash flow when you need to pay utilities, salaries and other operating expenses.

After all, according to a 2023 Small Business Credit Survey, 59% of small businesses that applied for funding did so to meet operating expenses. On top of that, 43% of respondents listed a business line of credit as the most preferred type of financing.

There are two types of business lines of credit: secured and unsecured. The main difference between these financing options is that secured credit requires collateral, while unsecured credit doesn’t. How fast you get funding highly depends on this requirement.

In this article, you’ll learn more about:

• What a business line of credit is

• The key differences between secured vs unsecured lines of credit

• What a secured line of credit is and its use cases

• What an unsecured line of credit is and its use cases

What Is a Business Line of Credit?

A business line of credit allows you to withdraw funds up to a specific credit limit at any time, just like a business credit card. However, business lines of credit typically have higher credit limits to accommodate more expensive purchases.

You’ll only pay interest on the borrowed amount. If you have a revolving line of credit, you can re-use the funds that you’ve paid back.

This financing option is popular among entrepreneurs because it has fewer eligibility requirements than personal loans or term loans from traditional banks. Typical documents required for a business line of credit application include business/personal credit scores, business information (how long you’ve been operating), and financial statements (like income statements and balance sheets).

As soon as you get approved by the lender, they will select your credit limit according to your risks and determine your interest rate and repayment schedule. Many lenders offer flexible repayment plans. For example, Backd’s Business Line of Credit allows you to pay in weekly installments.

Generally, there are also no restrictions on how you use this money, unlike traditional lump-sum loans.

Secured vs. Unsecured Lines of Credit: The Key Differences

Choosing which business line of credit to get depends on how you plan to use the funds and your target credit limit. Here are the main differences between secured and unsecured options:

• A secured line of credit requires collateral, while an unsecured line requires creditworthiness.

• A secured line may offer higher borrowing limits, depending on the collateral’s value.

• A secured line of credit generally has lower interest rates because the lender takes on fewer risks, while an unsecured business line of credit often has a higher interest rate because there’s no collateral.

• Secured credit has a longer application process because of collateral evaluation, while unsecured credit is processed much faster. However, an unsecured line has a stricter application process because of higher risks.

To understand these differences better, let’s take a closer look at each type of business line of credit.

Secured Line of Credit

A secured line of credit requires collateral that the lender can seize as repayment if the borrower is unable to pay, similar to secured loans (like home equity loans). This collateral can be valuable assets like real estate with equity, vehicles, equipment, and cash in bank accounts. The assets’ value must match the target credit limit.

Requirements can also include a personal guarantee, where you’ll have to repay the loan through your personal assets if your business can’t pay. Some lenders also require a Uniform Commercial Code filing, which allows them to seize your business assets if you default.

Since there’s collateral, a secured line generally has lower interest rates and higher credit limits. Here are some examples of secured lines of credit:

• Home equity line of credit (HELOC): This uses your house’s equity as collateral. Equity is the difference between your home’s current value and what you still owe on your mortgage. You can generally borrow up to 80% of your home’s equity.

• Auto line of credit uses the value of your vehicle fleet as collateral, similar to auto loans. This allows you to leverage an otherwise depreciating asset for much-needed funds.

Pros of a Secured Line of Credit

• Higher chance of approval, even if the borrower has a lower credit score

• Lower interest rate

• Higher loan amount

• Better loan terms, like longer repayment terms (can be up to 20 years for a HELOC)

Cons of a Secured Line of Credit

• Risk of losing your assets and disrupting your business operations if you default

• Longer application process because your collateral needs to be evaluated

• High fees for late payments

• Some restrictions on how the funds are used

Small Business Use Cases for Secured Lines of Credit

• Expensive investments that are capital-heavy, such as expanding your facilities, renovating your office, or upgrading your machines to accommodate more orders will require higher funding and better terms. These large-scale projects can benefit from lower interest rates and longer repayment periods.

• If your business does not have enough credit history, a low credit score, or even bad credit, you can use your assets to secure financing.

Unsecured Line of Credit

An unsecured line of credit doesn’t require collateral, similar to other unsecured loans. Instead, lenders look at the borrower’s creditworthiness. This means the lender will consider your credit history, monthly or annual revenue, and credit score.

As such, this type of financing is most likely out of reach for new businesses. Some lenders may even have a requirement for how long you’ve been in business.

Because the risks are higher, some lenders may require a personal guarantee from borrowers. There may also be stricter approval requirements. Some banks and financial institutions don’t offer unsecured financing, but many private lenders and credit unions do.

Pros of an Unsecured Line of Credit

• Not required to pledge assets as collateral

• Faster application process due to less paperwork

• No restrictions on how funds are used

Cons of an Unsecured Line of Credit

• Higher interest rates

• Lower credit limits

• Stricter requirements, including a good credit history or revenue minimums

Small Business Use Cases for Unsecured Lines of Credit

• The funds can be used to cover short-term cash flow gaps due to unforeseen expenses, seasonality, or delayed invoice payments from customers.

• It’s also best for smaller-scale financing needs like minor equipment purchases or software subscriptions.

• Businesses that need financing but don’t have significant assets for collateral can opt for an unsecured line. They also might have limited loan options but want to build their credit history.

Get Fast Funding With Backd’s Business Line of Credit

Getting financing whenever you need it empowers your business to weather financial challenges or take advantage of market opportunities. With Backd’s no-collateral Business Line of Credit, you can draw funds up to $750,000 any time and for any purpose. We also do a soft credit pull during the application process, so it doesn’t affect your credit score.

You can receive a decision in less than 24 hours once you submit your application. Our requirements are:

• $100,000 in monthly revenue

• 625+ credit score

• Established business credit

• Based in the U.S. with a brick-and-mortar address

• Been in business for two years

Apply now and keep your business moving forward.