A business line of credit can be one of the most flexible financing solutions available for small business owners. Business lines of credit give you the freedom to draw funds as needed, repay what you use, and borrow again when your company needs access to more cash. Yet before you apply for this useful funding tool, it’s crucial to understand that not all lines of credit work the same way. 

Most lenders offer two primary types of business credit lines: secured and unsecured. The key difference between these financing options has to do with a term known as collateral. When you open a secured line of credit, the lender requires you to provide business (or sometimes personal) assets to back the loan— these assets are collateral. With an unsecured credit line, the money you borrow depends on overall creditworthiness, including your business and personal credit scores, instead. 

Both options have benefits and tradeoffs. Knowing how they work and which solution aligns best with your company’s financial situation can help you make a smart funding choice. Use the guide below to learn what sets secured and unsecured business lines of credit apart, the pros and cons of both types of credit lines, and how to decide which option is the best fit for your funding goals.

Comparing secured and unsecured business lines of credit.

A business line of credit works like a reusable financial safety net—similar to a business credit card in several ways. When you open a new business credit line, the lender sets a credit limit for the account and you decide how and when to draw funds. You also only pay interest on the money you borrow, not the total available credit limit. This structure can make credit lines a great fit for managing cash flow, covering payroll, or handling unexpected expenses. 

Learn more about how a business line of credit works.

Business lines of credit fall into one of two categories: secured or unsecured. The difference between these options comes down to collateral, and that important detail shapes your approval odds, borrowing limits, and cost of financing.

What is a secured business line of credit? 

A secured business line of credit lets you borrow against assets your company already owns or, in some cases, against personal assets. When you open the credit line, you pledge collateral such as real estate, equipment, vehicles, or accounts receivable. The lender evaluates the assets and sets your credit limit based on their value, your financial strength, and other details. 

Collateral provides the lender protection and lowers its risk in the event of a default. If you stop making payments, the lender can take or sell the pledged assets to recover some (or all) of the outstanding balance on your debt. Because this structure reduces the lender’s risk, secured credit lines often feature lower interest rates, higher credit limits, and more flexible repayment terms. But the approval process may take longer due to the need for asset valuation.

Secured credit lines can be helpful for newer companies and startups. This type of financing can also be useful if you’re working to build business credit and for business owners who want to borrow larger amounts at lower rates. For example, a trucking company might use its commercial fleet as collateral to secure a credit line with a higher limit and lower borrowing costs. 

In general, secured credit lines work best for business owners who: 

  • Own high-value assets or property.
  • Place a priority on lower interest rates, higher credit limits, or longer repayment terms. 
  • Need to build or strengthen business credit.

What is an unsecured business line of credit?

An unsecured business line of credit gives you access to financing without pledging collateral. Instead of reviewing assets, lenders evaluate your creditworthiness (including personal and business credit scores, annual revenue, cash flow trends, and repayment history).

Because lenders take on more risk, some unsecured credit lines may feature smaller credit limits, higher interest rates, and shorter repayment terms. The qualification requirements for an unsecured credit line may also be stricter. And it’s common for lenders to require a personal guarantee, which connects repayment to your personal credit. However, approval and funding speeds tend to be faster with this type of financing.

Unsecured lines of credit may appeal to established businesses that want quick access to cash without risking assets like equipment or property. For example, a marketing agency with strong monthly revenue and an excellent credit score could use an unsecured credit line to gain quick access to working capital for managing payroll between client payments.

An unsecured business line of credit may work well for businesses who: 

  • Have excellent credit and stable revenue. 
  • Need smaller credit limits and short-term funding solutions to stabilize cash flow. 
  • Prefer to avoid pledging business or personal assets.

Secured vs. unsecured lines of credit.

Below is a side-by-side comparison of secured and unsecured business lines of credit so you can compare the key features of these popular financing options at a glance.

Feature Secured line of credit Unsecured line of credit
Collateral You pledge assets to back the credit line. You qualify based on credit, revenue, and other factors.
Interest rates Lower rates. Higher rates.
Credit limit Higher limits (tied to asset value). Lower limits (tied to cash flow).
Approval process Lender evaluates collateral. Lender evaluates credit and financials.
Funding speed Typically slower due to asset review. Typically faster since no asset valuation necessary.
Borrower risk You risk losing pledged assets. You risk personal guarantee liability.
Best for: Asset-heavy businesses, newer companies, and startups. Established businesses with strong credit, and/or businesses with strong revenue.

Weighing the benefits and risks: What each option means for your business.

Every financing decision comes with tradeoffs. So, it’s important to carefully consider the pros and cons of each option (secured and unsecured credit lines) before you choose the path that’s right for your business. Both financing options can support cash flow, operations, and growth. But the selection you make will influence your costs and risk exposure.

Interest rates and fees

Providing collateral reduces lender risk. So, lenders typically offer competitive, lower rates on secured credit. Unsecured credit, by contrast, tends to cost more because lenders assume additional risk. In fact, some lenders may be more likely to add on annual or maintenance fees for unsecured credit lines or other unsecured business loans.

Learn more about average interest rates for business lines of credit.

Asset impact and liability 

A secured credit line requires collateral, which puts your business or personal assets on the line if your company doesn’t repay its debt. If you default, the lender can take the pledged collateral. An unsecured credit line protects your assets, but often features a personal guarantee which can have a negative impact on your personal credit if the business fails to repay. This type of past due debt could harm your credit for many years into the future (possibly up to seven years).

Pros and cons

Secured line of credit

  • Pros: Lower interest rates, higher credit limits, easier approval criteria
  • Cons: Collateral risk, slower funding speed

Unsecured line of credit

  • Pros: No collateral, faster funding, protects assets‍
  • Cons: Higher interest rates, smaller credit limits, stricter qualification criteria, personal guarantee

Decision factors: Matching a business line of credit to your situation.

As you compare secured and unsecured business lines of credit, numerous factors may determine the best borrowing solution for your business. Your business goals, financial history, and available resources all have a role to play in the decision making process. 

If you want access to a larger credit line or if you wish to reduce borrowing costs, a secured credit line may serve you better. Meanwhile, for businesses that value fast funding speed and prefer not to risk assets (e.g., equipment, vehicles, property, etc.), an unsecured business line of credit might make the most sense. 

Of course, it’s also important to consider eligibility requirements and the type of credit line you’re more likely to qualify for before you apply. Every business credit line application is different, but lenders commonly evaluate factors such as the following.

  • Credit scores: Many lenders require borrowers to have a minimum 600 FICO® Score to be eligible for a business credit line. Unsecured credit lines may feature stricter requirements, especially for larger credit limits. 
  • Annual revenue: Minimum revenue requirements are often $100,000 per year, and in some cases as high as $50,000 per month depending on the lender and type of small business loan or line of credit.
  • Business age: Some lenders prefer to work with applicants that have been in business for at least one to two years. Yet there are lenders willing to approve borrowers with six months or more of operational history.
  • Available collateral: Traditional lenders may prefer for applicants to pledge assets to back their credit lines or loans. Online lenders, however, are often more flexible when it comes to this requirement and may offer more unsecured financing options. 

When to use secured vs. unsecured business lines of credit.

Both types of business credit lines have the ability to be helpful when your company needs a flexible financing solution. See the chart below for a look at several different scenarios and whether a secured or unsecured line of credit makes the most sense.

Business situation Best option Why it fits
Seasonal inventory needs Unsecured credit line Fast funding and no collateral requirements.
Long-term expansion or equipment purchases Secured credit line Higher limits and lower interest rates support larger investments.
Cash flow gaps between invoices Unsecured credit line Flexible, short-term borrowing without asset risk.
New business building credit Secured credit line Collateral helps business owner qualify even with limited credit history.
Business with valuable assets looking for lowest rate Secured credit line Assets strengthen your application and reduce borrowing costs.

Remember, strong credit can lower your business line of credit interest rates. But so can offering valuable collateral with a secured credit line. In the end, deciding whether an unsecured or secured credit line is best for your company comes down to identifying priorities and the type of financing you’re more likely to qualify for when you apply.

Bottom line.

A business line of credit can help you manage cash flow, cover expenses, and invest in the growth of your company. But you’ll need to choose which type of credit line makes the most sense for your business. Secured credit lines often reward you with lower interest rates and higher credit limits when you pledge collateral. Unsecured credit lines tend to offer speed and flexibility when you already have strong credit and want to avoid putting assets at risk.

Both options can support your financial goals when you use them responsibly. So, take the time to review your financials, consider your risk tolerance, and compare interest rates and fees before you choose a credit line that works for you. 

From there, explore Lendio’s business line of credit calculator to estimate how much you may be able to afford to borrow and learn how to qualify. When you’re ready, you can compare the best small business lines of credit to review rates, borrowing requirements, and more.