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4 Questions to Ask Yourself Before Taking Out an Unsecured Business Line of Credit

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An unsecured line of credit is among the most attractive external financing options. Find out how to determine if it’s the right one for you.

For many small businesses in New Zealand, an unsecured line of credit offers a practical way to manage cash flow gaps and cover unexpected expenses. Unlike secured business lines, unsecured lines don’t require you to put up assets as collateral, making them more accessible for businesses that may not have significant property or equipment. This flexible access to funds can be a lifeline when you need to bridge short-term funding needs or take advantage of new opportunities.

However, it’s important to weigh the pros and cons. Unsecured lines typically come with higher interest rates and may have stricter credit requirements compared to secured business lines. Your credit history and the strength of your business finances will play a big role in the loan terms you’re offered, including the interest rates and available credit limit. Before applying, review your cash flow to ensure you can comfortably manage repayments, and carefully consider all associated fees—such as weekly service fees, late payment fees, and interest rates. By understanding how these factors impact your business, you can decide if an unsecured line of credit is the right funding solution for your needs.


An unsecured line of credit is among the most attractive external financing options. Find out how to determine if it’s the right one for you.

Does your business have any cash flow issues? Are there any pressing matters that require more money than you have on hand? If so, an unsecured business line of credit can be a fitting solution. Unlike term loans, it’s a highly flexible and cost-effective way of injecting some cash into your business when you need it. Here’s how this type of credit work: it provides ongoing access to funds, allowing you to borrow as needed and repay on your own schedule, making it a flexible financial tool for managing business expenses.

Of course, this doesn’t mean it’s perfect for everyone. An unsecured business line of credit is a type of revolving line, which means you can borrow, repay, and borrow again without having to reapply each time. There are a few things that you need to consider before you decide to apply.

With a business line of credit, you can draw funds as needed, giving you the flexibility to cover unexpected expenses or take advantage of new opportunities.

Additionally, credit typically features flexible access, variable interest rates, and a range of repayment options to suit different business needs.

1. Can You Afford It?

As there’s no collateral, your lender will have to assume a higher risk. Because of this, you’ll want to make sure that you can meet the interest rate charges and additional fees. This requires you to take a close look at your cash flow and see how much you’re able to set aside for repayments.

One of the biggest advantages of an unsecured line of credit is that you only have to pay the interest and fees on a monthly basis. Better yet, the interest is calculated on the drawn balance, so interest is only paid on the amount you actually use, not the entire credit limit. Some business lines of credit offer a fixed rate or a variable interest rate, which can affect how much you pay over time.

This means that there are no deadlines to paying it back. You can pay down the credit line as much as you can afford, and then draw down more of that line of credit as needed.

Despite this convenience, you still need to make sure you can pay the price of your unsecured line of credit. The fee structure may include a weekly service fee charged from the settlement date, along with other one-off and ongoing fees. The interest rate can vary based on different factors, so it’s important to understand all associated costs.

2. Why Do You Need It?

In general, business owners turn to an unsecured business line of credit to meet their short-term capital needs. An unsecured business line of credit is a flexible funding option for managing working capital and covering operational expenses. You shouldn’t draw money out of your credit line to spend on unnecessary projects that won’t help your business grow.

One of the most common reasons why businesses need an unsecured LOC is seasonal business performance. For example, the summer may be the slow season for certain business, but in spite of the slower receipts, you can use a line of credit to ensure smooth day-to-day operation. And once the business picks back up, you can pay down the credit line and save it for the next off season.

In addition, an unsecured business line of credit is perfect when lucrative opportunities come up unexpectedly, such as if a supplier offers a sizable discount for you to stock up. This is also true for projects you can’t afford. For example, you might want to launch a marketing campaign or invest in other marketing campaigns and growth initiatives that aren’t going to bear fruit now but the future. To better understand why business loans are important, consider how they provide the financial flexibility needed for such opportunities.

You can borrow money from your credit line and access available funds to finance the campaign, then pay it down once you see the results. Not only that, but you might also generate additional profits on top of that.

After that, you can leave the LOC sitting there until you need it again. Better yet, this doesn’t create any expenses.

3. How Much Can You Borrow?

It doesn’t make sense to take out a line of credit that doesn’t cover all your needs. This may even result in your business having to pay interest and fees for no reason. A small business line of credit is designed to meet the unique needs of small enterprises, offering flexible access to funds for managing cash flow or growth. This is why you need to find a lender that will give you all the money you need at reasonable terms.

This depends on both the lender and your own standing. Lenders generally have a fixed minimum and maximum amount they’re willing to offer their clients. Business lending options, including lines of credit, are available for both established and new business applicants.

When considering lender criteria and borrowing costs, it’s important to compare credit loans and lines of credit, as they differ in loan term and repayment structure. Credit loans often have fixed loan terms, while lines of credit offer more flexible repayment options.

More importantly, your credit history will ultimately determine how much you can borrow as well as the borrowing costs. Many third party lenders are willing to take another look at those who couldn’t get approved by major banks. Still, those with a good credit history can get a better deal, as they can show that they’re a more reliable borrower. Unsecured business lines may come with a higher interest rate compared to secured options, so understanding the type of credit line is essential.

It’s best to find different options and compare them to see what works best for you. In addition, you might want to find a way to improve your credit profile in order to negotiate a better deal.

4. How Long Will It Take Until You Get the Funds?

The exact approval period will depend on factors specific to your needs and performance. But in general, it takes much less time to get an unsecured line of credit approved compared to any secured loan products.

By virtue of putting up an asset as collateral or security, the lender would have to evaluate the asset to their best ability. Your application might go through many officers and loan managers. As a result, it can take weeks or even months for your application to get approved.

In comparison, the application and approval process for an unsecured LOC is much simpler. Because of this, you might get an approval in as little time as a few hours. Once approved, funds can be accessed quickly and are often transferred directly to your business account or bank account, allowing for immediate business access to working capital. A revolving business line provides ongoing access to funds, which is especially useful for Zealand businesses needing flexible financing solutions. For example, the Prospa line is a business line of credit product that offers flexible loan amounts, fixed interest rates, and convenient repayment terms.

Of course, this will vary from one lender to another, and from one borrower to another. Before you apply, do your part and establish that you’re deserving of the lender’s trust. Be aware that some lenders may charge a late payment fee if you miss a scheduled payment, or fees for an unsuccessful attempt to draw funds from your line of credit.

Understanding the Application Process

Applying for a business line of credit is a straightforward process, but being prepared can make all the difference. Most lenders will ask for financial documents such as bank statements, balance sheets, and income statements to assess your business’s cash flow and creditworthiness. A credit check is typically part of the process, as your credit history will influence the interest rate and loan terms you’re offered.

Some lenders, like Prospa, have simplified the application process with online portals, allowing you to submit your application and supporting documents quickly. To improve your chances of approval, make sure your business has a valid NZBN, a solid credit history, and a track record of stable cash flow. You may also need to provide identification and proof of business ownership. By understanding what’s required and preparing your documents in advance, you can streamline the application process and position your business for success when applying for a line of credit.


Comparing Financing Options

When it comes to funding your small business, it’s important to compare all available options to find the best fit for your needs. Business loans, business credit cards, and lines of credit each offer unique benefits and drawbacks. A business line of credit provides flexible access to funds—you can draw and repay funds as needed, making it ideal for managing cash flow or covering unexpected expenses. In contrast, a traditional business loan gives you a lump sum with fixed repayment terms, which can be useful for larger, one-off investments.

Business credit cards offer convenience and may come with rewards, but they often carry higher interest rates and fees. When comparing these options, look closely at the interest rates, loan terms, fees, and how easily you can access funds. Also, consider the lender’s reputation and customer service, as well as their flexibility in adjusting loan terms if your business needs change. By weighing these factors, you can choose the financing option that best supports your business’s growth and financial stability.


Assessing the Risks

While a business line of credit can provide valuable funding and help manage cash flow, it’s essential to understand and manage the risks involved. Over-borrowing or missing repayments can harm your credit history and put your business finances under strain. Before applying, take a close look at your cash flow and funding needs to ensure you can comfortably meet the loan terms and interest rate obligations.

Establish a clear repayment plan and monitor your outstanding balance to avoid accumulating unnecessary debt or incurring late fees. Be sure to review the loan agreement for details on direct debit requirements, late fees, and what happens if you default on payments. By staying informed and proactive, you can use a business line of credit to support your business’s success while minimising financial risks.

Is an Unsecured Business Line of Credit Right for You?

After answering the above questions, you’ll know if an unsecured line of credit is a good option for your capital needs. As convenient and flexible as it is, not everyone may find it worthwhile. This has to do with the higher interest rates since you don’t have to put up any collateral.

On the other hand, you’re not risking any of your valuable assets and you can have the money you need right away. As long as you can meet the interest rate repayments, this can be a great option for getting the cash you need.

Still not sure if you should go with an unsecured line of credit? We’ve got you covered. To learn more about applying for an unsecured business line of credit, go ahead and visit our site.

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