Business Lines Of Credit For Startups: How To Get The Funding You Need

Startups often need to make small purchases frequently as they start to build up their businesses. Business lines of credit for startups provide a solution to this. A business line of credit is a loan that you can withdraw money from and only pay interest on the amount used and not on the total amount loaned. Once the entire amount has been paid back including the interest the loan amount is extended again without the need to reapply.

Key Points:

• Business lines of credit for startups offer flexible financing with low fees. Your credit line operates similarly to a credit card.  
  There are both secured and unsecured business lines of credit.
• Secured financing requires collateral while unsecured lines of credit don’t. 
• You can get business lines of credit through traditional banks, credit unions, and online lenders. 

How Do Business Lines Of Credit Work?

A business line of credit is a type of financing that allows a business to access a pre-approved amount of funds as needed, up to a certain credit limit. It is similar to a credit card in that the business is able to draw funds as needed, but the funds are typically accessed through checks or electronic transfers rather than a physical card.

Here is how a business line of credit typically works:

Application: The business applies for a line of credit with a lender. The lender reviews the business’s creditworthiness, financial statements, and other relevant information to determine whether to extend the line of credit and, if so, the terms and credit limit.

Approval: If approved, the business is given access to the line of credit up to the credit limit. The business can draw on the line of credit as needed, up to the limit.

Repayment: The business is only required to make payments on the amount borrowed, plus interest, rather than the entire credit limit. The repayment terms and interest rates will be outlined in the agreement with the lender.

Renewal: The line of credit is typically renewable after a certain period of time, as long as the business continues to meet the lender’s requirements.

One key advantage of a business line of credit is that it provides flexibility for the business to access funds when needed, without having to go through the application process each time.

However, it is important for businesses to use the line of credit responsibly and only draw on it when necessary, as interest rates and fees can add up quickly.

Can You Use A Business Line Of Credit For Anything?

While a business line of credit provides flexibility to access funds as needed, there are typically restrictions on what the funds can be used for. Lenders will often require the business to provide a specific reason for the line of credit and may place restrictions on how the funds can be used.

Here are some common uses for a business line of credit:

Cash flow management: Businesses may use a line of credit to manage cash flow fluctuations or cover short-term expenses, such as payroll or inventory.

Capital expenditures: A line of credit may be used to finance capital expenditures, such as new equipment or property improvements.

Emergency expenses: A line of credit can provide a safety net in case of unexpected expenses, such as a major repair or legal fees.

Seasonal fluctuations: Businesses that experience seasonal fluctuations may use a line of credit to cover expenses during slow periods or ramp up production during peak periods.

It's important to note that lenders may place restrictions on how the funds can be used, such as prohibiting the use of the funds for personal expenses or speculative investments. Businesses should carefully review the terms and conditions of the line of credit agreement to ensure they understand the restrictions and permissible uses of the funds.

How Is A Business Line Of Credit Different From A Business Loan?

A business line of credit and a business loan are both types of financing that provide businesses with access to funds. However, there are some key differences between the two:

Repayment: A business loan typically requires regular fixed payments over a set period of time, while a business line of credit allows businesses to borrow and repay funds as needed within a credit limit.

Interest: Interest rates for business loans are typically fixed for the term of the loan, while interest rates for a line of credit may be variable and can change based on the prime rate or other factors.

Use of funds: Business loans are often used for specific purposes, such as purchasing equipment or real estate, while a business line of credit can be used for a variety of purposes.

Funding amount: Business loans are often used to fund larger projects, while a business line of credit is typically used for smaller ongoing expenses.

Approval process: The approval process for a business loan is typically more involved than for a business line of credit, as the lender may require detailed financial information and collateral. A business line of credit is often easier to obtain, but typically requires a good credit score and a strong financial history.

A business line of credit provides more flexibility and is generally better suited for ongoing expenses or cash flow management, while a business loan is typically used for specific projects or larger expenses that require more capital upfront.

Secured Vs Unsecured Lines Of Credit

Here is a table comparing secured and unsecured lines of credit

Secured lines of credit offer lower interest rates, higher credit limits, and less risk for the lender, but require collateral and a more involved approval process. Unsecured lines of credit offer more flexibility and a faster approval process, but come with higher interest rates and lower credit limits, and may require a personal guarantee or lien on business assets.

Where To Get A Business Line Of Credit For Your Startup

There are a huge variety of business lines of credit lenders. Which one works best for you largely depends on your own finances, the loan amount and terms you’re looking for, and how fast you need your credit line. When considering a business line of credit, make sure to consider all of the following options:

Traditional banks: Brick-and-mortar banks like Chase, Bank of America, or Capital One (just a few examples), offer lines of credit. These may have longer wait times when it comes to approval, but they’re reliable sources of funding.

Credit unions: Some local credit unions offer business lines of credit. Working with them puts a personal touch on the lending process, as you’ll likely have to apply in person. Credit unions may have more lenient credit requirements as well.

Online lenders: Ondeck, Bluevine, and Fundbox are all examples of companies that offer business lines of credit. Online lenders definitely have the fastest funding process, with some offering next-day funding. Online lenders also tend to have the least strict credit requirements and the easiest application process. 

Pros Of A Business Line Of Credit

Often fast funding: Compared to traditional loans that can take weeks to get approved, lines of credit tend to have faster turnaround times.

Revolving credit lines allow you to fund multiple projects: Lines of credit can be reused once you’ve repaid your previous purchases.

Lines of credit can help you build business credit: Just like personal credit cards can help individuals build their credit score quickly, business lines of credit can do the same for your startup’s credit score.

Keeps the rest of your business’s cash flow available: A line of credit allows you to avoid making large purchases all at once, saving your business’s money for other important needs like inventory, employees, etc. 

Cons Of A Business Line Of Credit

Interest rates are often high: Business lines of credit are often in the double-digits, so the larger your purchases, the more you’ll pay in interest for the life of your credit line.

There are more limited options compared to loans: Many banks, credit unions, and online lenders offer business loans. Not all of them offer credit lines, though.

Collateral may be required: If you apply for a secured business line of credit, you’ll have to put up collateral. If you can’t make payments, whatever you put up as collateral will be seized to pay your debts. 

Business Line Of Credit Requirements For A Startup

Any financial product you apply for will require your financial information in order to determine if you’re a risky borrower or not. In order to even apply for a business line of credit as a startup, you’ll need to make some basic requirements, including:

A good credit score: Most lenders require at least a score in the high 500s to qualify for a line of credit. And this won’t guarantee you the best rates. Those with excellent credit will be offered the lowest interest rates.

Proof of annual revenue, or at least potential annual revenue: While startups likely don’t have a long time in business, a lender wants to be able to verify that you have some sort of income. This ensures that you’ll be able to pay down your credit line in a timely manner.

A minimum amount of time in business: There are online lenders that won’t require any time in business, but many brick-and-mortar lenders have a minimum requirement of three months in business.

Business financials: In order to prove that you can pay back the loan, you may have to submit financial documents such as your tax returns in order to prove that you have the financial means to take out a line of credit.

A business plan: Your business plan shows your potential for growth, and therefore your potential for income. Providing this, while not always necessary, can help show a lender that you have a plan for paying back any purchases you make with your credit line.

Is It Hard For Startups To Get A Business Line Of Credit? 

It can be difficult for startups to get a business line of credit, especially if they have not yet established a strong credit history or have limited revenue.

Lenders often require businesses to have a minimum amount of time in operation, typically one to two years, before they will consider extending a line of credit.

In addition to time in operation, lenders will also consider other factors when evaluating a startup’s eligibility for a business line of credit. These may include:

Credit score: Lenders will typically require a strong credit score from both the business and its owners.

Revenue and cash flow: Lenders will want to see a track record of consistent revenue and positive cash flow, which can demonstrate the ability to repay the line of credit.

Business plan: Lenders may require a detailed business plan outlining the startup’s strategy for growth and how it plans to use the funds from the line of credit.

Collateral: Some lenders may require collateral to secure the line of credit, which can be difficult for startups that may not have significant assets to pledge.

Industry and market: Lenders may also consider the startup’s industry and the overall market conditions when evaluating its eligibility for a line of credit.

While it can be difficult for startups to get a business line of credit, it is not impossible. Startups that can demonstrate a strong credit history, consistent revenue and cash flow, and a well-developed business plan may be more likely to be approved for a line of credit, even if they are relatively new to the market.

Can You Get A Business Line Of Credit For Your Startup If You Have Bad Credit? 

It is possible to get a business line of credit for your startup if you have bad credit, but it can be challenging. Lenders are often hesitant to extend credit to businesses with bad credit because they perceive them to be higher risk borrowers. If you have bad credit, you may face higher interest rates, lower credit limits, and more stringent terms and conditions than borrowers with good credit.

However, there are a few things you can do to improve your chances of getting a business line of credit for your startup, even if you have bad credit:

Improve your credit score: Work to improve your personal and business credit scores by paying bills on time, reducing debt, and disputing any errors on your credit reports.

Build your business credit history: If your startup is new, start building your business credit history by opening a business credit card or taking out a small loan and paying it back on time.

Consider a secured line of credit: If you have bad credit, you may need to provide collateral to secure the line of credit, such as inventory, equipment, or real estate.

Seek alternative lenders: Consider alternative lenders, such as online lenders or peer-to-peer lending platforms, which may be more willing to work with businesses with bad credit.

While it can be difficult to get a business line of credit for your startup if you have bad credit, it is not impossible. Improving your credit score, building your business credit history, providing collateral, and seeking out alternative lenders can all improve your chances of getting approved for a line of credit.

Is It Possible To Get A Business Line Of Credit If Your Startup Has No Revenue?

It is very difficult to get a business line of credit for your startup if you have no revenue. Most lenders require businesses to have a track record of consistent revenue and positive cash flow to demonstrate their ability to repay the line of credit.

However, there are a few options you can consider if your startup has no revenue:

Personal credit: If you have good personal credit, you may be able to use a personal line of credit to fund your business until it generates revenue.

Collateral: If you have valuable assets, such as equipment, real estate, or inventory, you may be able to use them as collateral to secure a line of credit.

Microloans: Microloans are small loans offered by non-profit organizations, community organizations, or government agencies, which may be available to startups with no revenue.

Crowdfunding: Crowdfunding platforms allow businesses to raise funds from a large number of individuals in exchange for equity or rewards, which can provide the capital needed to get your business off the ground.

Friends and family: Consider asking friends and family members to invest in your business or provide a loan to help get it off the ground.

While it is difficult to get a business line of credit if your startup has no revenue, there are alternative funding options you can explore, such as personal credit, collateral, microloans, crowdfunding, or funding from friends and family.

How To Get A Business Line Of Credit For Your Startup

Thankfully, the process of getting a business line of credit can be relatively easy. You can apply in person at a local credit union or bank, but many choose an online application because the process is even simpler. In general, here’s how to get business lines of credit:

Research lenders: Start the process by searching through different types of lenders. Look online and at local options, comparing interest rates, fees, and whether or not each lender requires collateral.

Gather your financials: Before hitting “apply” on any application, make sure you have all the necessary financials ready to go. This includes tax returns, your business plan, cash flow projections, and more. Connect with your accountant, if you have one, and they should be able to provide you with everything you need.

Apply with the lender of your choice: Next, it’s time to apply. If you’re using an online lender, this should only take 5 - 20 minutes, depending on the lender. You’ll answer a series of financial and personal information both about you and your startup.

Sit back and wait: Once you’ve gone through the application process, all you can do is wait. How long you wait depends on the type of lender you’re working with. Online lenders will often give you a decision in a day or two while traditional lenders can take weeks. 

How To Find The Best Business Line Of Credit For Your Startup

When it comes to finding the best business line of credit for you and your startup, you need to focus on your specific needs. Here are a couple of tips to consider before making your final decision:

Browse lenders: This is worth repeating. Take the time and do your research. This is the only way to ensure you’re getting the best deal for you. You can check out our list here for the best line of credit lenders.

Focus on upping your credit score: Your credit score is what’s vital to getting the best interest rates, so having a good score is important. If you can, make sure you’re not applying for a bunch of other loans right before getting your line of credit. Your score can take a hit if you’re applying for multiple loans in a short window.

Don’t apply until you’ve been in business for at least three months: To get the best deal on your loan, you need to show that your business is at least going in the right direction and you’re making a profit. The best lenders will require a certain amount of time in business.

Other Startup Financing Options

Business Credit Cards

Business credit cards, while similar to business lines of credit, have smaller credit lines, so they’re not the best option for startups who need to make larger startup costs.

For businesses who are looking to fund smaller, day-to-day purchases, a business credit operates in the same way as a line of credit. You’ll have a set limit that you can spend on until you hit that limit. Pay the card down and you can use it again.

Term Loans

Most lenders that offer business lines of credit also offer traditional business loans. For major purchases, loans may work better for startups. This gives you a lump sum in cash that you can spend upfront and pay back over time. These loans often come with origination fees, decent interest rates, and flexible loan lengths. 

Equipment Financing

Equipment financing, as its name implies, is specifically for equipment purchases. These are another form of business loan, just with specific spending requirements. Many of these loans can be accessed by bad credit borrowers, but collateral may be required.

Invoice Factoring

Invoice financing is a very short-term loan option that comes in handy when you have unpaid invoices. They give you cash to pay for any business expenses, and when your invoices do get paid, you’ll automatically pay back your lender. 

Angel Investors

Angel investors are private investors that earn equity in your business in exchange for cash. Instead of paying back your loan through monthly payments, you’re giving a share of your company to the investor and they earn a profit when you earn a profit. 

Business Grants

The Small Business Association (SBA) offers a limited number of business grants that startups can access. The COVID-19 relief program is a prime example of one of these grants. Just make sure to double-check the requirements for each grant, as many have more specific requirements than most loans or lines of credit.

Personal Loans

Startups, especially those started by one or two individuals, may want to consider personal loans to help fund their business ventures. These loans can be used for any personal reason, with the exception of financing property. There are hundreds of lenders to choose from and any credit profile can qualify.

Friends and Family

At the end of the day, not everyone qualifies for financing. In those instances, getting help from friends and family may be an option. Just make sure that you treat them like any other funding option. Be professional, present a business plan, and have a plan to pay them back.

Crowdfunding

Crowdfunding options are just loans funded by private investors. For borrowers, the loan process is similar to other loan types. You’ll have a repayment schedule and a set interest rate, which is what’s used to pay back investors. You can find these loans on sites like Prosper and LendingClub.

How Startups Can Get A Business Line Of Credit

Securing funding is one of the biggest challenges facing startups, and a business line of credit can be a valuable financing tool to help new businesses grow. However, for startups with no credit history or established revenue streams, getting approved for a business line of credit can seem like an insurmountable task. The good news is that there are steps startups can take to increase their chances of securing this type of financing.

Firstly, startups should focus on building their credit score by establishing a credit history and making timely payments. A solid credit score can go a long way in convincing lenders to approve a business line of credit application. To build credit, startups can apply for a small business credit card, which can help establish credit history and demonstrate responsible financial management.

Another strategy is to seek out lenders who specialize in working with startups. These lenders may be more willing to take a chance on a new business and may offer more flexible requirements for credit history, revenue, and time in business. Startups can also seek out business accelerators and incubators that offer access to funding opportunities and mentorship programs.

Finally, having a strong business plan and financial projections can also increase the chances of getting approved for a business line of credit. Lenders want to see that startups have a clear vision for their business and a plan for achieving growth and profitability. By demonstrating a solid understanding of their business and industry, startups can help lenders feel more confident in their ability to repay the loan.

How To Qualify For A Business Line Of Credit As A Startup

If you are a startup looking to qualify for a business line of credit, there are several factors that lenders will consider when evaluating your application. These include your credit score, time in business, revenue and cash flow, collateral, business plan, and industry and market. By understanding these factors and taking steps to improve them, you can increase your chances of qualifying for a business line of credit.

First and foremost, your credit score will play a significant role in the approval process for a business line of credit. Most lenders require a minimum credit score of 600, although some may require a higher score.

If your credit score is below the minimum requirement, it's important to take steps to improve it before applying for a business line of credit. This may include paying down debt, disputing errors on your credit report, or working with a credit counselor.

Another important factor that lenders consider is your time in business. Most lenders require at least six months to a year of business history before approving a business line of credit. This is because they want to see that your startup has a track record of generating revenue and managing cash flow.

If you haven't been in business for the minimum amount of time required, there are alternative funding options available, such as a personal line of credit or a small business credit card. However, keep in mind that these options may have higher interest rates and lower credit limits than a business line of credit.

Final Words

A business line of credit can help startups that have been in business for a short period of time grow and expand. For businesses that need to make more than one major purchase in a short window, a business line of credit offers flexibility. Good credit borrowers will find some pretty competitive offers, especially from online lenders. They can often get funding quickly as well.