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Startup business lines of credit
Your options — and alternatives — for flexible funding as a new business.
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Business lines of credit can be excellent tools for startups. But without a history of successful business loans, it can be difficult to find an inexpensive line that suits your business’s needs.
Can startups qualify for business lines of credit?
Yes — but it’s not as straightforward as it might seem. There’s no set definition for a startup, but most lenders will only consider you if you have at least six months in business.
This means brand-new businesses and businesses that aren’t up and running likely won’t qualify for a line of credit. But small startups with decent revenue and a good track record for paying creditors may be eligible.
How do I qualify for a business line of credit?
That being said, there are business lines of credit available to startups. Provided your business meets a lender’s requirements, which are usually provided upfront, your startup could be eligible.
The exact requirements vary by lender, but here are a few common criteria we’ve seen:
- Six or more months in business — although some lenders want to see one to two years
- Strong revenue that shows your business can afford additional credit
- Positive personal and business history of repaying debt
- Business plan that outlines how funds will be used
- Personal and business tax returns
How to get a startup business line of credit
When you’re ready to apply, start with a list of banks and online lenders that offer business lines of credit — it’s not as common as you’d think. From there, make sure the lender provides the information you need to make a decision on its business line of credit, including the eligibility requirements your startup will need to meet.
Choose between a revolving or non-revolving line
Your first choice, before you start looking for lenders, is to decide whether your business needs a revolving or non-revolving line of credit.
- Revolving: A revolving line of credit doesn’t have a set term. Instead, your business will be able to borrow up to your credit limit as needed. Once that amount is paid off, you’ll be able to borrow again.
- Non-revolving: A non-revolving line of credit has a set term. Funds aren’t renewed when you pay them off, and once you borrow up to your credit limit — or reach the maturation date — your ability to draw from your line will be closed. From here, you pay off any borrowed funds like a term loan.
Compare banks, credit unions and online lenders
As a startup, you likely won’t have an established relationship with a lender. That’s normal — but it does mean you may have to do extra work to find the right fit for your business.
Unfortunately, many lenders require you to have been in business for at least six months, although a minimum time in business of one or even two years isn’t uncommon. Because of this, you’ll want to compare a wide variety of options to narrow down your choices.
Check to see what interest rates, fees and terms each lender offers. You may also find that your lender requires collateral to secure your line. This can be in the form of equipment, business equity, inventory or a personal guarantee. Unsecured business lines of credit are rare, and it’s unlikely that your business will qualify as a startup with limited borrowing history.
Prepare financial and business information
Once you’ve found a few lenders that fit your needs, gather the documents and information you’ll need to apply. These typically include bank statements, personal and business tax returns, a well-written business plan and details on how you plan to use your funds. You will also need to provide details about your collateral for a secured line of credit, but the specifics will depend on your lender.
Understand the fees and total cost
Much like credit cards, the total cost of your business line of credit will depend on how much you spend. But beyond interest rate, your lender may charge a few fees.
- Maintenance fees. A common expense worked into your annual percentage rate (APR).
- Draw fees. A fee that gets charged each time you draw funds from your line of credit.
- Late and non-sufficient funds fees. These aren’t included in your APR, and can be costly.
Know the total amount your business can afford to pay each month and each year so you don’t overextend your budget.
Business loans you can apply for today
While not every lender on our table offers business lines of credit, you can compare a few that do against some of the most common alternatives, including traditional term loans.
Pros of startup business lines of credit
A business line of credit can be a useful tool for startups because it allows you to tackle early cashflow issues while building a positive credit history.
- Flexible, quick funding. Because you can make a draw at any time, you’ll have consistent access to funding when you need it.
- Lower interest rates than credit cards. This can help your business save money — but you may miss out on bonus points and cash back on regular purchases.
- Builds credit score and history. Positive payment history can increase your chances of approval for future funding.
- Builds positive lender relationships. This is especially true with a bank. When you work with the same lender for years, it will understand your business and expenses, making it easier to access other forms of credit.
- Interest only paid on amount borrowed. Unlike a term loan, you’ll only pay interest on the amount you borrow. Any amount you don’t draw will be available to your business as needed.
Cons of startup business lines of credit
While business lines of credit have their benefits, there are some drawbacks your business may face.
- Good to excellent credit typically required. Most lenders, especially banks, will require that you have good to excellent personal credit to qualify. If you don’t, you may not be eligible for a line of credit — even if you meet other requirements.
- New startups may not qualify. Like with the good to excellent credit score requirement, new startups may struggle to qualify because lenders want to see minimum time in business and revenue before they are willing to consider you for a line of credit.
- May still have high interest rates. Although lines of credit typically have lower interest rates than credit cards, your startup may only be eligible for a higher interest rate — sometimes upwards of 20%.
- Unsecured lines rarely available. Unsecured business lines of credit are generally reserved for established businesses with high revenue. For startups, you’ll need to provide some form of collateral to borrow.
4 alternatives to business lines of credit
Because lines of credit can be difficult to qualify for, here are a few alternatives that may be easier to access as a startup:
- Personal line of credit. If your startup isn’t open for business — or is less than six months old — you may want to consider a personal line of credit. Often, these can be used for business expenses when you don’t qualify for a business loan.
- Business credit card. A business credit card functions similarly to a personal credit card. Startups may find it easier to qualify for a business credit card, and unlike lines of credit, you’ll be able to earn points and cash back to support future expenses.
- Invoice financing. Invoice financing is useful for some businesses, but it can be expensive. If you regularly have long net terms, you could receive an advance on your invoices for a quick source of funding.
- Business term loans. For a fixed expense, a term loan may be a better choice. These are generally easier to qualify for — especially as a startup — and are a good option if you need to cover supplies, inventory or equipment.
Bottom line
Startups may find business lines of credit to be a positive way to build credit history while covering minor expenses. But because your business will need to meet strict criteria to qualify with most lenders, consider a wide variety of business loans before you apply.
Frequently asked questions
Our answers to some common questions about business lines of credit for startups.
What can a line of credit be used for?
A line of credit can be used for just about any expense. Inventory, equipment, office supplies and hiring costs are common uses. But provided you review with your lender about how funds can be spent, you likely won’t bump into anything you won’t be able to use your line of credit for.
Will I qualify with bad personal credit?
There are some lenders that work with business owners who have bad credit, but it can be difficult to find funding if you have bad credit and don’t meet other requirements.
Because your startup doesn’t have its own credit score, a lender relies on your personal credit to make a decision. Without good credit, you could struggle to get approved for a line of credit — and get a fair interest rate.
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