Startup Business Line of Credit: Best Options and How to Qualify

How do business lines of credit work?

Where to get a startup business line of credit

Pros and cons of a startup business line of credit

Pros

• Flexible form of financing. A business line of credit is one of the most flexible forms of business funding. You can use a line of credit for a range of short-term purposes, including managing cash flow, covering emergencies or taking advantage of unexpected opportunities. Flexibility makes this financing solution well-suited for the unpredictability of running a startup business.
• Access to fast cash. You can draw funds from your credit line and have access to cash quickly — when you actually need it — and only pay interest on the funds you draw. Plus, when you repay what you’ve borrowed, you can continue to draw on the line.
• Build business credit. Spending responsibly with a business line of credit may allow you to build a positive business credit history, which can help you obtain future credit accounts and loans. Making your payments on time and keeping your credit utilization ratio at or below 30% can help your business credit — as long as your lender reports responsible spending to the business credit bureaus.

Cons

• Can be expensive. Annual percentage rates on some startup business lines of credit can run high, as newer businesses generally pose a greater risk to lenders compared to more established businesses. To qualify for the best possible rates, it can help to show solid business financials and strong credit history — and in some cases, secure your line with collateral.
• Limited options. Not all lenders offer startup business lines of credit, and there can be limitations for the ones that do. Compared to credit lines available to more established businesses, for example, business lines of credit for startups may have smaller borrowing limits and shorter repayment terms.
• Personal financial risk. Even if you can qualify for a startup business line of credit, it’s important to make sure you can afford to take on potential debt. Finances can be tight when running a startup and you need to be able to repay borrowed funds if your business slows — or even fails. If you can’t repay your line of credit, it will likely impact your personal credit and finances. Most lenders will require you to sign a personal guarantee so that you’re individually responsible for paying back your debt, even if your business fails.

How to apply for a startup business line of credit

• Credit score: 600 or higher.
• Annual revenue: $100,000 or more (Or at least $8,333 per month).
• Time in business: Six months or more.

• Business registration documents.
• A business plan.
• Personal and business bank statements.
• Personal and business tax returns.
• Business financial statements, such as a profit and loss statement and balance sheet.

Other startup financing options

• Startup business credit cards. Your time in business is usually not considered when applying for business credit cards. They can help cover everyday purchases and small to medium-sized startup expenses while you build your business.
• Personal business loans. If your personal finances are in good shape, you may be able to take out a personal loan to help fund your new business. You’ll probably be able to borrow more money this way than you could with a business credit card.
• Friends, family and crowdfunding. If you don’t want to take on debt from a financial institution, consider turning to your personal network for investment — whether that’s by asking friends and family for funding directly or through a crowdfunding campaign.