Business Line of Credit for Startups: A Good Funding Alternative

Ezra Cabrera

Updated: January 31, 2022

 

Key Takeaways

  • A startup can go bankrupt when there is a lack of available capital. One way to gain access to additional funding is through a business line of credit.
  • A business line of credit is a type of revolving capital that functions almost exactly like a credit card.
  • Credit lines can be obtained from a variety of sources, including banks and online lenders. There are also alternative online lenders may offer faster and more convenient application processes, as well as more flexible credit line requirements, which make them perfect for startups.
  • If you don’t get approved for equipment financing, applying for a business credit card may be a viable solution.

There are many reasons why your startup may need additional funding. In today’s business landscape, having a great idea and having a strong desire to succeed is simply not enough. If you are an entrepreneur who is looking to expand and scale your business, you may want to consider seeking alternative funding options for your business.

Why? Because a small business can go bankrupt when there is a lack of available capital.

Finding money to invest in your company’s future growth is not easy, though. Today’s businesses, particularly those that are in the early stages of development, have numerous options for obtaining the funding needed. Venture capital, angel investing, and crowdfunding are just a few of the relatively new options available today. Help is also available through startup accelerator programs, which are also available.

So if you’re an entrepreneur who’s serious about starting a business, or a CEO of a startup, then here are the top five reasons why you should consider seeking alternative funding:

1.  It creates a solid foundation for your startup idea.

When it comes to turning an initial concept into a viable product, more money and a larger team are frequently required. It follows that, in order to bring your idea to life, you will need to hire more employees, recruit field specialists, invest in production costs, and maintain a steady flow of operations during the development phase.

2.  You can capture as much of the market as possible in the shortest amount of time.

In the event that you have a game-changing idea that is widely accepted by the market, you will almost certainly want to capture as much of that market as possible. Increasing your marketing and sales efforts in order to compete in the market with other dominant players will be necessary for your company. This, once again, can only be accomplished by spending a lot of money.

3.  It increases the amount of money your investors are willing to give you.

It goes without saying that the primary reason for contacting investors is to obtain funding. Investors, on the other hand, can provide more than just money. They may be able to assist you in obtaining deals with other companies with which they have business relationships. After all, their success in the market is dependent on your success.

4.  It will help you to attract the attention of the market and potential investors.

Obtaining venture capital or another form of business funding for your startup indicates that you are well-positioned for the future. Funding raises your profile and draws the attention of investors and other stakeholders. It adds value to your company and demonstrates to prospective partners and customers, as well as potential investors, that you are a company that should be taken into consideration.

5.  When you grow in size, you can accomplish more.

Some entrepreneurs prefer to have a small company in which they are the sole proprietors. If, on the other hand, you are among those who aspire to greater things, you will require more money – to attract top-tier professionals for the company’s continued development, to conquer the market with cutting-edge products, and to establish a respected position among other players in the field. After all, wouldn’t you prefer to own 1 percent of a billion-dollar company rather than 100 percent of a company that is worth nothing?

 

An Alternative Solution: A Startup Business Line of Credit

Running a business has its ups and downs, especially when it comes to finances. Startups are no exception. They may even face more challenges. This is why whether you’re just getting started or trying to maintain or grow an existing business, you might find yourself with a profit one month and a loss during the next.

The question is, how do you manage that risk while still maintaining some level of financial stability in order to run your business effectively?

One answer is getting a business line of credit for your startup. A business line of credit is a type of revolving capital that functions almost exactly like a credit card. The difference is that you have access to cash and, in many cases, with lower interest rates.

The qualification for these funding options, including startup business loans without collateral, will be significantly more difficult for startups, though. Given the strict requirements that banks have for startups, the vast majority of startups will have an easier time obtaining funding from online credit lenders.

However, there are a lot of misconceptions about a line of credit and what it can do.

What does it mean to have a business line of credit, and what are the advantages and disadvantages of having one?

 

How Does a Line of Credit Work?

It is a flexible financing option that allows you to withdraw funds up to a predetermined amount at any time. This means that you can withdraw funds as and when you need acces to them, rather than receiving the entire loan amount all at once. It is common for small businesses to use a business line of credit to fund short-term working capital requirements, such as inventory purchases or project costs in the future, as well as for company payroll.

Credit lines can be obtained from a variety of sources, including banks and online lenders. Note that alternative online lenders may offer faster and more convenient application processes, as well as more flexible credit line requirements, which is why they’re good for startups. The minimum qualifications for banks are high, and they frequently require specific collateral, whereas online providers can be much more flexible.

You should plan to compare options between several lenders in order to find the best fit and the absolute best terms. Don’t wait until you’re in desperate need of additional capital before you start checking your options. You should also be aware of the pros and cons to having a line of credit.

 

Business Line of Credit Benefits

Here are the advantages of having a business line of credit:

1.    Immediate Access to Cash

A small business credit line allows you to draw funds only when you actually need them, which is very convenient. This means that if you don’t need the money right away, you won’t be obligated to pay interest on the money you borrowed.

2.    More Manageable Cash Flows

While every business should have a cash reserve available for times when the market is more difficult, crises can last for much longer periods of time than the funds available. When a sales spike occurs, it is impossible to predict whether you will require additional employees or whether you will be unable to pay the employees you already have because a client has not paid you. A business line of credit can assist you in minimizing that risk.

3.    Establishes a Good Credit History

Small businesses must establish a credit history in order to be eligible for future credit accounts and loans. When you use a line of credit for your business, you can build a positive credit history as long as you use the line and make your payments on time. Using their lines of credit in a thoughtful and deliberate manner may result in an improvement in their business credit rating, which can be beneficial when applying for additional loans and credit lines in the future.

4.    There Are Flexible Options

In some cases, lenders who providelines of credit do not require you to provide a justification for the loan. This allows you to use your credit for whatever your company requires on a short-to-medium term basis.

Business Line of Credit Drawbacks

However, there are still drawbacks to a startup having a business line of credit. Here are some of them:

1.    Small Credit Limits

In contrast to term loans, credit lines typically have lower borrowing limits, making them more suitable for unexpected expenses but less suitable for large capital investments.

2.    Difficulty in Qualifying 

Even startups and small businesses that meet the strict requirements for a top-tier business line of credit at a bank may find it difficult to qualify. They nay have to bring in additional business or accounts to support their application for the credit.

This is due to the fact that credit lines are less predictable in terms of profitability for lenders (compared to a term loan, for example). As a result, some financial institutions may be hesitant to offer them as a stand-alone product. When applying for a line of credit, your bank may require that your company has been in operation for at least two years. In contrast to, say, obtaining a business credit card, you may be required to submit extensive financial documentation, such as tax returns, cash flow statements, and other documents.

3.    Additional Costs

The expenses associated with establishing and maintaining a line of credit can be a significant disadvantage. There are fees associated with setting up a line of credit that must be paid in advance to obtain the line. Additional to this, the company is responsible for paying interest on the money it borrows from the line of credit. While business credit cards may have higher interest rates than personal credit cards, lines of credit may have higher fees for maintenance and withdrawals, which can add up over time. Check to see if your interest rate is low enough to justify any additional fees you may incur.

4.    An Increase in Debt

Aline of credit can provide a much-needed cash infusion to a small business when money is tight. However, a line of credit is still debt that must be repaid, which can be difficult when cash flows are tight.

While having a line of credit on hand for emergencies is convenient, you may find yourself spending the entire amount of credit you have available and being unable to repay it because of a slowdown in your company’s operations in the future. In some cases, a standard loan may be preferable to a cash advance in order to avoid the temptation of having access to immediate cash.

Final Thoughts

Regardless of the size or nature of your company, a credit line can be extremely beneficial. But before applying, make sure you understand the advantages, drawkbacks, and risks that may be involved.

However, if your startup is prepared to deal with them, then the benefits could outweigh the risks and drawbacks by a wide margin. For a startup, having additional access to capital can go a long way.

 

Ezra Cabrera
Ezra Neiel Cabrera has a bachelor’s degree in Business Administration with a major in Entrepreneurial Marketing. Over the last 3 years, she has been writing business-centric articles to help small business owners grow and expand. Ezra mainly writes for SMB Compass, but you can find some of her work in All Business, Small Biz Daily, LaunchHouse, Marketing2Business, and Clutch, among others. When she’s not writing, you’ll find her in bed eating cookies and binge-watching Netflix.

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