Guide To Qualifying For Start-Up Business Lines Of Credit

Ezra Cabrera

August 17, 2021
Start-Up Business Lines Of Credit

 

Key Takeaways

  • A start-up business line of credit is a type of revolving capital that works like a credit card as you can access your credit at any time and only have to repay what you’ve used, plus interest.
  • Business lines of credit can be useful if you are in a situation where you have repeated cash outlays, but the amount you need is still unknown and your suppliers or vendors do not accept credit cards as a mode of payment.
  • If you’re seeking funds for future projects or you need to buy more inventory, start-up business lines of credit are ideal for you because they give you the flexibility of using money for anything your start-up business requires.

If you need a large amount of funding for your small business, start-up business lines of credit are a good financing option to consider. This article will give you an in depth-guide on everything you need to know about this type of credit line.

What is it?

A start-up business line of credit is a type of revolving capital that works like a credit card as you can access your credit at any time and only have to repay what you’ve used, plus interest. For instance, if you have a credit limit of $100,000 and only spend $20,000, you only have to repay $20,000, plus interest and any additional fees. Once this amount is paid off, the account will be replenished.

Unlike using a credit card, lines of credit allow you instant access to cash because you can withdraw funds at any given time. It is a suitable option for business owners looking for a viable capital source for short-term needs. When exploring this option, it is imperative that you understand the process it entails (which will be dependent on the financial institution you are applying with).

Pros and cons

When money is tight, it presents challenges to effectively and smoothly running your business, hence why working capital is considered a necessity for your operations – maintaining inventory, affording payroll, paying reoccurring overhead costs, etc. Having a start-up business line of credit offers the following benefits:

1. Enables You To Pay For What You Spend

Once you receive a credit line, you’re required to pay the amount you’ve used. Depending on what you and your lender have agreed on, you may repay the balance at any time without carrying a prepayment penalty.

2. Keeps Cash Flow Intact During Slow Seasons

A business line of credit is also deemed by most business owners as a perfect tool for balancing cash flow, especially in slow seasons. Let’s say you own a retail store that makes most of its sales during the holiday season (Christmas and Thanksgiving).In slower, off-seasons you may become short on cash making payroll daunting for you. Since paying your employees with your credit card is not an option, a start-up business line of credit is a viable solution in such times of need.

3. Promotes Business Adaptability

As much as you want to seize every opportunity that comes your way, having a limited access to capital when such opportunities arise can deter you from doing so. For example, a manufacturer has reduced their cost but you aren’t able to take advantage of the deal because you don’t have enough cash at your disposal. With a start-up line of credit, you’d have the capital to get in on the deal and ultimately save money down the line.

4. Builds Business Credit History

Another benefit you will reap from a start-up line of credit is the ability to build your credit history. If you want to get the best terms when taking out a personal loan, you will need to demonstrate a good personal credit history. The same is true with commercial or business lines of credit. A good credit score is instrumental and crucial in this pursuit. So, if you want to maintain or boost your credit score, receiving a start-up line of credit is one way to accomplish this goal. You just have to make sure you repay the amount responsibly and on time.

While start-up business lines of credit offer a number of benefits, they do have some downsides. Like any type of financing, not taking the time to do your research can lead to encountering potential issues. Before you utilize this financing option, be sure to educate yourself on the drawbacks.

1. Challenging Qualifying Process

Before you’re granted a business line of credit, you have to supply the required financial statements showing your cash flow and annual revenue. Additional financial information you’ll be asked for includes:

  • The planning documents of your business
  • Bank account details
  • Personal and business tax returns
  • Checking account details
  • Yearly review for maintaining your credit line

In most cases, lenders require at least two years of your business history to qualify for this option. Although most of the information they require is standard, there are businesses that prefer other types of financing due to shorter application processes and less requirements. These options include a business credit card, small business loan, and cash advance.

2. Potential Misuse of Funds

A startup business line of credit is a useful and reliable source of funds when used properly. It should only be intended for covering cash flow shortages. If you use it excessively, which is a real temptation, you will acquire significant debt that will make it difficult to repay your balance. Before you explore the idea of spending a line of credit on unnecessary things, think about its negative impact on your business.

3. Extra Fees and Charges

Startup business lines of credit are designed in a pay-as-you-go format, which makes this option ideal for small businesses. However, fees and other charges can quickly add up. You may incur additional costs depending on the lender and the agreement terms. While the low interest rate may entice you to choose this financing option, numerous fees will be one of the challenges you will face in the end.

Do not agree to terms and conditions unless you have conducted your research and compared lending options. Doing thorough research allows you to find the line of credit that you can afford and is right for you.

4. Limited Borrowing Amount

You should also take your needs into consideration when applying for start-up business lines of credit because they tend to have low borrowing limits. If you wish to undertake a major expansion project that requires a large amount of money, consider exploring other financing methods.

Best lenders list

SmartBiz

SmartBiz, a simplified and streamlined lending company, came about in 2009. Unlike other online lenders, SmartBiz does not directly approve and issue loans. It uses technology to match applicants with a suitable lender using preferred SBA bank lenders. It can also determine whether or not you are eligible for an SBA loan. You can apply for a loan through SmartBiz if you have a credit score of at least 640 and have been running your business for a minimum of two years.

Pros

  • Low interest rates
  • No penalty for prepayment
  • Transparent fees and terms
  • Good customer service
  • Great reputation

Cons

  • Long application process
  • Additional fees

BlueVine

BlueVine is an online lending service founded in 2013. It offers start-up business lines of credit with a flexible repayment plan. You can either choose a six-month or 12-month plan. To qualify for BlueVine, you will need to have been in business for a minimum of three years, have a credit score of 650 or higher, and have a business revenue of $40,000 per month.

Pros

  • Offers financing to startups and entrepreneurs
  • Accepts low credit scores
  • Fast and easy application
  • Quick disbursement of funds

Cons

  • High interest rates
  • Inconsistent customer service
  • Financing not available in some states
  • Shorter repayment terms

Lendio

Lendio is a type of business financing platform that matches borrowers to lenders. While they do not offer loans directly, they have a network of more than 300 business lenders or funders, being the one-stop-shop for financing. As for minimum qualifications, you will need a solid credit rating and a higher monthly revenue.

Pros

  • Lower borrower qualifications than banks
  • Multiple financing options
  • High borrowing limits
  • Long-term financing options
  • Fast and easy application process
  • Excellent customer service
  • Quick prequalification process

Cons

  • Higher interest rates
  • Long processing of fund disbursement

How it works?

Line of credit vs. Traditional term loans

Term loans come with a specific amount based on your creditworthiness and need. They are granted as a lump-sum and are intended for a one-time use only. Traditional loans can either be secured or unsecured. Secured loans are backed by a form of collateral to cover debts in case you default on the loan. Unsecured loans do not require a form of collateral and are approved based solely on your credit history. They have lower amounts with higher interest rates.

A line of credit can be obtained from a financial institution or a bank. It can be used over and over again making your revolving limit flexible. Credit lines can be used in many ways such as small business projects, purchasing equipment, and much more. The credit line operates like a credit card because you can access your funds whenever you need them. Examples of credit lines include personal lines of credit, home equity lines of credit, and business lines of credit.

Line of credit vs. Traditional term loans

A line of credit allows you to withdraw money from a certain credit limit. You can either borrow as little or as much as you want as long as you are within your credit limit. You also have the freedom to repay the amount you borrowed immediately or over a set repayment schedule.

A credit card is a type of financial tool that enables you to make purchases without paying for them immediately. Technically, you need to repay the balance you owe on your credit card by a specific date each month. You can make a minimum payment or pay the full amount you used.

How to use a business line of credit

Business lines of credit can be useful if you are in a situation where you have repeated cash outlays, but the amount you need is still unknown and your suppliers or vendors do not accept credit cards as a mode of payment. You can also use lines of credit for funding a refurbishment project.

Who qualifies for a business line of credit

While lenders and other financial institutions have specific requirements for you to qualify for start-up business lines of credit, most of them have the following qualifications:

  • Collateral
  • Good cash flow
  • High credit rating
  • Consistent Revenue

How to apply

Step 1: Determine the type of business line of credit you need

There are many types of credit lines to consider such as a revolving line of credit, an asset-backed line of credit, a home equity line of credit, and a business credit card. Choose the option that is suitable for your business purpose.

Step 2: Assess your financial health

Each lender sets specific rules when it comes to borrowing money. Before you consider taking out a business line of credit, take time to evaluate your borrowing health. Lenders often look at these factors:

  • Available collateral
  • Recent bankruptcies
  • How long you have been in business
  • Business revenue
  • Credit score

Step 3: Search for a business line of credit funder

After assessing your borrowing health, the next step is to look for lenders that offer lines of credit. They could include the following:

  • The Small Business Administration (SBA)
  • Online lenders
  • Credit card issuers
  • Banks

Step 4: Complete your application

You will need to fill out an application so the lender can evaluate you. Some lenders may also ask you to supply these documents:

  • Bank statements
  • Business and personal tax returns
  • Personal ID
  • Balance sheets
  • Basic business information

Bottom line: Is it right for you?

If you’re seeking funds for future projects or you need to buy more inventory, start-up business lines of credit are ideal for you because they give you the flexibility of using money for anything your start-up business requires. When applying for a line of credit, be sure to comply with all the requirements. You should also take the time to shop around and find the line of credit with the best terms and rates for your business.

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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