How to Get a Line of Credit as a New Business Owner
With a credit line, interest only accrues on the amount that is being used. While some lenders may charge a maintenance fee to keep the account open, there are typically little to no cost if you don’t use the line. That makes credit lines a great source of funds when your company needs cash in a pinch.
You may be wondering how a new business owner can acquire a line of credit. In this post, we’ll explain how you can get approved for a line of credit, so that you can have financing available as you grow your business.
How to Apply
Applying for a business line of credit is extremely easy. Most lenders allow you to apply online, so you don’t have to set up an in-person meeting. Lenders want to see a complete a picture of your business’s operations. Documents they might require include business tax returns, financial statements, business registration documents, and credit references.
For a new business without significant operating history, it is important to provide as much documentation as possible. Include any records you have of past transactions, such as invoices paid to vendors, or outstanding accounts receivables. Remember that your application should convince the creditor that your business will be able to repay its debts.
Business lines of credit come with varying terms, interest rates, credit limits, and application processes. As a new business owner, choosing the right one may significantly help your chances of being approved. This is especially true if you have no prior business experience. Lenders generally prefer to do business with established firms that have steady cash flow, well-documented financial history, and evidence of business longevity.
Improving Your Chances
Applications from new entrepreneurs are not doomed. You can improve your chances of getting approved for a business line of credit the same way you would for any other kind of loan. One way, for instance, is by putting up collateral.
In this case, collateral doesn’t have to be a large asset, such as a home, vehicle, or equipment. For a short-term loan product like a business line of credit, you may be able to pledge alternative sources of cash. For example, a lender may allow you to pledge the value of your accounts receivables in a practice known as invoice financing.
Another option is to build business or personal credit before applying. For example, paying off business credit cards on time signals to lenders that your business can use credit responsibly. Improving your personal credit score can also help, especially if the funder performs personal credit checks in the application process.
The application process will vary largely by lender. Some creditors won’t require a personal credit check, which may or may not work in your favor. Be sure to shop around to see which options are best suited to your business. The beginning stages of starting a business require financial wisdom, so ensure that you choose and utilize a line of credit wisely.
Editorial Note: Any opinions, analyses, reviews or recommendations expressed in this article are those of the author's alone, and have not been reviewed, approved, or otherwise endorsed by any of these entities.