How to Easily Qualify for a Startup Business Line of Credit
Sadly, established businesses have an easier time qualifying for a line of credit. However, it isn’t impossible to qualify for a line of credit as a new business owner. In this post, we’ll explain how to get a business line of credit, so you can have financing to grow your new business.
Revolving vs. Non-Revolving Lines of Credit: Which is Right for Your Startup?
Revolving lines of credit allow you to borrow up to a set credit limit. This differs from a term loan, in which you borrow a lump sum loan amount and make equal-sized payments until it’s repaid.
With a revolving line of credit, interest only accrues on the amount that’s being used. Therefore, you won’t be charged interest when you aren’t using the credit line, which makes this more affordable than a non-revolving line. While some lenders charge a maintenance fee to keep the account open, there’s typically no costs if you don’t use the line.
Another line of credit option is non-revolving lines of credit, which is a lump sum product. Once you pay off the amount, your account will be closed. Therefore, if you want a line of credit for ongoing expenses, this might not be the best option for your business.
Ultimately, your new business could benefit from either line of credit option. If you’re unsure of how much financing you need, or if you’ll need financing in the long-term, it might be better to start out with a non-revolving line. That way, you can close the account once your debts are repaid.
How to Apply for a Business Line of Credit for New Businesses:
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.
Online lenders want to see a complete a picture of your business’s operations. Below, you’ll find examples of documents that financial institutions might require:
- Personal and business tax returns
- Financial statements from your business bank account
- Business registration documents
- Credit references
- Annual revenues
For a new business without significant operating history, it’s important to provide as much financial information 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 in full.
Small business lines of credit come with varying repayment terms, interest rates, credit limits, and application processes. As a new business owner, choosing the right one may help your chances of being approved. This is especially true if you have no prior business experience.
Generally, lenders prefer to lend money to business that have been open for at least 6 to 12 months. In addition, they’ll also want to see the following:
- Steady cash flow
- Long financial history
- Strong credit history
- Business longevity
However, if the lender sees that you have a track record of responsibly paying off debt and managing your money, you may be able to qualify as a startup owner.
How To Improve Your Chances of Qualifying for a Start up Business Line of Credit:
Applications from new entrepreneurs aren’t 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 small business loan. One way, for instance, is by putting up collateral; this is called a secured line of credit.
In this case, collateral doesn’t have to be a large asset, such as a home, vehicle, or equipment. For a short-term 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. This is 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.
By waiting to apply for additional working capital until your business is established, you may be able to pursue an unsecured business line of credit instead. Most likely, if you prove that your finances are solid and that you’ve been able to maintain them, you won’t need to submit collateral.
Are There Other Financing Options Available to New Business Owners?
Although startup lines of credit are a viable small business funding option, there are other products you should consider. They include:
- Small Business Loans
- Business Credit Cards
- Merchant Cash Advances
- Invoice Financing
- Equipment Financing
- Bridge Loans
If your business has been operational for at least six months, Fora Financial may be able to help. We provide business loans to small business owners nationwide, and provide flexible options to fit your individual needs.
Conclusion: It’s Possible to Get Approved for a Startup Financing
It’s important to remember that the line of credit application process will vary 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 line of credit options are best suited to your business. Or, weigh your options further by researching other business funding sources.
The beginning stages of starting a business require financial wisdom, so you should be confident in your decision to pursue a startup line of credit (and your ability to qualify).
Editor’s Note: This post was updated for accuracy and comprehensiveness in April 2021.
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.