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How to Qualify for a Startup Business Line of Credit
June 25, 2019
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How to Qualify for a Startup Business Line of Credit

As an aspiring business owner, you may have heard that a business line of credit is useful for affording expenses such as equipment, payroll, and marketing costs. Because running a business comes with significant expenses, it can be useful to have access to additional financing.

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 approved for a line of credit. That way, 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 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 pay interest during times that you aren’t using the 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.

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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 want to see steady cash flow, a long financial history, and evidence of 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 Can You Improve Your Chances of Qualifying for a Startup 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.

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.

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 June 2019.

Fora Financial

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.

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Fora Financial is a working capital provider to small business owners nationwide. In addition, the Fora Financial team provides educational information to the small business community through their blog, which covers topics such as business financing, marketing, technology, and much more. If you’d like to see a topic covered on the Fora Financial blog, or want to submit a guest post, please email us at [email protected].