Tue, 28 Sep 2021

How to Qualify for a Startup Business Line of Credit

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17 Aug 2021, 01:24 GMT+10

Starting a business requires you to have a sufficient amount of funding. Some people have access to personal funds that they can use. Others obtain funds through angel investors. You can get the funding you need by applying for a business line of credit for your startup.

What Is a Startup Business Line of Credit?

A startup business line of credit is credit that can be accessed and used like revolving capital. It basically works like a credit card. If you are given $500,000 in credit, you can access this credit at will. You will only need to pay interest on your outstanding balance.

If you use $20,000 to help purchase equipment or during the product deployment phase, you will still have $480,000 that you can access at a later date. The flexibility of this type of financing is why it is so popular with startups.

With a line of credit, you can withdraw cash. Lines of credit are primarily used to cover short-term capital needs. These include things like inventory and project costs. Banks and online lenders traditionally are the ones responsible for extending these lines of credit.

What Are the Requirements to Get a Business Line of Credit?

A business line of credit for startups can give a startup a leg up during its first few months or years of operation. According to Lantern Credit, 'Having access to cash when you need it... can be tremendously helpful to a startup.'

However, if you want to get a business line of credit, there are several requirements that you will need. This is because a line of credit is flexible, so banks expect a lot of a startup before they will trust them with a line of credit.

Banks will give startups a business line of credit if they can prove they have:

  • A High Credit Score
  • Collateral
  • A Good Cash Flow

Lenders want a startup to have sufficient cash flow to be able to repay the line of credit. There needs to be some collateral that can back the business line of credit. This includes a lien, unpaid invoices, inventory, cash, etc.

Your credit history and credit score will also need to be top-notch. Don't expect to get a line of credit if your credit score is under 620.

What Documents Are Required?

Most financial institutions will require you to provide the following:

  • Credit references
  • Business and personal tax returns
  • Your businesses registration documents
  • Financial statements from your business bank account
  • Annual revenues

What Do Credit Lines Offer?

A business line of credit could give your startup access to anywhere from $10,000 to an excess of $1 million. Interest rates are typically between one and three percent. Remember, the interest only applies to the outstanding balance you have. Many lenders will let you withdraw funds from your credit line without paying high fees.

Conclusion

If you feel that your startup would benefit from a line of credit, you need to find financial institutions that offer said credit. Once this is accomplished, get the financial documentation you need together before applying. The right line of credit can give your startup the boost it needs to grow.

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