What is a Business Line of Credit?
A business line of credit is a flexible financing option that allows businesses to borrow money up to a predetermined credit limit. Unlike a traditional business loan, which provides a lump sum upfront, a line of credit enables businesses to draw funds as needed, paying interest only on the amount used.
This revolving credit structure provides a financial safety net, ideal for managing cash flow and covering unexpected expenses. Here’s how a business line of credit works: you can access funds repeatedly up to your credit limit, repay what you use, and borrow again as needed.
A business line of credit can be used to cover operational costs and manage inventory during peak seasons. Traditional loans accrue interest on the entire amount from the day it is disbursed, regardless of usage, unlike business lines of credit.
Business lines of credit can be either secured or unsecured. A secured business line is backed by collateral, such as real estate or inventory, which reduces the lender’s risk and often results in lower interest rates.
In contrast, an unsecured business line does not require collateral, but typically comes with higher interest rates and lower credit limits. An unsecured line generally requires a stronger credit profile since there is no collateral to secure the debt.
Business lines of credit through our lender network offer the following benefits:
- Max Funding Amount: $1K – $1M
- Factor Rates: Starting at 1% p/mo
- Term: Up to 36 months
- Speed: 1-3 Business days
Can Startups get a Business Line of Credit?
Startups can access business lines of credit, though it may be more challenging than for established businesses. Many lenders require businesses to be in operation for several months to several years to qualify for a line of credit.
This is because many commercial lenders require a review of your business credit score during the evaluation process. Having consistent revenue can also improve your chances of qualifying for a business line of credit, as lenders look for predictable and stable income.
Many lenders also look for a high personal credit score, which becomes even more crucial if you don’t yet have business credit. Demonstrating solid business revenue or projected revenue growth is also essential to credit approval. Pledging valuable business assets as collateral can also help mitigate some of the risk associated with financing a startup business.
Here are the minimum qualifications for a business line of credit through our lender network:
- Annual Revenue: $200K+
- Credit Score: 625+
- Time in Business: 6 months+
As you can see, small businesses must have been operating for at least six months, but business lines of credit often have more lenient requirements than traditional business loans. Aim for a personal FICO score of at least 680, as many lenders consider this a baseline for startups.
Many lenders offer business lines of credit ranging from $50,000 to $100,000, with some providing lower limits starting at $10,000. Business lines of credit can offer competitive interest rates starting from around 7.8% to as high as 25%, depending on creditworthiness.
Startup Business Line of Credit Lenders
If your startup is less than six months old and you’re looking for a business line of credit, several lenders may offer flexible solutions designed to accommodate early-stage businesses.
- Brex: Brex offers a business line of credit tailored specifically for startups. Its added benefit is that no personal guarantee or credit check is required, making it an excellent option for businesses without a strong personal credit history. The Brex Business Line of Credit for Startups is particularly suitable for new companies that require quick and easy access to funds to manage their cash flow or scale operations.
- Novo: Novo offers several business lines of credit options tailored for startups. The lender is recognized for its straightforward online application process and commitment to providing flexible credit lines with competitive rates. Novo Business Lines of Credit cater to startups seeking straightforward financing without the complications often associated with traditional banks.
- Lendza: Lendza offers business lines of credit with credit limits up to $100,000 for startups and small businesses. Its platform connects borrowers to various lenders, increasing their chances of finding the best terms. The Lendza Business Line of Credit is particularly beneficial for startups seeking more extensive credit lines to fuel growth or cover operational costs.
- OnDeck: OnDeck provides business lines of credit up to $100,000 with a quick and easy approval process. Startups can access funds in as little as one business day, and its flexible repayment terms allow businesses to manage debt comfortably based on their cash flow.
- Bluevine: Bluevine offers business lines of credit with no monthly fees and provides quick funding access within five minutes. It’s an excellent option for startups seeking fast, low-friction financing solutions.
- American Express: American Express offers business lines of credit ranging from $2,000 to $250,000, depending on the applicant’s financial profile. In addition to lines of credit, American Express also offers credit loans as part of its business financing options, providing startups with more ways to access funds. This option is ideal for startups with strong revenue potential or a founder with a proven credit history.
- Fundbox: Fundbox offers credit lines of up to $150,000. Its platform uses AI for fast application review and approval, making it well-suited for startups in need of rapid funding decisions and quick cash flow support.
- Credibly: Credibly has helped over 46,000 small businesses achieve their capital needs through its business lines of credit. Startups that need personalized guidance and funding solutions may benefit from Credibly’s broad experience and support.
- Lendio: Lendio offers a marketplace that connects borrowers with over 75 lenders for various funding solutions, including lines of credit. Startups benefit from Lendio’s vast lender network, which improves the odds of approval and helps find the best available terms.
How does a Startup Business Line of Credit work?
A startup business line of credit functions similarly to a credit card, offering businesses flexibility in borrowing and repaying funds as needed. The process is straightforward, with several key steps that enable businesses to manage their cash flow and expenses effectively. Credit limits for business lines of credit typically range from $10,000 to $500,000 or more, depending on creditworthiness and revenue.
Startup founders can leverage a business line of credit to fund rapid growth, such as hiring employees or launching marketing campaigns. Here’s a step-by-step breakdown of how it works:
- Activate Your Line of Credit: After being approved for a business line of credit, you’ll activate the line, which sets your credit limit. This credit limit is based on the lender’s assessment of your business’s financial health and creditworthiness. Once activated, you can access the funds up to this limit whenever needed. Business lines of credit are often reviewed periodically for potential increases in limits as the business demonstrates growth and expansion.
- Draw Funds: During the draw period, you can access the funds by withdrawing money as needed, either through checks, transfers, or a business bank account linked to the line. You only draw what you need, and interest is charged only on the amount withdrawn, not the full credit limit. Many lenders allow startups to draw from their credit lines multiple times within a specified draw period, usually lasting between 12 and 24 months.
- Interest Charges: Interest is typically charged on the outstanding balance, and the rate may vary depending on the lender and whether the line of credit is secured or unsecured. These interest charges apply only to the drawn amount, so you’re not paying interest on unused credit. Interest rates for business lines of credit typically range from 8% to 24%, reflecting the higher risk profile of startups.
- Repayment: Repayment terms are typically more flexible than those of term loans, and you may be required to make weekly or monthly payments. The amount of each payment is based on the amount borrowed and the interest charges, with many lenders offering options to adjust repayment schedules according to the business’s cash flow. Repayments help reduce the outstanding balance, which you can borrow against again.
- Repeat the Process: As long as your account remains in good standing and within the credit limit, you can continue to draw from your line of credit, repay it, and draw again. This revolving credit structure is beneficial for businesses with fluctuating cash flows, those requiring inventory, or those covering operational expenses.
A business line of credit can be used for various purposes, including covering payroll, inventory purchases, ongoing expenses, and operating costs.
This type of financing is beneficial for managing cash flow fluctuations, purchasing inventory, covering short-term operational expenses, or capitalizing on new opportunities during off-season periods. It provides businesses quick access to capital while offering flexibility in how and when funds are repaid.
Secured lines of credit often offer lower interest rates because they carry reduced risk for lenders. A non-revolving business line of credit is a one-time credit line that closes once the borrowed amount is repaid. Venture debt lines of credit are offered explicitly by specialized lenders to VC-backed startups. Borrowers can often expect origination fees of 1-3% of the credit line amount when they take out a credit line.
What are the benefits of a Startup Business Line of Credit?
A startup business line of credit offers several significant advantages for new businesses. One of the key benefits is flexibility; it allows businesses to borrow only the amount they need and pay interest only on the funds they draw, making it a cost-effective option.
Additionally, a business line of credit operates as a revolving credit, meaning startups can access funds repeatedly as long as they remain within their credit limit. This provides a reliable source of working capital. This flexibility also makes it ideal for enhancing cash flow management, particularly in covering short-term expenses or addressing unexpected costs.
Unlike term loans, startup lines of credit do not have fixed repayment terms. This allows startups more flexibility in managing repayment schedules based on their financial situation. Furthermore, many lenders report payment histories to business credit bureaus, which can help build business credit.
Incorporating a business line of credit into your financial strategy can help support growth, improve cash flow management, and contribute to long-term success.
What are the drawbacks of a Startup Business Line of Credit?
Despite the many benefits, borrowers should consider some potential drawbacks to startup business lines of credit. One of the main downsides is the higher interest rates that often accompany unsecured lines of credit, making borrowing more expensive than secured options.
Lenders may also impose specific credit requirements, such as a good personal credit score, excellent business credit rating, or even a personal guarantee, which can be challenging for new businesses with limited credit history. Additionally, startups may face lower credit limits, as lenders tend to offer smaller lines of credit to businesses without a proven financial track record.
Another concern is the potential for ongoing fees, such as maintenance or origination fees, which could add to the cost of the credit. Finally, strict eligibility requirements may make it difficult for some startups to qualify for a line of credit, as lenders typically have specific criteria for approval.
Startup Business Line Pros & Cons
Pros:
- Flexible financing option.
- Only pay interest on drawn amounts.
- Helps build business credit.
- Revolving credit structure.
- Supports cash flow management.
Cons:
- Higher interest rates for unsecured lines.
- Lower credit limits for startups.
- Ongoing fees and charges.
- Requires a good credit score and personal guarantee.
- Limited lender options for startups.
How do I get a Startup Business Line of Credit?
Accessing a startup business line of credit can be an invaluable tool to fuel early-stage growth, bridge cash flow gaps, and meet operational needs. It provides flexible funding that allows businesses to borrow up to a predetermined limit and repay as needed. If you’re a startup looking for this type of financing, here’s a consolidated guide to help you through the process:
Step 1: Determine Your Credit Needs
Before applying for a business line of credit, assess the amount of funding your startup requires. A good rule of thumb is to ask for 10-20% of your projected yearly revenue (or expected revenue if you’re pre-revenue). For established startups, credit limits typically range between $10,000 and $100,000, though these amounts can increase over time as you build a track record of timely payments.
Step 2: Evaluate Your Eligibility
Lenders typically require startups to meet specific eligibility criteria. While these criteria can vary, most lenders expect your business to have been operational for at least six months and to generate a minimum of $20,000 in monthly revenue. A credit score of at least 675 is often necessary, and your primary operations must be based in the United States. In addition to these requirements, be prepared to provide key documents such as financial statements, profit and loss statements (if applicable), tax returns, and business projections. Some lenders may also require a personal guarantee or collateral as a condition of lending.
Step 3: Prepare the Necessary Documentation
Gather and prepare your application documentation in advance. Lenders typically request detailed business information, including tax returns, bank statements, and financial projections. Some lenders may also require proof of your business checking account to verify business finances. To streamline the process, ensure everything is organized and ready for submission.
Step 4: Research and Compare Lenders
Not all lenders offer the same terms, interest rates, or credit limits. Take the time to compare options from traditional banks, online lenders, and credit unions. Pay attention to annual percentage rates (APRs), which range from 8% to 25%, depending on your creditworthiness and the lender’s specific terms and conditions. Ensure that the lender you choose offers the most favorable terms and repayment options that meet your business needs.
Step 5: Submit Your Application
Once you’ve selected a lender, proceed with the application process. This will likely include submitting your documentation and linking your business checking account. While some lenders can provide an instant decision, others may take longer to thoroughly review your application. Be prepared to answer any follow-up questions or provide additional information as needed.
Step 6: Review and Accept the Offer
Before accepting the credit offer, carefully review its terms and conditions. Ensure the loan amount, interest rates, repayment terms, and fees align with your business’s financial situation and goals. Accept the terms and finalize the credit line once you’re confident that the offer is suitable.
Step 7: Manage and Utilize Credit Responsibly
After approval, use your line of credit wisely. Only draw funds when necessary to meet working capital needs or fund growth initiatives. By borrowing responsibly and making timely repayments, you could access higher credit limits over time, offering your business even greater flexibility and benefits.
Many business line of credit lenders provide additional financial tools to help you effectively manage cash flow. By following these steps, you’ll be well on your way to securing the funding to help your startup grow and succeed.
Frequently Asked Questions
Here are the most common questions about startup business lines of credit.
What are the costs of a Business Line of Credit?
The costs associated with a business line of credit can vary depending on the lender and the type of credit line, but typically include the following:
Interest Rates: Vary based on whether the line of credit is secured or unsecured. Some lenders offer introductory fixed rates for the first 6 to 12 months to provide stability.
- Secured Lines of Credit: Interest rates generally range from Prime +4% to higher rates.
- Unsecured Lines of Credit: Interest rates tend to be higher, ranging from 10% to 25%, depending on the business’s creditworthiness and the lender’s terms.
Origination Fees: A one-time fee for setting up the credit line, typically ranging from 1% to 5% of the total credit limit.
Maintenance Fees: Ongoing fees for maintaining an open account, typically ranging from $10 to $50 per month. Some lenders may charge higher fees depending on the size of the line and account activity.
Draw Fees: Fees for each draw taken from the credit line, which can range from $5 to $15 per transaction or a percentage of the draw, typically 1% to 2%.
Payment Terms: Payments are generally due on a weekly or monthly basis, with flexible repayment terms. Some lines of credit may allow interest-only payments during the draw period, while others may require principal and interest payments. Loan terms usually range from 6 months to 5 years, depending on the lender and the credit line.
These costs can vary depending on your business’s financial situation and the specific lender, so it’s essential to thoroughly review all fees and terms before accepting a business line of credit.
Can I get a Business Line of Credit with Bad Credit?
Securing a business line of credit with bad credit is more challenging, especially for startups. Lenders generally view borrowers with poor credit as a higher risk, making it more difficult for them to obtain favorable terms. While it’s not impossible, most lenders will impose stricter conditions.
For example, you may face higher interest rates, lower credit limits, and less favorable repayment terms than those with good or excellent credit. Additionally, some lenders may require a personal guarantee or collateral to mitigate the higher risk associated with lending to a new business with limited or no credit history.
Startups, in particular, face additional obstacles when seeking a business line of credit, as many lenders require at least good to excellent credit to mitigate the inherent risks associated with financing a new enterprise. Established businesses typically have a proven track record of financial stability and repayment, which makes them more attractive to lenders. Without this history, startups are often scrutinized more heavily, and credit limits may be much lower. Furthermore, lenders may require more detailed documentation, including business plans and projections, to assess the potential for success.
However, if your business has substantial cash flow, it may help offset some of the negative impact of poor credit. Lenders might be more willing to approve a line of credit if they see that your business generates reliable revenue, even if your credit score is below average. It’s also crucial to improve your credit score before applying to increase your chances of approval and secure better terms. Many financial institutions offer credit repair services, and taking advantage of these is advisable to enhance your creditworthiness before applying.
In summary, while it’s more challenging for startups with poor credit to secure a business line of credit, maintaining a solid cash flow, providing collateral, and improving your credit score can enhance your chances of approval.
What are the alternatives to a Startup Business Line of Credit?
Startups and newer businesses have several alternatives to business lines of credit. Alternatives, such as merchant cash advances and personal loans, can provide startups with the operating capital they need to manage their cash flow and sustain operations until they become profitable.
It is important to note that business lines of credit and other business funding options should not be used for personal expenses, as this can lead to financial and legal issues.
Startup Business Line of Credit Options – Final Thoughts
A startup business line of credit can be a valuable tool for managing cash flow, covering operational expenses, and seizing growth opportunities. While eligibility requirements and costs can be a barrier, the flexibility and benefits often outweigh the drawbacks.
By understanding your financing needs, evaluating lenders’ terms, and maintaining a positive credit history, your startup can access the funds necessary to thrive. For startups that face challenges with eligibility, exploring alternative financing options, such as business credit cards, vendor credit, and crowdfunding, can provide additional support.
Contact us if you have more questions about startup business lines of credit or to apply for a small business loan. Our alternative financing experts can help you identify the most suitable funding options for your business objectives.
