How to Qualify for a Startup Business Line of Credit

02/17/20 | 7 MIN READ

An in-depth guide on what it takes to qualify for a startup business line of credit.

Starting any type of business requires an ample amount of funding. Whether this money comes from your own bank account or from investments that you're able to obtain via an angel investor, raising money is likely the only way that you will be able to continue growing and developing your company.

One method that you can use to gain funding is to apply for a business line of credit for your startup, which is a revolving line of credit that gives you the ability to borrow up to a certain amount of money.

A business line of credit works like a credit card wherein you have a set limit of money that you can withdraw. Once you withdraw money, interest will be charged on the balance. These lines of credit are highly flexible, which makes them ideal if you require some funding for product development or if you need to cover a gap in your startup's cash flow. While a business line of credit is highly appealing, it's also hard to obtain and comes with numerous qualification requirements.

This article provides an in-depth guide on what it takes to qualify for a startup business line of credit. You might require a line of credit for any number of reasons, which extend from paying your suppliers to paying operating expenses. With this information in hand, you should be able to ascertain if this type of funding is right for your startup.

What is a Startup Business Line of Credit and How Does It Work?

coins dropping on table

A business line of credit that can be accessed by startups is a kind of revolving capital that works almost the same as a credit card. If you're provided with $100,000 in credit credit, you can access this credit at any time and will only pay interest on the balance that you owe. If you use $10,000 of this credit to help pay for some equipment during product development, you will still have $90,000 remaining that you can access at a later date, which is why this form of funding is highly popular with startups that can qualify for them.

Unlike a credit card, you will be able to withdraw the funds that you need, which gives you access to cash. Lines of credit are almost always used for short-term capital needs, which can include everything from project costs to inventory purchases. If you believe that a business line of credit would be useful for your startup, you can find these lines of credit at most banks. However, it's important to understand that the already difficult application process for a business line of credit is at its most difficult when you apply at a bank.

You could instead think about applying for a business line of credit with an alternative online lender. These lenders will usually have easier application processes and less stringent requirements. On the other hand, banks can sometimes require collateral and may have high minimum requirements that you must meet in order to qualify for the line of credit. The only way to find the best deal is to consider all of your options and compare the terms and requirements with each.

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

post it note check list to do list

If you want to obtain a business line of credit, you will need to first meet a large number of requirements. A line of credit is highly flexible, which is why the requirements needed to obtain one are so high.

Banks will only provide startups with a business line of credit if they have:

  • Good cash flow
  • A high credit score
  • Collateral to offer

When looking specifically at cash flow, your business must have enough cash flow to be able to repay the line of credit that you're seeking.

It's also important that you have some kind of collateral that you can provide to back the business line of credit that you receive.

The types of collateral that you can use include:

  • Cash
  • Some of your inventory
  • Property
  • Lien
  • Unpaid invoices

apartment property house collateral

Your credit history and score will also need to be in good standing. While some banks and alternative online lenders include minimum credit score requirements of 500, you're much more likely to receive a business line of credit if your credit score is at 620 or higher.

The majority of lenders will usually only provide startups with a line of credit if they have an operating history of at least two years, which is the one requirement that can make it difficult for newer startups to qualify. Even after you qualify for one of these loans, covenants will be in place that you will be required to meet if you want to keep the line of credit in the future. If your startup fails to meet one of the covenants, it's possible that you would need to pay additional fees or that the line of credit would be revoked altogether.

While each lending institution and bank has its own covenants, the main ones that you can expect to see include:

  • Maintain a specific liquidity
  • Maintain a specific net worth
  • Repay the entire line of credit periodically, which could be once per year
  • Never exceed a certain amount of debt

When you want to apply for a business line of credit, you should look for a bank or alternative online lender that offers business lines of credit. Once you've found a lender that you trust, make sure that they provide low interest rates and have qualification requirements that your startup is able to meet.

While the line of credit requirements are strict and can be difficult to meet, the application process is actually fairly straightforward. The majority of banks and other lenders allow startups to apply online, which means that you may not need to go through the hassle of setting up an in-person meeting.

What Documents Are Required?

binding notebooks documents<br />

The types of documents that most of these financial institutions will require that you provide include:

  • Registration documents for your business
  • Credit references
  • Both business and personal tax returns
  • Annual revenues
  • Financial statements from your primary business bank account

If you're able to provide all of this documentation at the beginning of the application process, the process should be a smooth one. If you don't have a lengthy operating history, it's important that you're able to provide as much financial information and documentation as you can. The lender will need to be confident that you can repay the line of credit in full.

The time it takes for your application to be approved depends on the type of business line of credit that you apply for. If you're thinking about applying for a short-term line of credit that has relatively short repayment terms, your application could be approved within 1-2 business days. For a long-term line of credit, it can take upwards of two months before you receive full approval. Remember that providing all of the necessary documentation at the beginning of this process should help you avoid any significant time delays on the approval process.

What Do Credit Lines Offer?

abundance of money bills letter

A business line of credit can provide you with anywhere from $10,000 to over $1 million in credit that you can access whenever your startup requires funds. The interest rates associated with a business line of credit are usually between 1-3 percent. Keep in mind that these rates only apply to the amount of balance that you have yet to repay once you use some of the credit. The majority of lenders will allow you to withdraw funds from your line of credit without needing to pay a high fee.

On the other hand, a small fee is usually necessary whenever you open a line of credit.

  • For credit lines below $25,000, you might need to pay a one-time fee of $100-$150 to open the account.
  • While most lenders will waive the first year of annual fees, you could be required to pay $100-$200 for every additional year that you access the line of credit.

These lines of credit are very flexible, which means that you only need to borrow the amount of money that's necessary for your business at a given time. The remainder of your line of credit will continue to be available to you without additional interest charges.

Choosing the Best Startup Business Lines of Credit

person holding brown leather wallet and banknotes

If you're searching for the best startup business lines of credit, there are many options that you can turn to, which include:

  • Bank of America - Offers unsecured and secured lines of credit with low interest rates and the ability to obtain a line of credit of up to $100,000
  • PNC Bank - Offers secured lines of credit that can last for seven years with limit ranges between 10,000-$100,000 and ten years to repay any funds you use
  • Wells Fargo - Provides two unsecured lines of credit that allow startups to request as much as $50,000 with low annual fees and a fantastic rewards program

When you want to find the line of credit that matches your business, it's recommended that you read online reviews and compare the terms with each one that you consider, which should make your decision easier.

Useful Alternatives Compared to Business Line of Credit

close up text of application tiles

If you find that the downsides to business lines of credit are outweighing the benefits for you, there are some good alternatives that you might want to consider for funding.

These alternatives include:

Asset-based financing

Asset-based financing is available to large businesses that may not be able to qualify for a business line of credit or couldn't meet the necessary covenants. This type of loan gives you the ability to finance any of the assets on your balance sheet, which include machinery, real estate, inventory, and accounts receivable. The application process can be completed in as little as two weeks.

Accounts receivable factoring

As for accounts receivable factoring, this type of loan is designed specifically to help improve cash flow on a short-term basis. To obtain this loan, your invoices will be used as collateral. You will be able to receive anywhere from 70-90 percent of the total value of the invoices, which gives you much-needed working capital. The only firm requirement for this loan is that you have commercial clients that are creditworthy.

The Bottom Line

group of people in company table sitting

A startup business line of credit can be highly beneficial for your company if you require funds for future projects or need to purchase some inventory. Since these funds can be used for practically anything that your startup requires, there's very little downside to obtaining a line of credit. Whether you request $10,000 or $500,000, having access to a revolving line of credit can help you avoid going into high amounts of debt during the formative years of your company, which may be essential for long-term success.

Before you apply for a line of credit, make sure that you're fully aware of the high requirements that are needed to qualify. You should also shop around so that you can get a line of credit with the best terms. Alternative online lenders may have less strict requirements when compared to banks.

If you're interested in a business line of credit for your startup, the next step is to find banks and other financial institutions that offer this credit. Once you do, it's important that you gather all of the aforementioned financial documentation before applying. While a business line of credit can provide you with the funds you require to continue growing your company, our incubator at University Lab Partners offers flexible workspace that you can rent when you want to keep costs down.

Apply today to learn more about the equipment and space that can be accessed at this wet-lab incubator.


Revised 11/17/2020


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