How to Qualify for a Startup Business Line Of Credit?- A Complete Guide


Startup business owners may benefit from a business credit facility by having constant access to cash reserves or money to help them deal with fluctuations in their costs and income. To make the best decision for your company as a small businessman, it’s essential to research several funding sources. You may have heard of the potential for a small company loan, a credit line or unconventional finance sources. In this article, we’ll go over how to get line of credit for your business so you may access funding to expand your new company.

A Brief Introduction to Start-up Business Line of Credit

A business line of credit for a startup is a form of revolving capital that functions like a credit card. You can use your credit at any time and only repay what you’ve used, plus interest. For example, if your credit limit is $100,000 and you only use $20,000, you will only be required to repay $20,000 plus the interest charges and any other applicable fees. After this amount has been repaid, the account balance will be replenished.

In contrast to credit cards, lines of credit provide immediate access to funds as they can be withdrawn at any time. It is an appropriate option for business proprietors seeking a viable source of short-term capital. When considering this option, it is crucial that you comprehend the process involved, as it will vary based on the financial institution in which you enroll.

Pros & Cons of Business Line of Credit

When funds are insufficient, running a business efficiently and smoothly can be difficult, which is why working capital is essential for your processes – maintaining inventory, paying recurring overhead costs, etc. Possessing a line of credit for a start-up business provides the following benefits:

  1. Lets you pay only what you have spent- You must only reimburse the amount you’ve used, while there isn’t a prepayment penalty.
  2. Maintains cash flow throughout off-peak seasons- Assists in maintaining cash flow in off-peak seasons by offering an effective way to cover expenditures such as payroll.
  3. Develops adaptability in business- Provides capital, permitting you to grab opportunities while taking advantage of money-saving bargains.
  4. Establishes business credit history- By repaying the loan responsibly, you can establish and enhance your credit score.

The disadvantages are:

  1. Difficult qualifying process- Needs detailed financial paperwork and a lengthier business history, rendering the qualification procedure more difficult compared to other financing alternatives.
  2. Fund misuse- When funds are used in excess, it can result in substantial debt and repayment difficulties.
  3. Additional charges & fees- Even when interest rates are low, additional charges and fees can add up and increase the overall cost of borrowing.
  4. Limited borrowing amount: Lines of credit for new businesses have lower loan limits, which may not be ideal for large-scale initiatives requiring significant funding.

In order to select a line of credit that matches your requirements and financial capabilities, it is essential to conduct extensive research and compare various lending options.

Learn How to Get Line of Credit for Business

It is exceedingly simple to apply for the best business line of credit for start ups. Let’s take a look at the standard procedure for applications for startup’s lines of credit. Most commercial lenders enable you to make online applications for funding. Hence, they facilitate eliminating the need for face to face meetings. Online lending companies want a detailed picture of your company‘s operations.

Some requirements involve having a great credit history, running your business for a minimum of two years, and demonstrating that your company’s revenues are increasing. So, what should you think about?

  1. Requirements to get a business line of credit

If you would like to obtain a line of credit for your business, you must first satisfy a number of requirements. Banks will only grant a business line of credit to a startup if it has the following:
High credit score (minimum credit score limit to be maintained)
Good cash flow
Collateral to offer
Good annual revenue (minimum annual revenue limit to be maintained)

Also Read: Collateral Free Loan for Start-ups

2. Getting the Required Documentation Ready

A majority of lenders will require financial and legal paperwork. To make an application, you should collect the necessary documentation, which may take a lot of time and present difficulties if you’re a small business owner. Some general documentation includes:

  • Individual and corporation tax returns
  • Current account statements
  • Records for business registration, such as business license and ID proof issued by the Government
  • Acceptance of credit
  • Annual earnings

A detailed business plan, including the date of inception and information on products and services. It is critical to submit as much fiscal data as you can if you are a new company with no major operations history. Provide all prior transaction data like receipts paid to distributors or pending receivables. Remember that your application should persuade the lender that your company can repay its borrowings timely.

3. Application process

Step 1: Find out what type of line of credit you require for your business
The different kinds of credit lines are revolving lines of credit, home equity lines of credit, business credit cards, and asset-based lines of credit. Pick the one that best serves your objectives.

Step 2: Evaluate your financial situation
Each lender establishes its own criteria for obtaining money. Before you think about getting a business line of credit, you should evaluate your ability to borrow. Lenders often consider the following factors:

  • Recent bankruptcies
  • Available collateral
  • How long have you been in business
  • Credit score
  • Business revenue

Step 3: Search for a funder
After evaluating your borrowing health, the next stage is to search for providers that give lines of credit. They might consist of the following:

  • Credit card issuers
  • Online lenders
  • Banks
  • The Small Business Administration (SBA)

Step 4: Submit your application
You must submit an application for the lender to assess you. Some providers may also request the following documentation:

  • Business and personal tax returns
  • Bank statements
  • Personal ID
  • Basic business information
  • Balance sheets

Ways to Get a Business Line of Credit via Alternative Financing Options

There are some excellent alternatives to lines of credit that you should consider if you discover that the drawbacks outweigh the advantages for you.
These options consist of the following:

  1. Business Credit Cards
  2. Small Company Loans
  3. Merchant Cash Advances
  4. Equipment Financing
  5. Invoice Financing
  6. Commercial Real Estate Loans
  7. SBA Loans
  8. Bridge Loans
  9. Crowdfunding
  10. Business Grants

The most effective ones are:

Accounts receivable factoring

The purpose of accounts receivable factoring loans is to help businesses enhance their short-term cash flow. Your invoices may be used as security to secure this loan. You should expect to collect between 70 and 90 percent of the bills’ value, providing much-needed working capital. You must have creditworthy business clients in order to qualify for this loan, but that is the only strict criterion.

Asset-based financing

Large enterprises that might not be able to be eligible for a line of credit or could not fulfill the appropriate covenants can use asset-based financing. You can use this kind of loan to finance the assets on your balance sheet, including equipment, real estate, accounts receivables, and stock. It only takes two weeks to finish the application procedure.

Are Fees Charged for Lines of Credit?

The fees and interest rates for a line of credit vary from one financial institution to another. It also depends on your credit score, the assets you pledge and service charges, if applicable. In any case, before you opt for a line of credit from any financial institution you should take into account the interest rate and annual charges applicable.

The Takeaway

The application process, rates of interest and other applicable charges on credit lines vary from one lender to another. These factors also depend on the credit history and relationship of the business with the bank or NBFC. If you do not get favorable terms, consider other credit facilities and options.

MSMEBlog discusses issues with finding suitable funding sources for MSMEs and guides them with the procedures to acquire the necessary financing. Visit MSME Blog website for more information on MSME finance.

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