How to get a business line of credit for a startup


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Ask a Lender
June 13, 2017 | Updated September 29, 2017


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Key Points

Can startups get a line of credit?

  • It is difficult for startups to qualify for unsecured credit lines, but it’s not impossible.
  • Traditional credit lines require extensive documentation.
  • Nontraditional credit lines are based on FICO credit scores.
  • Lenders consider a business plan, credit, cash flow and collateral.

Can you finance a startup with a business line of credit? It’s not a simple task, but it can be accomplished.

A line of credit is a type of revolving credit, similar to a credit card. The borrower can pay down and reuse the credit up to a predetermined limit as long as the line remains open.

It can be difficult to finance a startup regardless of the type of loan. Business lines of credit can be particularly difficult for a startup to qualify for, although some newer loan products, dubbed “nontraditional credit lines,” may be more accessible to startups.

Types of credit lines

There are two main types of credit lines for businesses: traditional and nontraditional.

Traditional credit lines

These are typically issued by banks and require a large amount of documentation, such as tax returns, financial statements and bank account information. Traditional lines of credit can be difficult to qualify for.

Nontraditional credit lines

Often offered by online lenders or via credit cards, nontraditional lines typically are based on the borrower’s FICO credit score. These kinds of credit lines don’t require the heavy documentation required for a traditional credit line.

Qualifying requirements

If you would like to qualify for a traditional business line of credit, there are some things you can do to increase the chances you will qualify.

Banks will want to look at the following factors when determining whether or not to approve your application:

Business plan

Because your business does not exist yet, lenders will want to see a solid business plan before they will consider lending to you. Although a lender will not approve your application based solely on the strength of your business plan, having a solid, well-researched business plan will certainly help your chances.

Credit

As a startup, your business likely doesn’t have a credit history. Lenders will therefore look at your personal credit history when determining whether to approve your loan application.

Cash Flow

One of the challenges of qualifying for a line of credit as a startup is that you won’t have a cash-flow history to show lenders. Typically, lenders only give lines of credit to businesses that have been in business for two years or more. Nontraditional credit lines, which focus on FICO scores, may the best bet in this scenario.

Collateral

Collateral is an asset that is used to back the loan. For example, a home loan is backed by the home it is used to purchase, and a car loan is backed by the vehicle the borrower purchases. As a startup, a business may not have collateral to offer a bank. Although unsecured credit lines, which do not require collateral, may be available in some cases to startup businesses, borrowers should be aware that these unsecured credit lines typically come with higher interest rates.

Personal credit lines

If you are unable to qualify for a business line of credit for your startup, you may be able to leverage the equity in your home for your business by taking out a home equity line of credit (HELOC) and using the proceeds to fund the startup.

There is some risk with this HELOC option, however. If you fail to pay back the loan, it is your personal asset — in this case, your home — that would be on the line, not your business assets.

If you don’t own a home, you could take out an unsecured personal loan to use for your business. Although unsecured personal loans do not require collateral, creditors could still seize your personal assets via litigation if you fail to repay the loan.


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