How a business line of credit can help your new business
For new businesses, a business line of credit may be easier to obtain than a traditional long-term loan. While traditional business loans are generally less expensive, a business line of credit can be a great short-term financing method to address situations common to startup businesses, such as cash flow problems, working capital shortages, and cyclical sales.
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A startup is typically defined as a business that is in the early stages of growth. It can refer to a company that hasn't yet started operations, or one that has been in business for several years. For lending purposes, most banks require a company to have been in business for at least two years, so companies that don't meet that criteria are often called startups.
Where to Get a Startup Business Line of Credit for a New Business
Online Lenders
Online lenders can be a good option for new businesses: Some online lenders, such as Fundbox, offer startup business lines of credit to borrowers who have been in business for at least six months, while others, such as OnDeck, only work with borrowers who have been in business for at least 12 months.
Many online lenders have streamlined their application process and can disburse loans within 24 hours. For example, Headway Capital can provide funds to approved borrowers the next business day.
Some online lenders will even work with startups with low personal credit scores (the industry standard is usually 629 or below).
SBA Lending Institutions
Seasonal CAPLines are a business line of credit option for new businesses that have seasonal sales and have been in operation for at least 12 months. The line can be used to supplement cash flow when your business' sales slow during the off-season or when labor and supply costs increase before the new season begins.
Traditional Banking
Pros and Cons of Lines of Credit for Startups
Strong Points
A business line of credit is one of the most flexible methods of business financing. A line of credit can be used for a variety of short-term purposes, including managing cash flow, responding to emergencies, and taking advantage of unexpected opportunities. This flexibility makes this financing solution ideal for the unpredictable operations of a startup business.
When you draw down on a line of credit, you have instant access to cash when you actually need it, and you only pay interest on the funds you draw down. Plus, you can continue to draw down funds from your line of credit as you repay the amount you borrowed.
Cons
Not all lenders offer lines of credit for startups, and those that do may have limitations. Also, it can be more difficult to get a line of credit for a startup with no revenue. For example, lines of credit for new businesses may have lower borrowing limits and shorter repayment terms compared to lines of credit for more established businesses.
Business Line of Credit Calculator
When you withdraw funds from a business line of credit, you only pay interest on the funds you borrow. You then pay the funds back over time, based on a schedule set by the lender.
Enter the withdrawal amount, repayment term, and annual interest rate to estimate your monthly payment, total interest cost, and total repayment amount.
How to Apply for a Business Line of Credit for a New Business
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Credit score: Over 600.
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revenue: $100,000 or more (or at least $8,333 per month).
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Business period: More than 6 months.
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Business registration documents.
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Personal and business bank statements.
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Personal and business tax returns.
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Corporate financial statements such as income statements and balance sheets.
To speed up the loan approval process, some online lenders allow you to complete a line of credit application by connecting financial accounts, such as a business checking account or accounting software, to their platform.
Business Line of Credit Alternatives for New Businesses
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You should have the option to build your business credit history. When applying for a startup business credit card, the length of time you’ve been in business generally doesn’t count. These credit cards can help you cover everyday purchases and small to medium startup expenses while simultaneously building your business credit history.
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You are in good personal financial shape. If your personal finances are in good shape, you may be able to get a personal business loan to fund your new business, which will probably allow you to borrow more money than you could with a business credit card.
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You have family and friends who will support your new business. If you can't qualify for a loan from a financial institution, consider tapping into your personal network to raise funds. Family and friend funding typically involves asking friends and family for a loan or offering up equity in your business for a cash investment.
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You don't want to go into any more debt. Grants for startups are an option for raising capital for your business, but you'll face competition for this “free money” and need to find and apply for grants.
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They have a compelling story or offer a unique product. Crowdfunding for businesses can be used to raise capital for start-up companies. Crowdfunding is an inexpensive way to raise funds and build a customer base interested in purchasing your products or services online. Equity crowdfunding can also be used to sell shares to family, friends, and other people interested in investing in your new business.
methodology
NerdWallet's review process involves evaluating and rating small business loan products from traditional banks and online lenders. We gather more than 30 data points using each lender's website and public documents. We also examine the lender's initial application flow and may contact company representatives. NerdWallet writers and editors thoroughly fact-check and update the review annually, and throughout the year as needed.
Our star ratings award points to lenders who offer small business-friendly features such as: – Transparency in fees and terms. – Flexible payment options. – Fast funding times. – Accessible customer service. – Reporting payments to business credit bureaus. – Responsible lending practices.
We weight these factors based on our assessment of which are most important to small business owners and how significantly they will impact the borrower experience.
