How to compare startup business lines of credit
The best startup business line of credit will likely be the most affordable one you can qualify for that meets your needs. As you compare your options, consider the following factors:
Borrowing limits. Some lenders may offer lines of credit up to $250,000, whereas others will only offer up to $50,000. You’ll want to know how much funding you need when looking at your options. Keep in mind that larger funding amounts may be more difficult to qualify for than smaller ones.
Repayment schedule. Startup business lines of credit can have daily, weekly or monthly repayments. Frequent payments can be harder to manage when you’re just starting out and cash flow is tight. Make sure that you can afford any potential payments.
Interest rates. Rates on business lines of credit range anywhere from 10% to 99%. To qualify for the best rates, it’s helpful to have good credit and strong finances.
Fees. Ask lenders to provide a breakdown of their line of credit fees. They may charge additional fees such as draw fees, monthly maintenance fees or origination fees. Make sure you consider these fees when determining the overall cost of a line of credit.
Collateral. Although not all startup business lines of credit require collateral, providing collateral (or offering more than needed) may help you qualify, especially if some of your credentials aren’t where you’d like them.
Funding speed. Online lenders can typically provide the fastest access to funds, although they’ll charge higher interest rates. If you can wait for bank or SBA funding (and can qualify), you may be able to save on interest costs.
Lender reputation. It can be useful to read online reviews to get a better sense of what it’s like working with a particular small-business lender. Be wary of companies that try to rush you through the underwriting process or aren’t transparent about their rates and fees.
Use our business line of credit calculator to compare potential costs and payments on different offers:
Business line of credit calculator
When you draw from a business line of credit, you only pay interest on the funds that you borrow. You then repay the funds over time, based on a schedule set by your lender.
Enter a withdrawal amount, repayment term and annual interest rate to estimate your monthly payment, total interest costs and the total amount repaid.
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Pros and cons of a startup business line of credit
Pros
✅ Flexible form of financing.
A business line of credit is one of the most flexible forms of business funding. You can use a line of credit for a range of short-term purposes, including managing cash flow, covering emergencies or taking advantage of unexpected opportunities. Flexibility makes this financing solution well-suited for the unpredictability of running a startup business.
✅ Access to fast cash.
You can draw funds from your credit line and have access to cash quickly — when you actually need it — and only pay interest on the funds you draw. Plus, when you repay what you’ve borrowed, you can continue to draw on the line.
✅ Build business credit.
A business line of credit for new businesses can build a positive business credit history, which can help you to obtain future credit accounts and loans. Making your payments on time and keeping your credit utilization ratio at or below 30% can help your business credit — as long as your lender reports responsible spending to the business credit bureaus.
Cons
❌ Can be expensive.
Annual percentage rates on some startup business lines of credit can run high, as newer businesses generally pose a greater risk to lenders compared to more established businesses. To qualify for the best possible rates, it can help to show solid business financials and strong credit history — and in some cases, secure your line of credit with collateral.
» MORE: Best secured business lines of credit
❌ Limited options.
Not all lenders offer startup business lines of credit, and there can be limitations for the ones that do. Plus, getting a business line of credit for a startup without revenue can be even more challenging. Compared to credit lines available for more established businesses, for example, business lines of credit for new businesses may have smaller borrowing limits and shorter repayment terms.
❌ Personal financial risk.
Even if you can qualify for a startup business line of credit, it’s important to make sure you can afford to take on potential debt. Finances can be tight when running a startup and you need to be able to repay borrowed funds if your business slows — or even fails. If you can’t repay your line of credit, it will likely impact your personal credit and finances. Most lenders will require you to sign a personal guarantee so that you’re individually responsible for paying back your debt, even if your business fails.
Where to get a startup business line of credit for a new business
Online lenders
Online lenders can be good options for newer businesses. Certain online lenders, like Fundbox, offer startup business lines of credit to borrowers with six or more months in business — while others, like OnDeck, will only work with those with 12 or more months in operation.
Many online lenders have streamlined application processes and can provide financing within 24 hours. For example, Headway Capital can provide funds as soon as the next business day for approved borrowers.
Compared to bank lenders, online lenders are less likely to require physical collateral to secure a line of credit, but they may still back the line with a personal guarantee or Uniform Commercial Code lien.Some online lenders will also work with startups with bad personal credit scores – usually 629 or below by industry standards.
» MORE: Best startup business loans for bad credit
SBA lenders
SBA lines of credit are also available through SBA lenders that partner with the Small Business Administration. Called CAPLines, these lines of credit are designed to meet the cyclical or short-term needs of small businesses as related to seasonal sales, contracts, builder construction or working capital.
Seasonal CAPLines can be an option for a business line of credit 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 a business’s sales slow during the offseason or when expenses for labor and supplies increase before the start of a new season.
Traditional banks
Startups usually don’t qualify for business lines of credit offered by banks and credit unions. Traditional lenders generally require that borrowers have two or more years in business for both secured and unsecured business lines of credit.
There are exceptions, however. The Wells Fargo Small Business Advantage Line of Credit, for example, is available to businesses that are less than two years old. Similarly, startups operating for a minimum of six months can apply for a Bank of America Cash Secured Line of credit.
Alternatives to lines of credit for new businesses
If you can’t qualify for a business line of credit for your new business, here are some alternative options for startup funding:
You want an option to build your business credit history. Your time in business is usually not considered when applying for startup business credit cards. They can help cover everyday purchases and small to medium-sized startup expenses while you build your business credit history at the same time.
You have strong personal finances. If your personal finances are in good shape, you may be able to take out a personal business loan to help fund your new business. You’ll probably be able to borrow more money this way than you could with a business credit card.
You have family and friends who support your new business. If you don’t qualify for financing from a financial institution, consider turning to your personal network for funding. Family and friends financing typically involves asking friends and family for a loan or offering equity in your business for their cash investment.
You don’t want to take on any additional debt. Startup business grants can be an option for funding your business. However, you’ll face competition for this “free money” and also need to set aside time to find and apply for grants.
You have a compelling story or offer a unique product. Crowdfunding for business can be used to fund your startup. It can be an inexpensive way to raise money and build a base of customers interested in purchasing your products and services online. Also, equity crowdfunding can be used to sell shares to family, friends and others who are interested in investing in your new business.
Frequently asked questions
Yes, once you’ve been in business for at least six to 12 months, your startup may be able to qualify for a business line of credit. If your business is newer than that, you should consider other forms of financing, like business credit cards.
Typically, no. In general, you need several months’ worth of revenue history to get a business line of credit. Most lenders include a minimum monthly or annual revenue requirement in their loan applications. If your business has steady but low revenue, consider the American Express® Business Line of Credit, which is available to businesses with about $3,000 in average monthly revenue.
It depends. Startups will typically need to be at least six to 12 months old and have around $8,000 per month in revenue to get a business line of credit. If you need credit as a brand new business, consider applying for a startup business credit card instead.
Many lenders offer business lines of credit that are unsecured, though you’ll usually have to sign a personal guarantee, which is a promise that you will personally repay the lender if your business is unable to. Lenders may also place a UCC lien on your business, allowing them to seize your business assets if you default.
