Many businesses use a line of credit for a variety of needs. For example, resellers and wholesalers often use business credit for inventory purchases. Office businesses may turn to their line of credit during slow months to keep operations running smoothly, covering things such as payroll and lease payments.
The point of this type of financing is that it’s there when you need it. Can lines of credit help startup businesses as well?
What Are the Requirements for Lines of Credit?
The first factor to consider is whether it’s even possible for a new business to qualify for a line of credit. Any business, regardless of how long it has been operating, needs to meet a few requirements. These requirements are stricter for startups because they haven’t had time to build up a good reputation or a strong credit score.
Normally, having a good credit rating is one of the most important qualifications. This demonstrates that your business knows how to administer money wisely. New businesses can’t meet this requirement directly because they’re still working on developing a credit rating.
Another typical requirement is to have a certain amount of annual revenue and monthly cash flow. Meeting these targets is easier for established businesses than for startups. Fortunately, not hitting those goals doesn’t always disqualify you from having a line of credit; it may simply reduce the total financing amount available to you.
How Do Startup Lines of Credit Work?
It’s fairly easy to see that many startups would have a hard time qualifying for traditional business credit. Investing is just too risky for regular lenders. On the other hand, alternative lenders are willing to think outside the box — with a little persuasion. These lenders may offer lines of credit specifically designed for new businesses.
To balance out the increased risk, these business credit options usually have higher fees and lower spending caps. That said, they still offer flexible financing that can be a big help in getting your business on its feet.
What Are the Pros and Cons of Startup Lines of Credit?
Before you jump for joy, take the time to consider the advantages and risks of startup financing. Be especially careful when funding requires personal guarantees. This can put your home and savings at risk. Fortunately, there are startup options that specifically state “no personal guarantees required.” They can help you based on the strength of your personal credit rating alone.