A Primer for Startup Lines of Credit
If you’re considering starting a business, you need a strong financial plan. For many entrepreneurs, this includes a line of credit. Learn how lines of credit can help you establish your startup successfully, offer you flexible financing and learn how you can become approved for a line of credit for your startup.
First, a common misconception is that a line of credit application is based solely on your business plan. While this myth is attractive for entrepreneurs who are experienced selling their idea to investors, it’s far from the truth.
Instead, lines of credit are disbursed based on your available collateral, cash flow, and credit score. Each of these is reviewed in order to determine your eligibility. Without a firm application with all three of these, it can be very difficult to receive a line of credit.
Why is a line of credit so valuable for a startup? Think of it as a great combination of commercial loan and business credit card. Your line of credit gives you a pre-approved amount of capital that you can access whenever you want. Once you take out the credit, you’ll start accruing interest and making payments, similar to a typical loan.
The interest rates are far lower than a business credit card, making it an attractive option for major expenses. If you’re concerned with cash flow as your startup grows, a line of credit can be the lifeline you need. If you have a revolving line of credit, you can access a smaller amount of capital and then spend more on a second payment, as long as you don’t exceed your credit limit.
For most line of credit applications, approval isn’t the only thing you need to be concerned with. Once approved, many lenders have covenants written into the contract. This means that there are ongoing stipulations and guidelines you need to follow in order to maintain access. Some guidelines are basic, while others are very restrictive. Most deal with a base account balance or credit score you need to continue to take advantage of a flexible credit option.
Shop around for the business lines of credit that meet your needs. While some applications are marketed as unsecured, they require an excellent credit score and personal guarantee. Whether you choose revolving or non-revolving, secured or unsecured, a line of credit is a great way to jumpstart your business and give your startup the necessary safety net it needs to create positive cash flow.