Is a Business Line of Credit Good for a Startup?

What a line of credit does for a new business

It gives you a limit you can draw from, repay and draw again. That flexibility fits uneven early cash flow.

Early-stage businesses face timing gaps. Supplies are due before customers pay. A seasonal slump hits just as rent comes due. A line of credit covers those gaps without forcing you to take a large lump sum.

You draw what you need, repay, and the available amount frees up again. Interest accrues on the balance, not the full limit. Read understanding business lines of credit and draw period vs. repayment period for how the mechanics work.

The advantages for startups

Flexibility, interest only on what you use, a safety cushion and the chance to build business credit if the lender reports payments.

• Pay for what you use. Unlike a term loan, you do not borrow more than you need.
• Reusable. Repaid funds become available again.
• Bridge for slow months. It covers payroll or rent when sales dip.
• Credit building. On-time use may strengthen your business profile. See building business credit with a line of credit.
• Speed once set up. Drawing on an open line is quick.

Compare with other tools in term loan vs. line of credit.

The drawbacks and risks

New businesses may face low limits, higher rates, personal guarantees and fees. Easy access can also encourage overspending.

Watch for:

• Hard to qualify. Lenders look for revenue and time in business.
• Personal guarantee. You may be personally responsible. See line of credit personal guarantees.
• Fees. Origination, draw and maintenance fees add cost. See line of credit fees.
• Variable rates. Cost may rise. Read line of credit interest rates.
• Temptation. Using the line to cover chronic losses is dangerous.

A line should support a business that is working, not hide one that is not.

What lenders usually want to see

Most lenders look for time in business, steady monthly revenue, personal credit and healthy bank balances. Startups often fall short on the first two.

Requirements vary, but common factors are credit score, revenue, bank statements, existing debt and time in business. Without a history, lenders lean on your personal credit and your own cash invested. Review line of credit requirements.

If you do not qualify yet, work on the basics: separate your finances, keep a healthy balance, avoid overdrafts and grow deposits. Our page on startup lines of credit goes through the options in more detail.

Alternatives while you build revenue

Consider supplier credit, a small personal-credit-based option, SBA microloans or bootstrapping until you have revenue history.

Options for businesses without enough history include trade credit from suppliers, SBA microloans, and starting lean on savings. Some owners use a business credit card for small purchases and pay it off monthly, which can build a record. Understand costs before relying on cards. See the guide to business credit cards.

Also read how to get startup funding for a wider view. The goal is to reach the revenue and track record that make cheaper credit available.

When ROI Funder's line of credit fits

ROI Funder's business line of credit is for established businesses: 6+ months in business, $20,000+ monthly revenue and 500+ FICO. It is not for businesses under six months.

To be direct, ROI Funder does not place startup loans or lines for businesses under 6 months old. Once you have 6+ months of operation, $20,000+ in monthly revenue and a 500+ FICO, a business line of credit can be available in about 24 to 72 hours, and amounts across ROI Funder products run from $5,000 to $5,000,000.

Run the numbers first. In this illustrative example, you draw $15,000 for inventory that sells for $24,000 within 60 days. Even after interest and fees of, say, $1,000, the draw pays for itself. If the stock will not sell, it will not. A complete file, the application plus 3 months of bank statements, speeds the process. Applying uses a soft credit pull.