Can You Get a Line of Credit as a New Business?

Having a line of credit will give your business access to funding that you can draw from as you need to. Unlike a loan, where you have to take and pay back a specific amount, a line of credit gives you access to withdrawing money when needed and paying it back; you also often have more control over the interest rate you pay too. These are helpful if your business is growing rapidly and you often have unexpected expenses.

What is a Business Line of Credit?

A line of credit for a small business is more like a credit card than a loan. It is a type of revolving credit which is designed to give your business access to money that you can draw from to cover business expenses. In contrast, a small business loan gives you a set sum of money that you have to make monthly payments on. A line of credit, like a credit card, accumulates interest when you draw money from it, and once you pay down your balance, the money is accessible again.

Loan vs a Line of Credit

With a loan, you are able to access a set amount of funds in a one-time lump sum which you then must pay back (with interest) over a certain period of time. But with a line of credit you are able to access funds repeatedly up to your limit. Similar to a credit card, with a line of credit as you pay off your balance (plus interest) you are able to use the remaining credit again. This is also known as a revolving line of credit.

For example, let’s say you have a $20,000 line of credit. You borrow $5,000, so now your remaining line of credit is $15,000.

Your monthly payment on this $5,000 is $500, but only $400 goes to the Principal and the other $100 goes towards Interest. So after your first monthly payment, your remaining line of credit becomes $15,400.

The next month, if you make your payment and you do not withdraw any additional money, you will have $15,800 available, and so on until you return back to your full line of credit at $20,000. At any given point in time, your remainder line of credit is available to you to withdraw and spend.

Using a Business Line of Credit

The main reason that a small business will open a new line of credit is because they need access to funding in the short term for things like expanding the business or operational expenses. A business that is more cyclical will often rely on lines of credit to provide capital in the off-season.

While a small business loan is usually intended for a specific purchase or purpose (like buying a piece of equipment or purchasing commercial real estate), a line of credit is meant to be flexible, so it is good for any expense that comes up that you need more capital for quickly.

Secured vs. Unsecured Lines of Credit

A line of credit for a small business is usually an unsecured debt, meaning you do not have to use collateral to secure it. An unsecured line of credit is usually available for up to $100,000. If a business needs a line of credit above $100,000, they will often have to secure it with a lien on their assets or certificate of deposit.

Why would a new business want one?

The main reason a new business would want to consider opening a line of credit instead of opting for a loan is that it is much more flexible than a loan. You can use the money for anything related to your business. You will also only pay for what you withdraw from the line of credit, so if you only withdraw $50,000 of your $100,000 line of credit, you are only paying interest for the $50,000 you have used. This is perfect for a new small business that needs access to ongoing funding, not just a single lump sum from a loan.

Additionally, a new line of credit for your new business will help you build credit for your business, so you can get access to larger sums for loans on more favorable terms. For this reason alone, it can be highly beneficial for a new small business to establish a line of credit, even if they do not need a large pool of funds to withdraw from right now. Plus, establishing the line of credit early means you already have it when something comes up, instead of having to apply for it when something unforeseen happens that you need funding for.

While a line of credit is similar to a credit card, they often have more favorable interest rates than credit cards do.

How to Get a Business Line of Credit for a New Business

Getting a business line of credit for your new business can be a relatively straightforward process. Let’s look at the steps involved.

1. Find What You Need to Qualify

There are some criteria that a business has to meet in order to receive a line of credit for their business. While each lender has its own specific qualifications, there are some things they typically have in common.

• Credit Score. Your personal credit score can be factored into the qualifications. Usually, you need at least a 680-credit score to qualify.
• Revenue. Your business’s monthly or annual revenue is important to qualify. Lenders often have a minimum requirement of $120k annually, but some fintech lenders offer lines of credit for small businesses that have not met that amount yet.
• How Long You Have Been in Business. To qualify for a line of credit you need a decent track record for your business, so many banks require a one-year minimum to qualify. Certain fintech lenders, however, will let you qualify after three months, which can help new businesses grow more quickly. 
• Collateral. Ensure the lender you are going through does not need collateral, and if they do, determine what you can use for it.

It’s a good idea to look up what the specific lender you plan to go through requires for lines of credit.