A business line of credit for startups can assist business owners in maintaining consistent access to working capital or funds to smooth out changes in business expenses and revenues.
As a small business owner, looking for different funding options is vital to making the wisest choice for your business. You might have run into the possibilities of a small business loan, a line of credit, or non-traditional funding options.
In this article, we will teach you the differences between loans and lines of credit and how to apply for a startup business line of credit or other business funding.
Small business loan vs. a line of credit
There are many differences between lines of credit and small business loans. Below are the main ones you should think of when choosing:
You tend to get smaller amounts of money with lines of credit than with loans.
Business lines of credit typically have a higher cost than business loans.
With business lines of credit, you don't receive the total amount of money upfront, as you would with a loan. In this case, you draw on the line of credit when you make a purchase.
You usually don't have to specify up-front what you will use the business line of credit for, as you often do with a business loan.
The approval process may be more difficult for a line of credit than for a loan.
According to Investopedia, lines of credit can be helpful in situations with repeated cash outlays but not in cases requiring substantial cash deposits. With this in mind, if you need more money in one lump sum to finance expansion, inventory, equipment, or other essential expenditures, you must research all the funding options available to small business owners.
How to apply for a startup business line of credit
Now let's check the usual process for applying for a startup line of credit. Some requests include having an excellent credit history, having been in business for at least two years, and showing that your business revenues are growing. So, what do you need to consider?
1. Meeting the minimum qualifications
Candidates who exceed the requirements and minimum qualifications have the best chances of qualifying. For example, your chances of qualifying for a business line of credit will be slim if you've had recent delinquencies or bankruptcies. Funders also look at:
Annual revenue of $100,000 or more (at least $8,333 per month)
Years in business
Credit score (600 or higher)
2. Having enough collateral
You may qualify for a startup business line of credit if you have an excellent credit history. Otherwise, it would be best to look for a secured business line of credit that requires you to pledge assets as collateral to secure the loan. Lenders will prefer assets that can be liquidated quickly, such as accounts receivable and inventory. If you default on your payments, the lender can assume ownership over the pledged assets to recoup their money.
3. Counting with the proper documentation
Most funders will require legal and financial documentation. You must gather the appropriate paperwork to apply, which can be time-consuming and challenging for you as a small business owner.
Some of the documentation you will need typically includes: Commercial Leases, government-issued ID, your business license/articles of incorporation, several years of income tax returns (potentially personal and business), and a business plan.
You'll also probably need to create a projection of your business revenues and expenses for at least three years. Also include information showing how the line of credit will be used to drive profits for your business. And show detailed information about your accounts receivable, inventory, and all other financial liabilities.
What are the fees for a line of credit?
Lastly, you have to consider what this will cost you in the longer term. Fees for lines of credit vary by lender and will be based on your credit history, the collateral you pledged, and the funders servicing charges for transactions. You will probably pay an annual fee and interest on the money you use at any time.
Try alternative funding for your small business with One Park Financial
Now that we have gone through an overview of what it can take to get a line of credit, you might want to check more accessible alternatives for your business! Lines of credit aren't the only option to fund your business. With One Park Financial, you get access to a network of funding sources that offer more flexible approval terms than traditional lines of credit, such as merchant cash advances.
As long as your business has at least three months and generates $7,500 in monthly revenue, our team of professionals will be more than happy to help you find the proper alternative funding. Applying is painless and easy; learn if you prequalify for financing by filling out our online form today.
Disclaimer: The content of this post has been prepared for informational purposes only. It is not intended to provide and should not be relied on for tax, legal, or accounting advice. Consult with your tax, legal, and accounting advisor before engaging in any transaction.