How to Get a Business Line of Credit for Startups
As a startup company, you’ll need financing to get off the ground. Although it would be nice to walk into a bank and get a small business line of credit to fund your operations, that avenue is likely closed for most true startups. Banks and finance companies only lend out money they think has a high probability of coming back, so a business line of credit for a new business is almost nonexistent. With a limited or nonexistent operating history, you just can’t demonstrate that you’re a good risk when you’re first starting out. In cases like this, your best bet may be to find alternative sources of capital, such as Seek Business Capital.
How Does It Work?
What Are the Rates?
Am I Eligible?
How Much Can I Get?
What Documents Do I Need?
What Are the Terms?
Although startups aren’t generally the target market of traditional banks, companies like Seek Business Capital actually prioritize newer and startup companies. In addition to providing a startup loan, Seek Business Capital can provide business consultants to help talk you through your current and future financing options. With a startup loan, you’ll get cash to get your business off the ground and will have to pay it back like a traditional loan. However, you may be able to get a flexible arrangement of some type with a specialized lender.
Rates as a startup company are likely to be high. With no track record of paying back business loans, any lender will be taking a chance on financing your company. To be compensated for that risk, lenders will generally charge you higher rates.
You may be able to avail of special promotions with specialized lenders, however. Some alternative lenders like Seek Business Capital may offer an introductory 0% APR to help get you started, with a variable rate after the promotional period.
Just like it can be hard for a startup company to get good interest rates on a loan, it can be hard for startups to even qualify for financing to begin with. Startups just don’t have the financial metrics that are the basis of any general business loan — namely, consistent and rising cash flow, a history of paying back loans and a long operating history. This puts startups in a tough situation off the bat.
However, like anything in life, financing isn’t completely one-dimensional. All successful startups end up getting financing of some kind, so if you can find the right lender, you can still get your startup loan.
The path to a business loan for many startups begins with a well-written business plan. A line of credit is usually still out of the question, but a good business plan may qualify you for alternative types of capital if it charts out the way that your company will make money. If your business plan pans out and your company does turn profitable, then you might be in line for a business line of credit down the road.
In addition to a good business plan, you’ll likely need to have solid personal credit for your startup to qualify for a loan, especially if you are a sole proprietor. Since there are no business financials to rely on, a potential lender will want to see that you yourself have a good track record when it comes to paying back your personal debts. Your personal credit history may not be a perfect indicator for the ability of your startup to manage its debts, but it’s another data point a lender can work with in the underwriting process. So, before you apply for a loan for your startup, it can only help if you get your personal credit in order.
One of the advantages of working with a company like Seek Business Capital is it understands the financial restrictions of startup companies and can work with them to find a way to get funding. However, you’ll still need to provide some concrete evidence that your company can pay back its loan. A strong personal credit history coupled with a clear path to profitability in a business plan can go a long way towards satisfying that need.
As a startup, you shouldn’t expect to have access to the large sums of capital that a well-established business might. And to some extent, that is actually a good thing. The last thing you need as a startup is to get in over your head when it comes to debt. If your debt service payments eat up too much of your cash flow, you won’t be able to get off the ground. Thus, any startup loan you can get should match your anticipated capability to make your payments.
That’s why it’s often a good idea for startups to work with specialized finance companies like Seek Business Capital. Although Seek grants loans of up to $500,000, in most cases you should anticipate approval at a much lower level. The important thing is that your loan amount matches your company’s financial profile and payback capability.
As a startup, you likely won’t have much in the way of financial documentation to provide to potential lenders. However, even without comprehensive financial statements and years of tax returns, you’ll still need to provide some type of evidence that your business is or will be financially solvent and that you will have the wherewithal to pay back your loan. To that end, you should expect to provide the following documents at a bare minimum:
- Your Social Security number for a personal credit check
- Your startup’s business plan, with details as to how your company will generate profits
- The specific use of your loan proceeds
Additional documentation is likely. You may be asked to put up some collateral to back up your startup loan, or you may be asked for a personal guarantee. You can speak with your lender about what might be required before you put together your complete application.
Remember that if you’re working with a nontraditional lender that focuses on startups, you’re likely to have more leeway in terms of what documentation you might need.
As a startup, you may not be able to manage traditional loan payments right off the bat until you start generating some revenue. Since specialized lenders understand that cash flow for startups can be erratic, particularly at first, you may be able to negotiate a more flexible repayment plan than with a traditional loan. Loans for startups tend to be shorter-term in nature since that helps reduce risk for lenders. However, this can be a blessing in disguise, because if you can pay off your initial short-term startup loan, it will improve your credit profile for your next loan application.