If you are a startup business, you already know how hard it is to get financing, but you may not have considered applying for a startup business line of credit.
Traditional lenders, such as banks, are often not willing to take a risk on a startups or small business owners like they would with established businesses. However, there are other options available for startups and small businesses.
One of these is a startup business line of credit which is often referred to as a “BLOC”. This is a flexible financing option that allows you to draw on a line of credit and only pay interest on the amount of money that is borrowed.
For most business owners, a BLOC can be a good tool for managing cash flow and working capital.
What is a Startup Business Line of Credit?
A BLOC is a type of financing that allows you to borrow money and only pay interest on the amount that you borrow.
This can be a good option for startup businesses and small business owners because it provides flexibility in terms of how much money you can borrow and when you need to repay the loan.
Unsecured Business Line of Credit
A BLOC is often unsecured, which means that it does not require collateral. This can make it easier to qualify for a BLOC than other types of loans.
In addition, unsecured business lines of credit can be especially useful to cyclical businesses to bridge cash flow gaps for expenses in the off-season.
How Does a Startup Business Line of Credit Work?
A BLOC works by giving you access to a set amount of money that you can borrow against i.e. the credit limit.
Only Pay Interest on the Money You Actually Borrow
Unlike a traditional small business loan, the money is not disbursed in a lump sum. You will only be required to pay interest on the amount of money that you actually borrow.
This can be a good option for a startup business or small business owner because it allows you to have access to cash when you need it without paying interest on money that is unused.
Funds Can be Used for Business Expenses as They Occur
Also, unlike a traditional business loan or method of business funding, a BLOC is not designated for a specific purpose or purchase so the money can be used for business expenses as they occur.
The funds are generally drawn from the credit line with a business checking account, a business credit card, or now, even a mobile banking app with the financial institution.
Unsecured Business Line of Credit vs Secured Line of Credit
There are two types of BLOC: unsecured lines of credit and secured lines of credit.
An unsecured business line of credit does not require collateral, which can make it easier to qualify for. However, you may be required to have a higher credit score to offset the risk to the lender.
A secured line of credit requires collateral, which may be assets such as real estate or equipment. This can make credit lines like these easier to qualify for, but you may need to put your assets at risk if you default on the loan.
Secured credit lines may also qualify for lower interest rates than unsecured lines of credit which are higher-risk for the lender.
Is a Business Line of Credit a Business Loan?
A BLOC is not a traditional business loan. A traditional business loan is a lump sum of money that you borrowed and will need to repay over time.
A BLOC is an ongoing source of financing that you can draw on as needed. You only need to repay the amount of money that you borrow plus interest.
BLOCs vs. Personal Loans
One common question that startup business owners have is whether they should get a BLOC or a personal loan. The answer to this question depends on your specific situation.
When You May Need a Personal Loan
If you are starting a business and do not have any annual revenue or business credit history, then you may need to get a personal loan to finance your startup costs. The personal loan will be based on your own finances, personal credit score and personal credit history.
A personal loan can be a good option for startup businesses because it can give you the lump sum of money that you need to get your business off the ground, but you will be personally responsible for the loan which can be a risky proposition.
How to Qualify for a Startup Business Line of Credit
There are a few things that you will need to qualify for a BLOC.
The Minimum Credit Score
First, you will need to have a good credit score. This is because a BLOC is often unsecured, which means that there is no collateral required. Lenders generally have a minimum credit score that they require for a BLOC.
That minimum credit score can vary from lender to lender, so it pays to shop around. However, the minimum credit score required by many lenders is 600 or more.
Time in Business and Business History
Second, you will need to need to show your time in business and your business history. This is because lenders will want to see how your business is doing and what your annual revenue has looked like like.
The time in business required (like the minimum credit score) can vary from lender to lender, so if your business is new, do your homework.
Financial Statements
Finally, you may need to provide information about your business finances, financial statements and tax returns. This is to show the lender that you have the ability to repay the loan.
Does a Business Line of Credit Require a Personal Guarantee?
Sometimes.
Many lenders do not require a personal guarantee. This means that you will not be held personally responsible for the debt if your business is unable to repay the loan.
However, some lenders do have personal guarantee requirements, and others may require a guarantee if you have bad credit, your business is relatively new, or if your business is in a high-risk industry.
Does a Business Line of Credit Require Monthly Payments?
Monthly payments on a BLOC are determined by a number of factors, including the interest rate, outstanding balance, and other terms of the BLOC.
The interest rate is usually calculated based on the average daily balance of the BLOC. After calculating the average daily balance during the billing period, the lender will calculate the interest due based on the proportion of the annual interest.
What Are the Benefits of a Startup Business Line of Credit?
There are several benefits of a startup business line of credit.
Fast and Flexible
First, it can be a good option for new business owners because it is flexible. You can borrow the amount of money that you need when you need it and only pay interest on the amount that you borrow.
Because of this, BLOCs are also convenient and fast. Business owners have fast access to cash whenever unpredictable expenses arise.
Can be Unsecured
Second, a startup BLOC is often unsecured, which means that it does not require collateral. This can make it easier to qualify for a startup business line of credit than other types of business financing.
Can be Used for Cash Flow and Working Capital
Third, a startup BLOC can help you with cash flow and working capital. This is because you can borrow the money when you need it and only pay interest on the amount that you actually borrow.
Build Credit for the Future
Finally, a BLOC can be useful as a way to build credit for your business for the future. This can can lead to a credit line increase in the future, as well as additional options for business financing
What Are the Disadvantages of a Startup Business Line of Credit?
There are some disadvantages of a startup business line of credit.
First, if you do not use the line of credit wisely, it can be easy to get into debt. Remember, you have to repay what you draw down, plus interest!
Second, a startup business line of credit may have higher interest rates than other types of loans than a traditional small business loan like an SBA loan. This is because it is unsecured BLOCs are considered to be a higher risk types of business financing.
Third, a startup business line of credit may have fees associated with it which can make it expensive. These fees can include an annual fee, an origination fee, maintenance fees, draw fees, and a closing cost.
Small Business Loan vs. Startup Business Lines of Credit
There are two main types of financing for startup businesses: small business loans and startup business lines of credit.
A small business loan can be a good option for startup businesses because they often have low interest rates and fixed repayment terms. SBA loans are also backed by the government.
However, small business loans may require collateral. This means that you may need to put up real estate, equipment or other assets as collateral for the loan.
Also, because small business loans are for a fixed amount that are disbursed at one time, you will be paying interest on the entire amount of the loan from the start, even if you are not using all fo the funds immediately.
In most cases, startup BLOCs may have higher interest rates than small business loans. However, startup BLOCs can be a good option for startup businesses who need money for working capital and expenses because they are often unsecured and have flexible repayment terms.
However, if you need to make a large purchase like a major piece of equipment or infrastructure, a BLOC is not a good way to go. Generally, the credit limits are not high enough for this kind of purchase and the interest would be much more favorable in a traditional loan.
For more on SBA loans, read our article on SBA Loans: The Pros and Cons.
Business Credit Cards vs. Startup Business Lines of Credit
There are two main types of financing for startup businesses: business credit cards and startup BLOCs.
Credit Cards: The Pros and Cons
Credit cards can be a good option for startup businesses because they often have low interest rates and do not require collateral.
However, credit cards generally have lower limits than startup BLOCs. This means that you may need to use multiple credit cards to get the financing that you need.
The Issue with Credit Limits
Startup business lines of credit can be a good option for startup businesses because the credit limit is much higher than on any credit card, while still being unsecured and having flexible repayment terms.
Is Your Startup a Candidate for a Business Line of Credit or Credit Line?
If you are a startup business, you may be wondering if you are a candidate for a business line of credit.
There are several factors that can affect your eligibility for a business line of credit. These factors can include your credit score, your business history, the financial health of your startup, and the amount of money that you may need to borrow.
Any lenders that you apply to for lines of credit will be looking at all of these factors to see if you are likely to pay back back any debts incurred.
They will also be considering these factors when calculating the interest rate and credit limit that you qualify for.
How to Choose the Best Startup Business Lines of Credit for You
There are several things to consider when selecting a startup BLOC.
Interest Rates
The first thing is to compare the interest rates. You will want to choose a business line of credit with a low interest rate.
Repayment Terms
The second thing to consider is the repayment terms. You will want to choose a business line of credit with flexible repayment terms and consider the repayment period.
Fees
The third thing to consider is the fees: the original fee, the draw fees, annual fee, maintenance fees, etc. You will want to choose a BLOC with the lowest fees possible.
How to Apply for a Startup Business Line of Credit
If you are interested in applying for a startup business line of credit, there are a few things that you will need to do.
First, you will need to gather some information about your startup business. This information can include:
- Your business registration documents,
- Your business plan,
- Bank statements (both personal and business),
- Tax returns (both personal and business), and
- Business financial statements.
Next, you will need to find a lender that offers startup BLOCs. You can check with traditional banks like your local bank or credit union to see if they offer business lines of credit. You can also check online for business lenders that offer BLOCs.
Once you have found a few lenders, you will need to compare interest rates, fees, and terms of the business lines of credit. These can vary a lot from lender to lender, and especially between traditional financial institutions and online lender.
After you have found a business line of credit that meets your needs, you will need to fill out an application. The lender will then review your application and make a decision.
What Financial Institutions Offer Business Lines of Credits?
There are a few places that you can get a startup BLOC.
The first place to look is your local bank or credit unions. Many banks and credit unions offer business lines of credit.
The second place to look is online lenders. There are many online lenders that offer business lines of credit.
If your startup or small business is relatively new, online lenders may be your best bet for a BLOC because they are more likely to have a low minimum credit score requirement and a shorter time in business requirement.
An online lender may also be able to review and approve your application relatively quickly by linking your online financial information like your bank account and accounting software.
Some of the online lenders that offer BLOCs include:
The third place to look is the Small Business Administration. The Small Business Administration offers business lines of credit through their SBA Express Loan program.
If a Startup Business Line of Credit Isn’t for You, Here Are Some Alternatives:
If a startup business line of credit isn’t right for your business, there are some other financing options that you may want to consider. These other financing options can include small business loans, startup and small business grants, and venture capital.
Small Business Loans
Small business loans can be a good option for businesses that need to borrow a large amount of money, especially if it is for a specific purpose to be use at a specific time.
Small Business Grants
Startup business grants can be a good option for businesses that are working on developing new products or services.
Venture Capital
Venture capital can be a good option for businesses that may be high-risk, but high growth potential and need a lot of funding to grow. Learn more about venture capital advantages and disadvantages and how to raise venture capital.
Angel Investors
Angel investors are high net worth individuals who invest in early-stage businesses. Learn more about how do angel investors work and angel investors advantages and disadvantages.
