How to get a business line of credit when you're just starting out

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When you’re starting a new business, there may be no more important resource to have on hand than financing. Call it what you want — funding, cash, liquidity — but small business financing makes it possible for you to afford all the important investments you’ll need to make in your business to get it off the ground. With that in mind, you may be wondering how to get a business line of credit.

A line of credit (LOC) is typically a pool of money that a lender extends you, which you are able to draw from as financing needs arise. Each draw has its own repayment schedule, and when you replenish the pool by repaying your draw, you can continue to draw from it ad infinitum.

No matter what financing product you’re in the market for, however — whether it’s a line of credit, short-term loan, or long-term loan from the SBA or through your bank — it’s a little more difficult to get what you need when you’re a new business.

The explanation for this is simple: Lenders like lending to well-established businesses that aren’t as likely to close, and thus likely default on their loan, anytime soon.

New businesses are unproven, and lending to them is more of a risk.

How to get a business line of credit when you’re just starting out

Getting a business line of credit isn’t impossible when you’re starting out — but it will take some work.

What is a business line of credit?
Why would you want a line of credit?
What line of credit options are there for new businesses?
- Apply through online lenders.
- Connect with a local bank.
- Explore lines of credit through the SBA.
How to apply for a business line of credit?

Let’s review the basics of business LOCs, why they’re so in-demand, what options are available to new businesses and how to apply for one.

What is a business line of credit?

There are two kinds of lines of credit.

A non-revolving line of credit is closed once the borrower draws and pays off the total pool of money made available by the lender.

A revolving line of credit, on the other hand, is similar to a credit card. A lender approves your line of credit — which can have a limit of anywhere from $10,000 to over $1 million, in some cases. If you withdraw $25,000 from a $50,000 line and repay that draw on schedule, you’ll once again have up to $50,000 that you can borrow at any one time.

There are a lot of benefits to a financing product like this. You can typically use LOCs for a wide range of business purposes.

Using one is an excellent way to build your credit score.

Some LOCs require collateral, while others can be secured with a personal guarantee. And the higher your credit score, the lower your interest rate will be, in all likelihood.

Another great perk of a line of credit is that you don’t make any payments or incur any interest if you don’t have an outstanding draw on the books.

Once you’re approved for your line, it can sit there unused for some time until you have a need for it. That makes LOCs great not just for working capital needs but for use in emergencies or to plug sudden cash flow gaps.

One thing to keep in mind: You won’t have unfettered access to your LOC at the same interest rate until the end of time.

You might need to provide updated documentation on how your business is faring to make draws down the road. A lender can rescind access to your LOC if they find you’re struggling and may not be able to make payments.

Why would you want a line of credit?

We’ve gone over quite a number of benefits of a line of credit that make it pretty clear why many business owners covet such a product.

That being said, why a line of credit over a term loan, or a credit card, or any other kind of financing?

A line of credit isn’t perfect, but it does have some advantages in comparison to other financing products, including:

Reusable: When lenders approve you for a term loan, they give you a lump sum upfront. When that money is gone, so too is your financing. With a line of credit, you can use one financing product for multiple projects.
Stow it away: Once lenders approve your term loan, the timer starts on using and repaying that money. But you can deploy a line of credit whenever it’s most effective—whether that’s one week or three months from now.
Big dollar amounts: A line of credit can have a credit limit of $1 million or more. While a business credit card typically has a higher credit limit than a personal credit card, it often won’t have the same spending power as a line of credit.
Deals in cash: Unlike a credit card, you’ll actually get cash in your bank account when you draw from your line of credit.

There are a couple of instances where a line of credit may not be the preferred option for business spending.

For example, most credit cards are unsecured, while the lines of credit with the best rates will require some kind of collateral that not all business owners will have available. Credit card purchases also often rack up reward points and perks, which is not the case for a line of credit.

Finally, for major, high-price tag projects, a term loan is often the way to go over a line of credit, which can often have a lower credit limit than a loan.

What line of credit options are there for new businesses?

Let’s get this out of the way first: When it comes to obtaining a line of credit as a brand new business, you won’t have many options.

As discussed up top, lenders — whether they are large banks, small banks or online lenders — prefer lending to businesses with at least a couple of years under their belts. Some will start lending to businesses with one year of operating history; some will consider your application within a few months of your opening.

But if you started your business yesterday, don’t expect to find many lenders eager to work with you. There are a few programs geared towards new businesses — such as the SBA Microloan program — but that’s about it.

If someone is offering you a line of credit as a brand new business, with excellent terms, read the fine print (and have a lawyer and/or accountant do the same). Offers like this are almost always too good to be true.

Person Signing Contract Demonstrating How To Get A Business Line Of Credit

Let’s say that you’ve been in business for a few months, however. Business is good, and you’re forecasting more growth ahead — especially if you’re able to get your hands on a line of credit so you can buy inventory in bulk, or to upgrade your operations, or to make a big marketing push.

Here are your best bets on how to get a business line of credit:

Apply through online lenders

Over the last decade, online lenders have emerged as a viable lending option for small businesses that don’t qualify for bank loans. Online lenders have less stringent application processes than banks, as well as faster underwriting and turnaround times. In some cases, a lender will approve you for a loan or line of credit in as little as one business day.

There is no shortage of online lending options out there these days.

Companies like OnDeck, Kabbage and Fundbox all offer lines of credit, but your best bet is to apply through an online lending marketplace to compare the best options, rates, and terms.

Connect with a local bank

Unless you have a longstanding relationship with a bank, it will be difficult to get a line of credit through one. But if there’s one thing that the small business world learned from the coronavirus pandemic and the resulting Paycheck Protection Program, aimed at helping small businesses weather the economic downturn, it was the value of smaller, community-focused banks.

Often, we saw smaller banks come through for their clients and for new customers alike when larger institutions let them down. Your business is much more important to a local bank than it would be to a multinational one; therefore, it’s worth getting in touch with a community bank and seeing if they’re willing to talk to you about a line of credit.

Contact a relationship manager at a local bank and see what steps you might take to improve your chances of getting an LOC from them.

Explore lines of credit through the SBA

The Small Business Administration oversees a number of loan programs aimed at getting financing into the hands of small business owners.

The SBA’s most popular programs include the 7(a) loan program, the 504/CDC loan program, and the Microloan program. That being said, the SBA also has several line of credit options available to eligible businesses.

The CAPLines umbrella program features revolving and non-revolving LOCs for seasonal uses, for use executing contracts, to finance labor and material costs for construction projects, and to cover working capital.

SBA loans have excellent terms; but for that reason, their requirements are strict. Prepare for a long application process if you’re going this route.

How to apply for a business line of credit?

Every lender has a different application process and may ask for different documents, paperwork and other materials when it comes time to apply for a line of credit.

If you are gearing up to apply for a line of credit, however, there are certain documents that are a given in any application process. They include:

Your driver’s license
A voided business check
Your bank statements
Your credit score/recent credit report

You may also want to have at the ready documents outlining the health of your business, which can include your balance sheet, profit and loss statements, business tax returns and your personal tax returns.

Here are a few steps you can take to improve the likelihood that you’ll be approved as well:

Clean up your credit history: Your credit score, as well as any dings on your credit report such as bankruptcies, play a major role in not just whether lenders will accept your application, but what terms the lender will offer you. Make sure your credit report is accurate, and take steps ahead of your application to boost your score as much as you can, through responsible borrowing and repayment.
Wait as long as possible: If you can wait until you’ve been in business for one or two years before applying for a loan, your chances of approval for a decent line of credit will improve. Most of the successful applicants who applied through Fundera, for example, were in business for at least one year.
Apply to multiple lenders: Some business owners are reluctant to apply to more than one lender when seeking a line of credit or loan, worried that the pull on their credit report will hurt their score. A credit check may dock your score by a point or two, but not enough to seriously affect the outcome of your application. Don’t be afraid to shop around.

The bottom line on a business line of credit

There’s no doubt that a business line of credit is an incredible financial tool and lifeline for small businesses. New small businesses in particular could benefit from access to a flexible, affordable pool of funding that helps them build credit while they finance major investments.

The trick is finding a line of credit that makes sense for your bottom line.

Take your time when researching and applying for a line of credit — an LOC with bad terms could sink your business before it even gets off the ground.