If you’re looking for lines of credit that work with startups, you probably already know there’s a lot of conflicting information out there. Before you spend a lot of time applying for financing that might not be a great fit, let’s talk about some basics and clear up some myths about revolving credit lines and new businesses. For starters, there are a lot of companies out there that claim they can finance startups with an unsecured line, but often they mean they can finance some startups. Even the most generous credit deal in the world will require some risk assessment, and that means there will be criteria and exclusions.
For example, it’s common for lenders setting up revolving credit lines to put covenants in place that require certain behavior from the borrower to keep the line active. Otherwise, it reverts to an amortizing loan you have to pay off, and you lose the ability to draw on the balance you’ve paid down. Some examples of these covenants for lines of credit include maintaining certain cash reserve levels or debt to income ratio requirements. In rare cases, the covenant links funding to something much more concrete, like the existence of a major customer contract that will guarantee a base level of income for months or years to come. Lose the account or break the contract and the credit line goes with it.
While startups tend to encounter stringent requirements for credit lines that larger companies don’t have to meet due to their larger cash reserves and incomes, there are programs that can extend your cash flow considerably. Banks look at three factors for any loan, and lines of credit are no exception. Your credit rating, cash assets, and collateral. In some cases, business assets other than cash can be used as collateral. An example of this is asset-based credit, where your available balance maximum is based on the total valuation of your inventory, invoices, purchase orders, and equipment.
In any case, you need to cover all three major criteria to borrow, but the balance between them can be tweaked, with more collateral when you have less cash and a lower credit score or larger cash reserves and income statements when you have less collateral and you’re still building your score. It’s all a matter of finding a financing company who looks at your balance of approval factors and sees something they can work with, and that just takes time and research.