How Realistic Is It for Startups To Get Lines of Credit?

If you’re a new entrepreneur, it’s important to know your options when it comes to financing. When you have access to capital, it can help you avoid many of the common obstacles that new businesses face. You can speed up your company’s growth and build a good foundation, such as by purchasing equipment that helps you do the job right. That said, when analyzing your options, it’s important to keep both eyes open. Are startup lines of credit trustworthy or not?

Why Is Getting Financing Difficult for Startup Businesses?

Whether you’re looking at lines of credit, loans or investments, the fact is that qualifying is never as easy for new businesses as it is for established companies. There are a few reasons why.

The Time Factor

Companies that have been in business for at least two years have a handle on basic operations. The owners have shown that they have a good handle on financial matters and running the business. Many startups are a question mark as far as real-world experience goes.

Stable Income

Lenders want to make sure you can repay any loans or financing, including a line of credit. Your business’s revenue is an essential part of this. New companies that don’t have many customers or sales may have a hard time convincing banks.

No Credit Rating

New businesses don’t usually have any credit rating whatsoever. In the eyes of a bank, no credit is the same as bad credit. It takes a while to build up a reputation with a solid credit score, such as by paying your suppliers on time.

These issues aren’t your fault, and they’re not caused by the lender being unreasonable, either. There simply are a lot of unknowns at this early stage of business operations.

What Are the Pros and Cons of Lines of Credit for Startups?

As mentioned, financing is extremely valuable for new businesses. That said, you have to be careful not to let your excitement put your finances at risk. Only work with lenders that you trust.

One thing to be especially careful with is personal guarantees. This essentially makes you put your personal assets on the line. Unexpected problems could lead to damaging your personal credit rating.

An experienced lender that works with many small businesses and enjoys an excellent reputation can give you pointers for financing your business goals safely. For example, equipment financing or leasing can be affordable and relatively low-risk for new entrepreneurs.