Startup business lines of credit: best options for your new company

Starting a business is an exciting, if uncertain journey, so having some spare cash on hand in case opportunities (or risks) arise can make a big difference. One of the most flexible forms of finance is a business line of credit, which you can dip into and repay as needed, but startups looking for a business line of credit face some extra challenges that more established enterprises might not. 

In this article we’ll look at how startup business lines work and explore the options available to fund your plans.

What is a business line of credit for startups?

A business line of credit provides on-hand funding for your business, working as a capital source you can draw down and repay back as needed. 

With a business line of credit, you’re approved for a maximum credit limit and can take from it as you go. Interest is only charged on the amount you use, and once you repay, the funds become available again.

For startups, this flexibility is certainly useful – it can help cover unexpected costs, help you invest in growth, or cover cash flow gaps if they arise. And unlike a small business loan, you’re not locked into a fixed repayment plan unless you’ve used funds, so there’s less commitment, which can be handy if you’re trying to minimise debts.

How to use a business line of credit for your startup

Managing finances as a new business comes with a whole new set of challenges, especially if it’s your first time. Depending on your business model, you might have to deal with fluctuating revenues month-on-month, sudden expenses that arise or changing plans if you, say, run out of stock or need to pay a larger than usual VAT bill. Having a business line of credit on hand can help cover you.

• Quick funding: Use it when you need it, and then repay and use it again – perfect for variable cash flow.
• No fixed borrowing schedule: Only pay interest on what you borrow, making it more cost-effective than a lump sum loan.
• Builds credit: Properly managing your credit line can improve your business credit score, opening doors to better funding options later.

Understanding your funding options

Before diving into applications, it’s worth getting your head around how a business line of credit compares to other options:

1. Business loans: Provide a lump sum that’s repaid over time, ideal for one-off expenses like purchasing equipment or property.
2. Credit cards: Business credit cards are great for smaller, day-to-day expenses but may have higher interest rates and lower limits.
3. Grants: Government business grants can provide non-repayable funds but often come with stringent requirements or equity expectations.

A line of credit stands out because of its flexibility and ongoing usability, making it ideal for startups who want the peace of mind of knowing there’s capital available, but don’t want to commit too hard.

Can startups without revenue qualify for a line of credit?

Startups without revenue often face more hurdles when applying for funding. Many traditional lenders require proof of consistent income, but alternative lenders and credit lines tailored to startups may have more flexible requirements.

Here’s what lenders typically look for:

• Business plan: A clear, realistic plan demonstrating how your startup will generate revenue.
• Personal credit score: If your startup has no credit history, your personal credit becomes a key factor, which can put your personal credit at risk.
• Collateral: For secured lines of credit, lenders may require assets like property or inventory or you may be required to sign a personal guarantee.

For unsecured funding options, requirements can be less stringent, but they often come with higher interest rates or lower credit limits.

How to build a strong application as a startup

Whether you’re applying for a line of credit as a startup with or without revenue, there are a few steps that can improve your chances, all focused on reducing your perceived level of risk for a lender. This includes proving your ability to repay the loan, offering a look into how you'll use the funds and building a strong credit foundation.

1. Document and prove your ability to borrow: Even if you lack revenue, provide evidence of any investments, savings, or potential income streams that can reassure a lender of your ability to repay.
2. Showcase a solid plan: Clearly outline how you intend to use the funds and repay them to show your planning and thinking.
3. Strengthen personal credit: If your business is new, lenders may assess your personal credit history as a substitute for business credit – or you can spend some time building your business credit.

It’s important to note, however, that while a business line of credit offers great flexibility, it carries the same risks as other forms of borrowing. Businesses should only draw funds when necessary, and prioritise timely repayments to maintain access to credit and avoid mounting interest costs.

Building good financial habits early can set your startup on the right track, ensuring you’re ready to adapt and follow opportunities while staying financially stable.

Funding your startup

A business line of credit can be a powerful tool for startups, offering the ability to manage variable costs, grow faster, and adapt to your market. However, it’s just one form of finance for startups, alongside startup loans and short-term loans.

You could also consider funding your startup with an iwoca Flexi-Loan – if you’ve been in business for at least 12 months, then you could be eligible to join over 90,000 entrepreneurs that have used iwoca to power their journey.

• Borrow from £1,000 to £1,000,000 to invest in your growth
• Only pay interest on what you use with no origination fees.
• Repay in line with your cash flow, with the ability to overpay or repay early without penalties.
• Quick approval: Apply online in minutes and get a decision in hours, not weeks.

Find out how an iwoca Flexi-Loan can help you keep moving forward – see how much you could borrow with our business loan calculator.