How a Startup can get a Business Line of Credit

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How a Startup can get a Business Line of Credit

Published By Credit Suite at August 21, 2017


Do you know how a startup can get a business line of credit? As a new business, by definition, you have no or little business credit history, so it can be difficult. When you ask: What is the credit score of a new business? The answer is – it’s usually not so hot. But don’t worry! Here are some ideas which will work.

Use your personal credit to get going

At some point, you will want to stop doing this, but in the beginning, you have got to get your startup off the ground, and that means you will need developmental capital. This is capital to do anything from paying a rental deposit for an office to purchasing a set of prototypes for a product you want to make. If you have decent personal credit, then you can tap into it to get your startup, well, started.

Once you have established a history and a good payment reputation, then you can work on getting your business line of credit. Having a good personal credit score will go a long way to showing creditors that you are trustworthy and will pay off your debts on time.

Guarantee with personal assets and collateral

What happens if your personal credit is not so hot? Collateral is essentially when you use something (or several things) of value in order to guarantee your payments. However, as you might expect, if you default, you will lose your collateral. Still, it is a good method of how to finance a business with bad credit.  As always, pay your bills on time and in full, and don’t borrow more than what you can pay back comfortably. After all, now your second car (or something like that) is on the line if you’re late with payments.

Establish a relationship with a local vendor and get trade credit

Trade credit is when you work directly with a local vendor you use all the time and ask them to float you some credit for payments at a (not too far into the future) later date. For a catering company, this could be a green grocer. For a dance studio, it could be the company that cleans the floors or maybe a salon which does the students’ hair and makeup for recitals and shows.

No matter which kind of vendor you get trade credit with, be responsible and, of course, pay them on time (and early, if you can swing that). Not only does that bolster and maintain that relationship, it also counts toward your credit score.

Be responsible with any credit you’ve got, including personal

This may feel a bit like a no-brainer, but your use of currently existing credit will be what any creditor (trade or banks, etc.) will use to determine whether you can pay your bills on time and are, therefore, what is considered a good credit risk. Suddenly blowing all of your personal credit at the tables in Vegas is not going to endear you to future lenders. Startup companies in particular, no matter how careful they are, are generally reviewed as the full credit package. That is, both personal and business credit scores are under consideration. If you look like a bad credit risk on the personal credit side, you’ll appear, to future lenders and creditors, to be an equally poor credit risk on the business side of things.

Establish your business under IRS rules

And finally, because a startup business and its credit will inevitably be conflated with the personal credit of its founder(s), take steps to separate the two. One of the biggest steps you can take is to apply for an IRS EIN (Employer Identification Number). By declaring to the IRS that your startup business is the real deal, and not just a pipe dream or a hobby, then that helps to signal to creditors that its commercial credit is not the same as your personal credit, and should not be treated as such.

Startups can succeed, although the odds are long. But if a startup has their own business line of credit, that can make it a bit easier to thrive.

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