The world is a scary place for first-time entrepreneurs. Trying to navigate the first few years of business can be exciting but also worrisome. There are many financial needs that have to be addressed, from rent and payroll to inventory purchases and taxes. Life would be so much easier with a line of credit to help when the going gets tough. That’s not possible, though, is it?
Myth #1: Startups Can’t Qualify for a Line of Credit
This is flat-out wrong. Many lenders provide financing for new businesses. In addition to microloans from the SBA, alternative lenders and some banks have startup funding programs featuring lines of credit.
How is it possible to qualify for funds if your business doesn’t have a credit rating yet, you ask? In these cases, lenders look at the business owner’s (or one of the partners in the case of a partnership) personal credit rating. If a new entrepreneur has a history of managing credit wisely and paying off credit cards, it’s completely possible to get approved for a line of credit.
Myth #2: You Always Need Collateral for a Line of Credit
Many lines of credit ask for collateral, and there are benefits to choosing this type of business credit. With security backing your line of credit, you can qualify for a larger total line and lower interest rates.
Just in case you’re wondering, collateral refers to assets such as vehicles, property, equipment or inventory. Collateral isn’t the only way to get approved.
Many business owners can get unsecured credit lines. These focus on the owner’s credit rating. With a strong score, it’s possible to get significant funding at much better rates than a credit card.
Myth #3: There Are No Obligations With Unsecured Lines of Credit
Some people swing to the opposite end of the spectrum, thinking that no collateral means no obligation to pay back the funds. Generally speaking, even unsecured lines of credit for startups have some type of guarantee of repayment. This may be a personal guarantee from the business owner, which allows the bank to put a lien on property or other assets in the event of failure to repay.
Lines of credit are versatile and valuable tools for a startup. They can help with equipment purchases, inventory and other important needs. That said, you need to read the agreement carefully to make sure you can handle the obligations.