Building Business Credit for Startups: Strategies for Establishing a Strong Foundation

For many budding entrepreneurs, securing loans from traditional lenders can be challenging, especially when they don’t have enough collateral or extensive credit history.

Luckily for small business owners like you, you can get a business line of credit as a flexible alternative to get the funding you need for your venture. 

A business line of credit is a great solution for financing your growing venture. It can help you fill your inventory, manage your cash flow, and more.

If your startup needs a business line of credit, we’re here to help. In this blog, we’ll discuss what they are, how they work, and what you need to do to secure one. 

What is A Business Line of Credit?

A business line of credit for startups is a revolving credit that lets you withdraw money as needed. 

It’s unlike a typical loan that you pay in a lump sum. With this credit line, you only have to pay the interest on the borrowed money. You don’t have to pay for the remaining credit you didn’t use. 

They also have a draw period that typically lasts one to five years. You can withdraw money from your credit line within this period. Once it ends, you’ll enter a repayment period where you must repay the principal amount and the accrued interest.

Now, there are two types of business credit lines that you can get: a secured and unsecured line. 

An unsecured business credit line requires you to have collateral. These can be real estate assets or business equipment. Sometimes, lenders request a personal guarantee that says you’ll be liable for paying back the outstanding balance if your business defaults on the loan. 

Meanwhile, a secured business credit line does not require collateral or personal guarantees. Secured lines of credit are typically less expensive. However, they’re much harder to get since they often require a strong business credit score. 

Three Advantages of Securing A Business Line of Credit For your Startup

Aside from being a great alternative to traditional loans, there are plenty of other benefits to having a business line of credit. These include:

Flexibility

Lines of credit are popular for their flexibility. You can use it to solve different short-term issues, like covering emergencies. It’s the perfect solution for the unpredictable nature of running a startup. 

Fast Cash

When you need extra cash, you can quickly withdraw funds from your startup’s business line of credit. You don’t need to wait for bank approvals which often take days or weeks. 

Builds Business Credit

Some vendors submit credit reports to the three major credit bureaus, which can help your startup build its business credit. However, to get a strong score, you need to learn how to use your line of credit responsibly. 

This means keeping your credit utilization ratio at or below 30% and making timely payments to your lenders.

How to Secure Business Credit Lines 

If you want your startup to secure a business line of credit, it needs to build a strong financial foundation. Here’s how you can do it:

Obtain Your Employer’s Identification Number

To help your startup get a business line of credit, you first need to obtain your employer’s identification number (EIN) from the Internal Revenue Service (IRS). You need your EIN to open bank accounts and apply for business credit lines. 

You can get your EIN for free by submitting your application via mail or online. 

Open Business Bank Accounts

Once you get your EIN from the IRS, you can open a business bank account. A business bank account allows your customers to make checks to your startup. 

It’s also an important requirement when securing a line of credit for your startup since lenders typically want to see your cash flow before approving your application. 

Create A Realistic Annual Budget

An annual budget lets you plan and manage your startup’s finances effectively. Your annual budget acts as a guide on how you can operate your business within your means. It will help you keep your spending in check and prevent you from overspending. 

When you create your budget, it’s important that you be realistic. This way, you can avoid overestimating and underestimating, which can lead to financial strain. 

Monitor Your Cash Flow

Once you have a realistic budget you can follow, you need to start tracking your cash flow. Your cash flow statements show how much money comes in and out of your business each month. 

Since startups are often unpredictable, keeping track of your cash flow will help you analyze changes. You can look for trends and identify opportunities to improve your operations. 

By monitoring your cash flow, you’ll know when to make investments and when to avoid making new expenses. 

Make Long-term Investments

Long-term investments like real estate properties and equipment will help your startup secure a business line of credit. When lenders ask for a guarantee, you can offer your venture’s equipment or property as collateral. 

Build A Positive Credit History

A positive business credit history can do wonders for your startup. For instance, it can help you get better interest rates and more flexible payment terms. 

Lenders value businesses with excellent payment histories. They want them to keep doing business with them, so they’ll give them better rates and payment terms. 

Ultimately, having a positive business credit history will help your startup get sustainable growth.

Let Your Startup Grow Today

If you’re having trouble securing a business line of credit for your startup, look no further than NCH. 

NCH is one of Nevada’s leading business formation service providers. We specialize in helping startups establish a strong foundation for their business line of credit. 

Our team of business specialists will guide you through building a solid business credit profile. With our help, you can enhance your chances of securing a business line of credit that lets your startup reach its full potential. 

Secure your startup’s financial future and partner with NCH today. Learn more about our credit-building services by visiting our website here or call us at 1-800-508-1729.

DISCLAIMER: The above material has been prepared for informational purposes only, containing opinions of the provider, and is not intended to provide, and should not be relied on for, tax, legal, or accounting advice. Please consider consulting tax, legal, and accounting advisors before engaging in any transaction.