Launching a startup can be an exciting yet unpredictable challenge. Expenses often pile up before your first sale or invoice payment. Even a solid business plan can run into cash flow gaps that stall growth or make it tough to cover day-to-day costs. 

That’s where a startup business line of credit can help. This flexible financing tool gives you on-demand working capital when you need it most. But like any business funding tool, it also comes with benefits and drawbacks. 

Before you apply, it’s important to understand how a business line of credit for startups works, what lenders look for, and how its pros and cons stack up against other funding options.

How business lines of credit work for startups.

A typical business line of credit is a revolving form of financing, similar to a business credit card (though often with higher credit limits and different repayment terms). Instead of receiving a lump sum upfront as you would with a term loan, you qualify for a credit limit and only borrow what you need, when you need it. You pay interest solely on the funds you draw, not the full credit limit. And as you repay, your available credit resets. The cycle repeats throughout the draw period.


For example, if your startup secures a $50,000 revolving credit line and you draw $10,000 for a project, you’ll only pay interest on that $10,000 until you repay the balance. Once you pay back the money you borrowed, the full $50,000 limit becomes available to use again.

This revolving structure gives startups breathing room between pay cycles, new projects, or product launches. For many founders, that flexibility makes business credit lines a preferred financing alternative to long-term debt.(Note: Some lenders also offer fixed lines of credit. This financing option lets you borrow once and repay without the ability to draw again.)

Startup eligibility factors.

Qualifying for a business line of credit depends on each lender’s eligibility criteria. Banks tend to prefer established companies. Online lenders often work with newer businesses that demonstrate repayment ability.

  • Time in business: Traditional lenders, such as Wells Fargo or American Express, may prefer to work with borrowers that have one to two years in business. However, online lenders may accept newer startups (at least six months of operating history) that can show steady deposits or strong financial projections. Within the Lendio Marketplace, we partner with multiple lenders who offer lines of credit to businesses from brand new startups, to those with 6 months - 1 year in business. 
  • Revenue and cash flow: Consistent monthly revenue demonstrates an ability to repay the money your business borrows. Requirements vary, but startups with at least $8,000 in monthly revenue often have better approval odds.
  • Personal and business credit scores: Both your business credit and personal credit matter. If your company is new, strong personal credit may help offset limited business credit history and help you qualify for better rates.
  • Collateral or personal guarantee: Some lenders may ask for collateral, like business equipment or inventory, if you’re applying for a secured business line of credit. If collateral isn’t an option, a personal guarantee might also boost approval odds or help you secure lower interest rates.‍
  • Financial statements and projections: Lenders may review financial statements (e.g., bank statements, profit-and-loss reports, cash flow forecasts, etc.) when you apply for a startup credit line. These documents can help show that your business has a plan to manage and repay the money it borrows.

Meeting lender requirements doesn’t guarantee approval for financing, but it may put your company in a better position. If your business is too new to qualify with a bank, Lendio’s marketplace includes lenders that specialize in startup-friendly business financing.

Pros of a business line of credit for startups.

A business line of credit can be a valuable resource when you’re building a company from the ground up. Below are some of the top advantages for startups. 

Flexible funding for fluctuating cash flow

Most startups haven’t had a chance to establish predictable income yet. You might make a big sale one month and barely break even the next. Although this situation can be stressful, it’s part of the growth process. A business line of credit for startups can help you manage that inconsistency.  

You might use a line of credit to cover inventory purchases before a busy season, fund marketing campaigns, or handle payroll while waiting for invoices to clear. That flexibility is why many small business owners prefer a revolving credit line over a traditional business loan.

No lump-sum debt commitment.

Traditional loans provide a fixed amount of money you have to repay with interest, whether you use the full balance or not. With a line of credit, you borrow only what you need, when you need it.

That means you’re not paying interest on unused money or stuck with debt you don’t need right away. This arrangement can help startups keep financing costs lower while still having access to capital for future needs. As a result, startups can reduce the risks of overborrowing and overspending.

Opportunity to build business credit.

An often overlooked perk of business lines of credit is their ability to help you build business credit. Lenders often report payment activity on credit lines to the business credit bureaus (like Experian, Equifax, and Dun & Bradstreet). Over time, paying on time and keeping your credit utilization low could improve your business credit score—possibly opening doors to better financing options later.

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A business credit line could be a fast, easy way for your startup to begin separating personal and business credit. Remember, keeping personal and business finances separate is essential for your company’s long-term stability.

Quick access to working capital.

Many business loans take days or weeks to fund. But some online lenders can approve and fund a business line of credit within a few days or less. And once you open a business credit line, you’ll have the ability to access funds as needed during your draw period (up to the credit limit on your account).Fast access to cash means you can act quickly when unexpected costs come up, like broken equipment or a time-sensitive investment opportunity. For new business owners juggling uncertainty, having access to instant working capital can be a major stress relief.

Cons of a business line of credit.

While the benefits of a business credit line are appealing for startups, founders should also consider the limitations of this type of financing before applying. 

Cost factors: rates, fees, and potential for overspending.

Business lines of credit typically feature variable interest rates, meaning that the APR you pay fluctuates based on market conditions. While this arrangement can work in your favor when interest rates drop, it also means that rates (and your payments) could increase unexpectedly.

On top of interest, lenders may charge:

  • Annual fees
  • Origination fees
  • Draw fees (for each withdrawal)
  • Late payment fees

It’s important to read the fine print before you sign any agreement. You should always calculate the total cost of borrowing upfront.

Because funds are so easy to assess, overspending is another risk to be aware of with business credit lines. As a startup, it’s important to be aware of this fact and treat your business line of credit like a financial tool, not extra cash.

Qualification barriers for startups.

New startups with limited credit history or inconsistent revenue may struggle to qualify for a business line of credit. Other startups might receive smaller credit limits or higher rates. Many lenders prefer borrowers to have at least six months of business history and a solid credit score before offering favorable financing terms.You might offset qualification challenges with collateral or a personal guarantee, but those options carry added risk. If your business can’t repay its debt, you could be personally responsible.

Short-term nature compared to other funding sources.

A line of credit is designed for short-term needs, not large-scale projects. So, if your startup needs funding for long-term investments (e.g., real estate, large equipment, etc.), a term loan or SBA loan might make more sense. 

Lender can reduce credit limit.

Another drawback to consider is the fact that lenders can reduce or freeze the credit limit on a business line of credit. If your business experiences financial setbacks or your credit score declines, you might experience this scenario. That’s why it’s important to maintain a strong financial foundation and diversify your funding sources.

Pros and cons of a business line of credit at a glance
Pros Cons
Flexible, revolving access to funds. Variable rates could increase borrowing costs.
Pay interest only on funds you use. Fees may apply for draws or maintenance.
Potential to build business credit with on-time payments. May require collateral or personal guarantee.
Helps manage cash flow and payroll gaps. Not ideal for long-term or large-scale financing.
Quick approval and funding options. Risk of overspending or mismanagement.

Business line of credit vs. other startup financing options

Even if a business line of credit seems like a good fit, it’s smart to consider and compare other financing solutions. The right funding source for your business depends on your goals, timeline, and risk tolerance.

When a line of credit makes sense for startups

A business line of credit could be a good choice if your startup:

  • Needs help managing cash flow gaps or seasonal slowdowns. 
  • Wants flexibility to handle recurring or short-term expenses. 
  • Plans to borrow small amounts of money and repay debt quickly. 
  • Prefers to avoid long-term debt.

Consider the following scenarios. An Ecommerce startup might use a line of credit to stock up on inventory ahead of a holiday rush and repay the balance after sales post. Likewise, a new consulting firm might draw from its credit line to cover payroll while it waits for client invoices to clear. In both cases, access to revolving capital keeps business operations running smoothly without the burden of fixed-term debt.

Startup financing alternatives.

If a business line of credit doesn’t seem right for your startup, there are other ways to borrow. Below are more startup business loans that might work for your company instead.

1. Term loans

A business term loan provides a lump sum you repay over a fixed schedule. It’s a strong choice for long-term investments like expanding operations, purchasing equipment, or hiring staff. Payments stay consistent throughout the life of the loan, making budgeting easier.

2. SBA loans

The U.S. Small Business Administration (SBA) partially guarantees SBA loans. There’s less risk involved for the lender and borrowers receive improved access to capital. SBA loans typically feature longer repayment terms and competitive interest rates. These benefits often make https://www.lendio.com/blog/sba-loan-startup (provided applicants have steady revenue and detailed business plans to satisfy SBA lender requirements). 

3. Business credit cards

A business credit card could also work for new business owners who want a financing option to cover everyday expenses and small purchases. While credit limits are sometimes lower than business lines of credit, business credit cards may also offer rewards and help build credit. Just be mindful of higher interest rates if you carry a balance.

4. Equipment financing

Equipment financing can help you purchase machinery, tools, vehicles, or electronics while preserving cash flow. The equipment you finance serves as collateral for the loan. Repay the money you borrow in fixed monthly payments (plus interest) over a fixed term. 

5. Invoice financing

Another funding option that may work for certain startups is invoice financing. With this type of financing, you essentially sell your business’ outstanding invoices to secure working capital now. Terms vary, but you may be able to borrow up to 80% of your accounts receivables. 

Is a business line of credit right for your startup?

Whether or not a business line of credit is right for your startup depends on your goals, risk tolerance, and how you plan to use the funds. When you manage a credit line responsibly, it has the potential to help your new business maintain stability, cover short-term expenses, and build business credit. 

However, a business credit line isn’t ideal for every startup. If your funding needs are large, long-term, or growth-oriented, you might benefit from pairing a line of credit with another financing option (like a term loan or SBA loan). Explore the best startup lines of credit in the Lendio marketplace and apply today.