Entrepreneurs going into their first startup operation often have a lot of misunderstandings about financing through debt. Not only are there a lot of rumors that make access to small business loans and lines of credit seem difficult, but there are also a lot of myths and misconceptions that lead to false beliefs about the way those debt instruments work. When someone borrows using a product that is not well understood, that just increases the risk to the startup and the lender, so it’s a good idea to learn all you can about each financial product you consider.

Qualifying for Startup Credit Lines

Startup credit lines are a little different from mainstream commercial credit lines because they are built for companies that have not yet begun operations. As a result, they can not be based on commonly used criteria like a company’s business credit score or income. So how does it work? The financial industry uses three criteria to balance the risk for any debt, so when cash flow and credit score are not established that leaves only collateral.

Startup lines of credit often rely on an asset like a piece of real estate to mitigate the risk of the debt. This allows businesses to access credit before operations start while providing recourse to the lender in the event of a default. In some cases, you may also have the option of using personal income from other investments to qualify for a credit line without collateral, but you’ll need a good personal credit score because the debt will usually be assigned to you as the investor and not your company. Unsecured debt is also a lot more expensive, so most new businesses simply opt for a secured line.

Accessing Funds & Maintaining the Line

Credit lines work like a credit card in some ways and a working capital loan in others. You can reuse them without having to apply again by simply drawing on any available balance, up to whatever you have been approved for a maximum. It does not have to be paid down completely before you can access the line again, either. Like a credit card, it simply has to be paid on time and there has to be enough open capital before hitting the account’s ceiling. Lines of credit tend to be much less expensive than credit cards, and sometimes they are even less expensive than one-time working capital loans. To learn more, talk to a lender who offers startup credit lines about the options for your company.