diff --git a/.changeset/sdk-6948-binary-url-fallback.md b/.changeset/sdk-6948-binary-url-fallback.md
new file mode 100644
index 00000000..0700043f
--- /dev/null
+++ b/.changeset/sdk-6948-binary-url-fallback.md
@@ -0,0 +1,7 @@
+---
+"@wdio/browserstack-service": patch
+---
+
+fix(cli): fall back to `BROWSERSTACK_BINARY_URL` when `update_cli` fails (SDK-6948)
+
+`update_cli` runs during bootstrap — before the binary is spawned and before GRR localizes the API hosts — so it always targets production `api.browserstack.com`. On an internal staging run (`BROWSERSTACK_STAGING_ENV`) the staging credentials are rejected there (`401`), which left the CLI binary path empty and crashed the launcher with `spawn('') … ERR_INVALID_ARG_VALUE: 'file' cannot be empty`. When `update_cli` fails and `BROWSERSTACK_BINARY_URL` is set, download the binary from that URL instead so the run can proceed. Opt-in only — with the variable unset the original error propagates exactly as before.
diff --git a/packages/browserstack-service/src/cli/cliUtils.ts b/packages/browserstack-service/src/cli/cliUtils.ts
index 03b335f2..73d11149 100644
--- a/packages/browserstack-service/src/cli/cliUtils.ts
+++ b/packages/browserstack-service/src/cli/cliUtils.ts
@@ -252,14 +252,40 @@ export class CLIUtils {
             }
             queryParams.cli_version = version
         }
-        const response = await this.requestToUpdateCLI(queryParams, config)
+        const browserStackBinaryUrl =
+            process.env.BROWSERSTACK_BINARY_URL || null
+
+        let response
+        try {
+            response = await this.requestToUpdateCLI(queryParams, config)
+        } catch (err) {
+            // update_cli runs during bootstrap — before the binary is spawned and before GRR
+            // localizes the API hosts — so it always targets the production api host. On an internal
+            // staging run (BROWSERSTACK_STAGING_ENV) the staging creds are rejected there (401). If an
+            // explicit binary URL was supplied, use it so the run is not blocked on this call. Opt-in
+            // only: with no BROWSERSTACK_BINARY_URL the error propagates exactly as before, so
+            // production behaviour is unchanged.
+            if (!isNullOrEmpty(browserStackBinaryUrl)) {
+                const status = (err as { response?: { statusCode?: number } })?.response?.statusCode ?? (err as Error)?.message
+                logger.warn(
+                    `update_cli request failed (${status}); falling back to BROWSERSTACK_BINARY_URL`,
+                )
+                const fallbackBinaryPath = await this.downloadLatestBinary(
+                    browserStackBinaryUrl as string,
+                    cliDir,
+                )
+                PerformanceTester.end(PerformanceEvents.SDK_CLI_CHECK_UPDATE)
+                return fallbackBinaryPath
+            }
+            PerformanceTester.end(PerformanceEvents.SDK_CLI_CHECK_UPDATE)
+            throw err
+        }
+
         if (nestedKeyValue(response, ['updated_cli_version'])) {
             logger.debug(
                 `Need to update binary, current binary version: ${queryParams.cli_version}`,
             )
 
-            const browserStackBinaryUrl =
-                process.env.BROWSERSTACK_BINARY_URL || null
             if (!isNullOrEmpty(browserStackBinaryUrl)) {
                 logger.debug(
                     `Using BROWSERSTACK_BINARY_URL: ${browserStackBinaryUrl}`,
diff --git a/packages/browserstack-service/tests/cli/cliUtils.test.ts b/packages/browserstack-service/tests/cli/cliUtils.test.ts
index aa82167c..f924ba2e 100644
--- a/packages/browserstack-service/tests/cli/cliUtils.test.ts
+++ b/packages/browserstack-service/tests/cli/cliUtils.test.ts
@@ -459,6 +459,41 @@ describe('CLIUtils', () => {
                 mockConfig
             )
         })
+
+        it('falls back to BROWSERSTACK_BINARY_URL when update_cli fails (SDK-6948)', async () => {
+            const saved = process.env.BROWSERSTACK_BINARY_URL
+            process.env.BROWSERSTACK_BINARY_URL = 'https://example.com/staging-binary.zip'
+            try {
+                const fallbackPath = '/mock/cli/dir/binary-fallback'
+                vi.spyOn(CLIUtils, 'runShellCommand').mockResolvedValue('1.0.0')
+                // update_cli fails (e.g. staging creds against the prod api host -> 401)
+                vi.spyOn(CLIUtils, 'requestToUpdateCLI').mockRejectedValue({ response: { statusCode: 401 } })
+                vi.spyOn(CLIUtils, 'downloadLatestBinary').mockResolvedValue(fallbackPath)
+
+                const result = await CLIUtils.checkAndUpdateCli(mockExistingPath, mockCliDir, mockConfig)
+
+                expect(result).toBe(fallbackPath)
+                expect(CLIUtils.downloadLatestBinary).toHaveBeenCalledWith('https://example.com/staging-binary.zip', mockCliDir)
+            } finally {
+                if (saved === undefined) { delete process.env.BROWSERSTACK_BINARY_URL } else { process.env.BROWSERSTACK_BINARY_URL = saved }
+            }
+        })
+
+        it('re-throws when update_cli fails and no BROWSERSTACK_BINARY_URL is set (unchanged behaviour)', async () => {
+            const saved = process.env.BROWSERSTACK_BINARY_URL
+            delete process.env.BROWSERSTACK_BINARY_URL
+            try {
+                const err = new Error('Unauthorized')
+                vi.spyOn(CLIUtils, 'runShellCommand').mockResolvedValue('1.0.0')
+                vi.spyOn(CLIUtils, 'requestToUpdateCLI').mockRejectedValue(err)
+                const downloadSpy = vi.spyOn(CLIUtils, 'downloadLatestBinary').mockResolvedValue('/should/not/be/used')
+
+                await expect(CLIUtils.checkAndUpdateCli(mockExistingPath, mockCliDir, mockConfig)).rejects.toBe(err)
+                expect(downloadSpy).not.toHaveBeenCalled()
+            } finally {
+                if (saved !== undefined) { process.env.BROWSERSTACK_BINARY_URL = saved }
+            }
+        })
     })
 
     describe('setupCliPath', () => {