Getting a startup business loan is more challenging than for already established businesses. However, it is still possible. New business owners can boost their approval odds by selecting the correct type of financing, familiarizing themselves with their credit scores, and determining the most competitive lending options available.
Before contacting financial institutions and banks for startup business loans, it’s smart to familiarize yourself with lending options, credit scores, loan types, and other market technicalities. This will help you make better and more sustainable judgments in the future.
Ready to explore the 5 steps to secure a startup business loan easily? Let’s jump right in!
Get A Startup Business Loan In 5 Steps:
Several business ideas fail to take off due to less capital. While it is not possible for every budding entrepreneur to self-finance their startup, understanding the needs of a successful loan application is quite achievable.
There are multiple ways you can approach financing, but the following procedures help you get improved success rates.
- 1. Find Out How Much Funding You Need
Many business owners make the crucial mistake of requesting far more funding than they actually need to get operations up and running. They may get approved for a huge sum, struggle to handle the loan payments, end up paying capital in interest, or default on a loan.
A lender can also reject a request that is too large. To avoid both heartbreaking situations, make a financial forecast with line terms for projected expenses and income. By doing these, you will know exactly how much you require to borrow to keep the operations running until the revenue begins coming in and your business can uphold itself.
- 2. Examine Loan Types
There are many small business owners who opt for financing through credit unions and traditional banks. However, there are multiple types of business financing that can help startups to get started. If you are looking to secure a startup business loan fast, here are some typical types of loans to consider:
- Business Lines Of Credit
A lender raises funds up to a particular amount with a business line of credit. On an as-needed basis, the business owner can access the financing.
The interest-only rises on the portion of the credit line acquired monthly. Furthermore, after making payments during the draw time, the borrower can access funds frequently.
- Online Term Loans
Term loans are normally issued by traditional lenders or online. It involves a bank expanding a huge amount of cash, repaid over a period of time at a set interest rate.
APRs (annual percentage rates) on the best startup business loan start around 9%. Its maximum limit commonly expands from $250,000 to $500,000. Startup business owners may not be eligible for the highest amounts of loans and the most competitive rate of interest.
- Asset-based Financing
Asset-based financing is a kind of secured business financing that authorises startup owners to borrow against helpful assets like equipment and machinery, inventory, real estate and accounts receivable.
This form of financing is not very risky for lenders, so the terms are more competitive than those of other loans. However, safe financing means the bank can reclaim the collateral if the borrower defaults.
- SBA Microloans
These loans are available to eligible startup business owners up to $50,000. They are normally offered to startups in less deprived areas and to those owned by women and outnumbered people. The repayment term might be as long as six years, with a rate of interest varying from 8% to 13%, depending on the lender.
- SBA 7(a) Loans
This loan program is proposed through the US SBA (Small Business Administration). It expands a startup business loan up to $5 million to eligible candidates. Funds can be utilized to cover equipment purchases, working capital, and business development expenses. The interest rates vary from 2.25% to 4.75%, including a base rate.
Check Your Eligibility
The next stage is to check the eligibility criteria for a startup business loan. The qualification criteria differ by the type of funding you are applying for and also by the lender. The most typical criteria on a lender’s website are its needs for your time in business, annual revenue, and personal credit score.
However, lenders look at a range of things to identify whether you can manage the repayments of loans and are eligible or not. The common areas that the lender might evaluate include:
- Personal Credit Score: Many lenders provide funding solutions to credit-challenged business owners with scores in the 500s-600s. However, to neutralise the risk, these solutions come with a much higher rate of interest. Lenders with low and relaxed credit requirements tend to be online lenders. If you need a startup business loan immediately, you can boost your personal credit score by raising your credit card limit and paying down debt.
- Business Credit Score: If you have already started building business credit, the lender might peek at your credit rating. However, your personal credit score history is much more essential to small business lenders. It is especially important when you are just about to start your business.
- Time In Business: It’s not unusual for bank lenders to need 2 or more years of business experience to be eligible for a loan. This is challenging if you have not yet launched. You will likely be better off with a lender expanding financing to startups online. Multiple online lenders might need a minimum of 6 months in operation, while only quite a few provide loans to startups with 3 months or less in business.
- Personal Guarantee: You often have to offer a personal guarantee with business loans. This guarantees that you will repay the loan from your personal acquisitions if the business is bankrupt and cannot be able to repay the loan.
- Annual Revenue: Small business owners must also meet minimum revenue criteria from lenders to be eligible for funding. Several lenders want to see that your business has an annual revenue of $100,000 to $250,000, with online lenders demanding the most lenient revenue amounts. Some lenders, such as PayPal, go below this revenue approach.
- Debt Obligations: Lenders will examine your debt load to identify if you can afford more debt or not. You can also check this by yourself with a debt-to-asset ratio calculator. Also, they may assess the coverage ratio of your business’ debt service. It takes into account your net profit divided by your annual debt.
Compare The Lenders
When examining where to get a startup business loan, online lenders typically provide the highest odds of approval. However, you should always compare every loan from every type of lenders, including traditional ones.
Don’t just only review every lender’s terms, loan amounts, and interest rates. Examine deeper by examining the application method, funding times, and the fee you will acquire by doing business with the lender. If it is possible, get prequalified to verify if the online lender is an option and how much the startup business loan might cost.
Some of the best startup business loan lenders are:
| Lender | Minimum time in business |
| Funderial | 2 months |
| PayPal | 3 months |
| Taycor Financial | 3 months |
| Credibly | 6 months |
| SMB Compass | 6 months |
| Bank Of America | 6 months for its Cash Secured line of credit |
| Accion Opportunity Fund | 12 months |
Collect Documents and Apply
When you are ready to apply, you’ll need to assemble loan documentation for a startup business loan, including the following documents:
- Personal details, including your address, name, and Social Security number.
- A copy of your company’s business license and formation papers from your state.
- Company’s EIN (employer identification number).
- Business loan proposal, summarising how much you require and plan for repayment.
- A business plan, including financial projections and a thorough breakdown of how you will use the loan.
- Personal and business tax returns from the past 3 years receipts from the quarterly tax payments.
- Cash flow statements.
- Balance sheet.
- Recent business bank statements up to 1 year.
- Statements of profit and loss.
- Your personal bank statements.
- Business debts schedule.
- Personal guarantee.
- Outstanding invoices (if applying for invoice factoring).
What To Do If Rejected For A Startup Business Loan?
Before giving up on your new venture, reach out to your lender and know the reason why your business loan was rejected. It could be a result of inconsistent information in the application. It can also be a credit-related issue. Either way, you will know what is required to enhance your chances the next time you apply.
Additionally, you can try applying with a lender with more lenient needs to see if it is the perfect fit or not. You can also wait and re-apply with the same lender at a later date.
Startup Business Loan Alternatives
If you are looking for a startup business loan fast or want to explore other options to fund your new business, consider these alternatives:
- Use a crowdfunding platform.
- Business grants.
- You can use a business credit card.
- Borrow from relatives and friends.
- You can also use a personal loan for business purposes.
- Your personal savings.
A Summary
To help you acquire a startup business loan easily, we have mentioned five simple ways. This blog will surely help you get a loan for your startup business quickly, and we have also mentioned some alternatives to help you make an informed decision.
FAQs
Yes, a startup can easily get a business loan. Some easy steps include determining how much funding you require, researching the loan type and your eligibility, comparing lenders, and collecting documents.
A credit score ranging from 650 to 749 is quite okay for a startup business loan.
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