How to Get a Startup Business Loan

Not sure if a startup business loan is right for you? Business.org explains what you need to know to get a startup business loan.

According to the National Small Business Association, “One in four individuals in the total U.S. population is part of the small-business community.”1 Since so much of the population relies on small businesses, we want to help small business owners learn how to qualify for a startup business loan.

While money can’t buy happiness, it sure can provide peace of mind when your blooming startup business has enough working capital to get by. But as anyone living on a budget knows, money can dissipate quickly. But if you’re smart about how you spend and save money, a loan can provide you with much-needed financing to really help you get off the ground.

Learning how to get a startup business loan can feel overwhelming, especially because you have to prove that you’ll meet the loan requirements and are worth the risk despite your burgeoning business. But if you can explain exactly why you need a loan, how you’re going to use it, and how you’re going to repay it, you can qualify. Easier said than done, right? We’ll walk you through the steps to make the doing part a little easier.

Create a business plan.

Think of this as the roadmap to your business’s success—including all of the business financing you’ll need to succeed. Having a plan that covers how you’ll fit into a market, attract customers, make money, etc. can help lenders see how their loan fits into your business needs. And be sure to show your working capital, market growth potential, and revenue plans since lenders are most interested in the money. Make it as detailed as you can to help show that you’re going to be a good borrower.

Itemize your business costs.

This sounds simple enough, but it actually requires meticulous detail. You have a lot of startup business costs to consider, after all. Some recurring costs include things like rent, utilities, salaries, employee benefits, supplies, and any other materials, services, items, etc. that you need. You’ll also need to look at one-time costs like conducting market research, outside training, consultant fees, office furniture, etc. And it’s important to look at hidden costs so that nothing gets left behind. Like does the company pay for Joanne’s lunch? Or stock the vending machines? Or provide coffee? These may seem like simple, benign details but those charges can quickly add up. You want to ensure that you’re both careful with your money and that you know how much money to ask for when applying for funding.

Prove you qualify for a loan.

You’ve pitched why someone should give you money. Now you need to give some proof to back up your plan. Lenders want to see your working capital, revenue, sales history, and any other cash flow. They’ll also consider things like personal and business credit scores, debt-to-income ratio, time in business, collateral, and personal assets. The more you can show, the better. They want to ensure you can repay the loan.

Your business credit

Did you know that your business has a credit score? Building business credit can help you more easily secure funding in the future.

Determine the type of loan you need.

So you’ve finished your business plan and are ready to prove you’ll be an ideal borrower. Now it’s time to be choosy with the type of loan you apply for. You want to ensure you can meet the loan terms, after all. The good news? There are many business loans for startups.

If you’re able to qualify, apply for a traditional loan through a bank because you’ll likely get the best loan rates. However, it’s difficult for startup businesses to qualify for a traditional bank loan. So if your bank is a no-go, consider some alternatives, most often provided through online lenders. These alternatives can also help you build your business credit—just make sure that your loan reports to the Big 3 (that is, the credit agencies). If your loan and payments don’t show up on your credit report, you won’t build your credit. And that would be a shame.

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SBA Loans

SBA startup loans (that is, loans backed by the Small Business Administration) offer competitive rates for those who qualify. They offer an SBA microloan program, disaster relief, long-term loans, real estate loans, equipment financing, and more. But their qualifications are strict: you’ll need at least two years in business, $100,000 in annual revenue, and a minimum credit score of 680. Plus, you must have exhausted other financing options. But their low interest rates and favorable terms make them worth the application if you can qualify.

Cash loans

When you need financing for a variety of needs, a cash loan may be your best option. While alternative loan providers can provide you with much-needed money, their loans often come with high interest rates, especially if you have bad credit. However, if you’ve got a plan to repay the loan, the cost could be worth it if it helps you grow the business. You could also consider taking out a microloan to improve your credit report so you get better rates in the future.

Peer-to-peer lending

With peer-to-peer lending, you get money directly from investors, usually through a third-party website. You still pay interest and it works much like a term loan, but they’re often easier to qualify for.

Invoice factoring

Do your cash flow troubles come from unpaid invoices? If so, invoice factoring can be a good financing option because the loan is paid off when your borrowers pay their invoices. It’s an attractive financing option for people with bad credit because a lender will consider the creditworthiness of those who owe you money when determining whether you qualify for the loan. Just remember that you’ll be responsible for any invoices that aren’t paid, so have a plan B in place in case your delinquent accounts fail to pay up.

Lines of credit

Lines of credit are similar to credit cards in that you get approved for a loan amount and then you only pay off what you use. So you can get money when you need it without borrowing unnecessarily. It’s a great option for those who aren’t sure how much financing they’ll need.

Equipment financing

This type of loan can apply to a variety of equipment from heavy machinery to outfitting an office. Equipment financing often has more attractive interest rates, especially if your equipment is valuable, because the equipment itself acts as collateral for the loan. Bonus: they may offer lower interest rates than other online lending platforms.

Merchant cash advance

Merchant cash advances (MCAs) can be a good financing option if you’re really strapped for cash and you sell goods. MCA lenders take a percentage of your sales to help pay back the loan. But MCAs have extremely high APRs, so only use them for short-term loans and consider other alternatives whenever possible.

Real estate loans

Commercial real estate loans tend to have lower interest rates if you have good credit (and you probably shouldn’t apply if you have bad credit since they’re long-term loans). And you’ll want to be confident in your piece of real estate so you’re not financing something you won’t need before you finish your monthly payments.

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Find a Loan

Carefully choose a loan provider.

There are many alternative options for small business loans. These are some of our favorites from online lenders:

Best loan providers that accept businesses less than a year old

Lendio
Lendio
A marketplace with a smorgasbord of loans, Lendio is highly likely to have a loan option that fits your needs. And they lend to a variety of borrowers, including small business owners, startup businesses, and people with bad credit, so this is a great place to start your loan search.
BlueVine
BlueVine
Do you have unpaid invoices from other companies? Or do you want a flexible loan option? BlueVine offers lines of credit and invoice factoring at competitive rates. And they let you be in control of the loan and your relationships with the businesses who owe you money.
Kiva
Kiva
A crowdfunding nonprofit, Kiva provides microloans (up to $10,000) at 0% interest—yes, you read that right—to businesses. Their approach to funding is a bit unique. There’s no required minimum credit score, cash flow, or collateral. Rather, they assess your credit worthiness by your ability to raise money through your community, so your first few investors must be your own friends and family. Then your loan will be visible to Kiva’s worldwide lending network.
Prosper
Prosper
A personal loan company serving people with average and above-average credit, Prosper offers microloans ranging between $2,000 and $40,000. Obtaining a microloan can help you build your credit history without accruing lots of debt.
Accion
Accion
This nonprofit is all about helping small businesses get their feet off the ground. They offer business support in addition to providing loans, so they’re a great option for new businesses. Plus, they’ll still consider you for microloans if you don’t have a credit history.

Best loan providers that accept businesses more than a year old

OnDeck
OnDeck
Serving businesses with at least $100,000 in revenue and a year in business, OnDeck provides short-term loans to small business owners. They’re a good option for people with bad credit because they accept a 500 minimum credit score.
Kabbage
Kabbage
Offering revolving lines of credit, Kabbage serves businesses open at least one year with a minimum of $50,000 in annual revenue or $4,200 per month over the past three months. Plus, they’re friendly to businesses with bad credit.
LendingClub
LendingClub
This peer-to-peer lending platform matches investors with borrowers (although your loan is still handled through LendingClub). If you have a great credit score, they offer competitive interest rates, especially for an online lender.
SmartBiz
SmartBiz
Looking for an SBA loan? SmartBiz streamlines the application by matching you with lenders who offer SBA-backed loans. It’s a simple way to see if you qualify for an SBA loan.

Consider alternative funding options

Business credit cards

Like lines of credit, business credit cards can help you have a flexible cash flow. To qualify for a business credit card, you’ll need a good personal credit score and a good debt-to-income ratio (traditionally 36% or less)—at least if you want competitive rates. Most business credit cards require that you give a personal guarantee on the card to act as collateral. To improve your business credit report, ensure your credit card company reports to the credit agencies and that you pay the balance from your business account.

Venture capital

Venture capitalist firms finance startup businesses with high potential in exchange for future equity in the company. Venture capitalists take on a lot of risk working with startups, but they also have the potential to get great rewards if the company really takes off. Venture capitalists also can have a lot of control in the company, which is a double-edged sword. On the one hand, they can be invaluable mentors. On the other hand, you may lose more control than you’d like since they’re the ones controlling the purse strings.

Crowdfunding

Different types of crowdfunding sites can help you secure funding without interest. With equity crowdfunding, people invest in your business in exchange for equity in the company. Rewards-based crowdfunding often goes through crowdfunding platforms like Kickstarter and Indiegogo, and they usually work best for niche markets, businesses who already have a base, and artistic pursuits. Donation-based crowdfunding, often done through platforms like GoFundMe, is usually most successful for non-profits and don’t often result in a lot of money.

Angel investors

Angel investing is similar to venture capitalism where someone invests in your business in exchange for equity or shares. It can be difficult to find an angel investor—the qualifications to become one are pretty strict—and, like with venture capitalists, you run the risk of finding someone who may take a lot of control of the company. But they can also be a great source of cash flow and may provide some valuable advice.

The takeaway

While finding financing can feel daunting, having a detailed plan can help you be better equipped to qualify for a loan, find the loan that best matches your needs, and follow a payment plan. With your much-needed funding, you can take your startup to great places.

Do you have experience getting a startup business loan? Tell us about it in the comments!

Disclaimers

At Business.org, our research is meant to offer general product and service recommendations. We don’t guarantee that our suggestions will work best for each individual or business, so consider your unique needs when choosing products and services.

Source

  1. National Small Business Association, “2017 Year-End Economic Report”