What is a startup business loan?
Startup business loans are a type of financing specifically designed for startup businesses. Many traditional lenders won’t fund startups because they are considered to be more risky than other loans. Startup loans may have higher rates, require higher credit or request high-value collateral.
What is a startup business?
Generally speaking, a startup business is one that’s in the early stages of its development and is focused on growth. That includes both businesses that haven’t started operating yet and businesses that have been operating for several years. Most banks and traditional lenders want to see at least two years in operation for a business loan – and may consider anything under two years to be a better fit for startup financing.
Here are some of the most common types of startup loans.
SBA loans
The U.S. Small Business Administration’s microloan program is startup-friendly, offering loans of up to $50,000 for small businesses looking to start or expand. The average SBA microloan in the fiscal year 2022 was $16,340.
Microloans
Because these startup loans often come from mission-based organizations, the terms will likely be better than you would receive from a private lender, making it possible for you to grow your business and establish better credit. That can help you qualify for other types of financing down the road.
Online business loans
Personal business loans
Personal loans can have high annual percentage rates (up to 36%), especially for bad-credit borrowers. That means this type of startup business loan is best for borrowers with excellent personal credit and strong income.
Revenue-based financing
How to qualify for a startup business loan
Check your personal finances
Assess any available collateral
It can also be helpful to offer substantial collateral, even when it’s not required. In general, anything you can use to show your creditworthiness and ability to repay the financing will help you qualify for a startup business loan — as well as help you access more competitive rates and terms.
Demonstrate strong business data if you have it
Putting in the time and effort to create financial projections not only gives a lender an idea of your business’s potential, but it also demonstrates that you are serious about your business. If you’ve already started your business, your lender will most likely request financial statements or bank statements as well.
How to get a startup business loan
The process for getting a startup business loan will vary based on the type of funding you choose, as well as the lender or financial institution. In general, however, you can follow these steps to get a loan for your new business.
1. Determine what kind of financing you need
2. Evaluate your credentials
Next, you’ll want to review common eligibility criteria, so you have a sense of where you stand before applying. If you’ve already started your company, you’ll want to consider your time in business, credit score and revenue.
On the other hand, if you’re working on launching your business, you’ll want to focus more heavily on your personal finances in addition to your credit score.
3. Research and compare lenders
You should research several lenders in order to find the right fit for your startup business. Ideally, you’ll want a lender who can provide the financing you need, as well as offer competitive rates and terms. You should also be able to meet the lender’s eligibility requirements.
As you compare different options, you should think about factors such as loan types, interest rates, repayment terms, fees, the application process, funding speed and lender reputation.
4. Gather documents and submit your application
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Basic information about you and your business.
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Business licenses or formation documents.
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Personal and business bank statements.
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Personal and business tax returns.
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Financial statements, such as balance sheets and profit and loss statements (if your business is already operating).
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Cash flow projections.
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Collateral information.
5. Review your options
If you have any questions or concerns about the document, you should contact your lender for clarification before signing.
What to do if you can’t get a startup business loan
If you’re having trouble qualifying for a startup business loan, there are a few steps you can take to help your chances of getting approved.
Take time to improve your personal credit
Find a cosigner
Look for alternative options
You may not be getting approved because your lender isn’t accustomed to working with businesses in your industry or in your stage of growth. Make sure you’ve shopped around to see if there’s a better fit for your business. You can also consider alternatives to loans altogether, like grants or crowdfunding.
Alternatives to startup business loans
If you can’t qualify for a startup loan, or are wary of taking on debt to start out, there are other options available to help you start and grow your business.
Grants
Friends and family
In these situations, the potential cost of failure isn’t just financial; it’s personal.
Trim your list of friends and family to those who understand your plans, and do your best to make certain they’re comfortable with the risks involved.
Credit cards
Let the balance linger and interest charges will pile up, however, quickly turning your credit card into an expensive small-business loan.
The APRs on your business credit card are based largely on your personal credit scores. If you have poor personal credit, you’ll have a higher interest rate.
Crowdfunding
Crowdfunding is a great funding option for business owners who want to test out their product or service with a customer base and gauge the response without having to take on debt.