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Getting a business loan is more challenging for startups than for established businesses—but it’s still possible. New business owners can improve their approval odds by choosing the right type of financing, familiarizing themselves with their credit scores and identifying the most competitive lending options available. Here’s how to get a startup business loan.
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1. Evaluate What Kind of Loan You Need
Many small business owners opt for financing through traditional banks and credit unions. However, there are several types of business financing that can help startups get off the ground. Common types of startup business loans include:
- Online term loans. Term loans are generally issued by online and traditional lenders, and involve a bank extending a lump sum of cash, repaid over a set period of time, at a set interest rate. Annual percentage rates (APRs) on the best small business loans start around 9%, and maximum limits typically extend from $250,000 to $500,000. That said, startup owners may not qualify for the highest loan amounts and most competitive interest rates.
- Business lines of credit. With a business line of credit, a lender extends funds up to a certain amount and the business owner can access the financing on an as-needed basis. Interest only accrues on the portion of the credit line accessed from month to month. Furthermore, the borrower can access funds repeatedly after making payments during the draw period.
- SBA 7(a) loans. The 7(a) loan program is offered through the U.S. Small Business Administration (SBA) and extends business loans up to $5 million to eligible applicants. Funds can be used to cover working capital, equipment purchases and business expansion expenses, and interest rates range from 2.25% to 4.75% plus a base rate.
- SBA Microloans. SBA Microloans are available to eligible business owners up to $50,000. Loans are typically offered to startups in disadvantaged areas and to those owned by minorities and women. Repayment terms may be as long as six years, with interest rates ranging from 8% to 13%, depending on the lender.
- Asset-based financing. Asset-based financing is a form of secured business financing that lets startup owners borrow against valuable assets like inventory, machinery and equipment, accounts receivable and real estate. This type of financing is less risky for lenders, so the terms are often more competitive than other types of loans. However, secured financing means the bank can repossess the collateral if the borrower defaults.
2. Check Your Business and Personal Credit Scores
Lenders evaluate an applicant’s credit score to gauge the amount of risk they pose. Applicants with a higher credit score are more likely to make on-time payments and, therefore, have higher approval odds. Business credit scores are typically available after six months to one year of operations, so new businesses may not have one, especially if the startup is brand new.
That said, loans are often personally guaranteed—meaning the borrower legally agrees to repay the debt with their personal funds if the business fails to repay—so lenders also look at the applicant/business owner’s personal credit score.
Prepare for the application process and gauge your approval odds by requesting copies of your business credit reports and checking your personal credit score before applying for a loan.
3. Gather and Prepare Required Documents
The exact documents required to get a business loan vary by lender. However, there are some documents that most lenders use to assess and verify an applicant’s identity and a business’ existence. For example, lenders often request tax returns going back at least two years, as well as financial records like bank statements, accounts receivable, credit card sales and outstanding invoices from the past four months—at a minimum.
As a startup founder, you can also improve your approval odds by drafting a comprehensive business plan. This can demonstrate to lenders that the business is financially stable enough to repay its debts based on future revenue and expense projections. Lenders also may request copies of business licenses and registrations applicable to your business or industry, as well as banking information for direct deposit.
4. Research and Compare Lenders
Depending on your personal and business qualifications, you may qualify for a startup loan through multiple lenders. To identify the best startup business loans for your needs, consider these factors when comparing lenders:
- Annual percentage rates. In general, business loan APRs start around 9%, but rates may be higher for startup business loans, and they can even be lower for the most qualified applicants. Visit each lender’s website or contact a customer support representative to determine available APRs.
- Fees and other costs. Business lenders often charge origination fees ranging from 3% to 5% of the total loan amount to cover the costs of handling paperwork and verifying application information. Others also charge prepayment penalties for borrowers who pay off their loans early or late payment fees for those who miss their due date. These fees can increase the overall cost of borrowing, and some lenders eliminate them to remain competitive.
- Lender reputation. Even if a lender looks good on paper, take time to read online reviews to evaluate its reputation among current and past borrowers. Likewise, reach out to other members of your business community to learn about others’ experiences with the financial institution. Consider choosing another lender if your research reveals any red flags, like negative customer support experiences.
5. Submit Your Application
Once you choose a lender, familiarize yourself with its application process and make sure you compiled the correct documentation. Application and underwriting processes tend to vary by lender, so look into whether you can apply online or via telephone—or if you’ll need to visit a branch. After you submit your application, a lender representative may contact you to request additional documentation such as proof of collateral or further financial records.
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What If I’m Rejected for a Startup Business Loan?
If you’re rejected for a startup business loan, there are a number of things you can do to fund your new business. Start by contacting the lender directly to find out why your application was rejected. This information can provide insight into changes you can make to improve your credit profile and future approval odds. Then, continue to develop your business’ finances until it is established enough to qualify for a startup business loan or other financing.
If you don’t have time to improve your credit score or build your business before reapplying for a business loan, consider an alternative form of financing.
Startup Business Loan Alternatives
Startup business loans can help cover the costs of getting a new venture off the ground—or growing it into a larger operation. However, strict qualification requirements can make it difficult to get a traditional business loan. These are some popular startup business loan alternatives.
Business Credit Cards
Business credit cards let business owners access financing on a revolving, as-needed basis. Funds can be used for a wide range of purposes—including everything from buying furniture and other office supplies to larger purchases like equipment—and the application process is more streamlined than for business loans. Because lending decisions are based solely on the borrower’s personal credit score, it’s often easier to qualify for a business card than a loan.
APRs range from around 13% to 25%, but some cards offer introductory 0% APRs that let business owners make interest-free purchases for up to two years. What’s more, cardholders only pay interest on unpaid balances that carry over to the next billing cycle. So, credit cards can help startups cover monthly operating costs while avoiding interest.
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Personal Loans for Business
Startup founders who are unable to qualify for a business loan may have better luck applying for a personal loan. Not only is the application process often less rigorous than for business loans, but personal loan qualification requirements are also generally less robust.
And, while loan amounts may be lower than those available through business lenders, qualified applicants may qualify for lower APRs with a personal loan than a business loan—as low as 3% for the most creditworthy applicants.
These characteristics make personal loans an excellent option for startups without established revenue or financial projections. However, some personal loan lenders don’t allow borrowers to use funds for business purposes, and borrowers are personally liable for repaying personal loans—though this is also the case for many business loans. Finally, commingling business and personal loan funds can complicate bookkeeping, tax and legal matters.
Related: Best Personal Loans
For some, borrowing is not the only way to finance a new business. Business owners who have sufficient personal savings can use those funds to start or grow their businesses. Not only do personal savings eliminate the need to pay origination fees and interest, but using cash to finance a startup can help a business owner avoid giving equity to investors.
That said, investing personal money can be a risky move and may result in a business owner losing their savings if the business fails. Many startup founders also lack the spare cash to invest in their ventures—much less enough to start or grow a business without additional funding.
Friends and Family
Alternatively, startup owners may consider borrowing money from friends or family to get their business off the ground. Borrowing cash from family eliminates the need to meet traditional qualification requirements, but the approach does come with its own challenges. Before asking someone for a loan, a business owner should consider whether they’re comfortable entering into that kind of relationship.
Borrowing money from friends and family can complicate existing relationships, so it’s important to ensure all parties understand the terms of the loan. To reduce future conflict, startup founders should get the loan agreement in writing, including the loan amount, interest rate, repayment terms and other factors.
Crowdfunding offers startup founders a way to raise funds for their business without having to borrow from a traditional financial institution or friends and family. Business owners can start a crowdfunding campaign using an online fundraising platform like Kickstarter or Indiegogo.
Once the campaign is set up, users can donate funds that become available to the business at the close of the crowdfunding round. The business owner doesn’t need to meet any traditional qualification requirements, and donors do not receive any business equity in exchange for their generosity.
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Frequently Asked Questions (FAQs)
Is it hard to get a startup business loan?
Getting a startup business loan can be more difficult than getting approved for financing as an established business. This is because most lenders gauge their risk of borrowing based on the financial stability and history of an applicant’s business. When considering a new business’ application, financial institutions must instead base lending decisions on business plans, revenue projections and other theoretical information.
Therefore, it is imperative that startups take time to draft a comprehensive business plan that demonstrates their ability to make on-time debt payments. Startup owners also can increase their approval odds by waiting to apply for a loan until after they can demonstrate established revenue.
How do I qualify for a business startup loan?
Lenders typically look at a business owner’s personal and business credit scores to evaluate whether they qualify for a business startup loan. Many startups, however, are too young to have an established credit score, and financial institutions must rely solely on the applicant’s personal score.
In addition to credit scores, lenders look at a range of documents to gauge the business’ financial stability and the risk of nonpayment it poses. Common requirements include tax returns and other financial records, as well as a business plan and necessary business licenses, registrations and legal documents.
Is it possible to get a startup loan if I have bad credit?
It is possible to get a startup loan with bad credit, but it’s more difficult than for better-qualified applicants. Prospective borrowers can bolster their loan applications by developing a comprehensive business plan that specifies how the company plans to make money and describes the business’ marketing strategy. Some financial institutions also specialize in lending to low-credit borrowers, but these loans may come with higher interest rates and origination fees.