How to get a startup business loan? The number one barrier for entrepreneurs trying to launch their new business is gathering the necessary funds. In fact, getting the funding is often much more difficult than launching the product itself. One of the most obvious ways to fund your startup is by getting a startup business loan from a lender.
While you might have experience in getting personal loans, learning how to get a startup business loan is a totally different process. As a startup owner trying to apply for a business loan, it can be overwhelming to figure out where to start and how to successfully get the loan. So in order to help any startups out there that are trying to get a startup loan, we have created this step-by-step guide to help you on your journey.
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Here is the content that we will cover in this post. Let’s get started.
- 1. What exactly is a startup business loan?
- 2. What factors do lenders consider when issuing a startup loan?
- 3. How to get a startup business loan?
- 4. Have a solid business plan ready
- 5. Make sure you have a decent credit score
- 6. Select the right type of startup business loan
- 7. Online term loans:
- 8. Cash advance:
- 9. Credit lines for businesses:
- 10. Make sure you have the required documentation:
- 11. Choose the right loan and lender
- 12. Annual percentage rates:
- 13. Costs other than fees:
- 14. Lender reputation:
- 15. Placing your loan application:
- 16. What if you fail to qualify for a startup business loan?
- 17. Personal loans
- 18. Personal Savings
- 19. Family and Friends
- 20. Crowdfunding
- 21. Conclusion
What exactly is a startup business loan?
A startup business loan typically refers to any business purpose debt funding that is used to establish or expand a startup. Because there are so many difficulties that might develop during the early phases of launching a company, it is essential that entrepreneurs have access to financing.
There is a reason why there are many different loans available to start a business. Not to mention it’s considerably difficult for entrepreneurs to obtain startup loans from banks.
Loans for new businesses are frequently used for things like buying goods or equipment, and other recurring costs, as well as marketing, hiring, and expansion. The purpose of the loan generally influences the amount of loan that you should seek. And, how you intend to pitch to investors.
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What factors do lenders consider when issuing a startup loan?
A variety of variables affect a lender’s decision to lend money to a startup, but ultimately it comes down to the lender and the startup borrowing the money. When it comes to who and what kinds of businesses they would lend to, some banks and lenders are much more restricted than others. It undoubtedly helps to have a solid relationship with your bank, but in the end, lenders usually look at the following factors when deciding whether to lend money to a startup.
- Capital: Lenders prefer to see companies with assets that have the potential to generate a profit. In addition, the capital of a startup can then be used to make loan payments. It is much easier to get a loan when you already have money in the bank and don’t really need it.
- Collateral: Startups may be able to use equipment, other personal belongings, a co-signer, or other means to secure a loan. The better the collateral the easier it is for lenders to lend money to a startup.
- Cash Flow: Some lenders are looking for cash flow when deciding to lend to a startup. However, this refers to the company having a track record of money pouring into the business and doesn’t directly apply to brand new startups.
- Credit: Credit is one of the most important factors that allow you to get in the good books of your lender. So ultimately, one of the most crucial criteria a lender will consider to assess your application is having a great business credit rating. In lieu of this, you may sign a personal guarantee if the founders have great personal credit. Though this is risky.
How to get a startup business loan?
Now that you know the basics, you are ready to actually take the steps of getting a startup business loan. Just like a personal loan or a mortgage, a startup business loan involves going through various stages. So, without further ado, here are the different steps that you need to follow if you want to get a startup business loan.
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Have a solid business plan ready
Consider this your business’s game plan, which has the details about all the financing it will require to prosper. Use the business plan to provide as much information as you can to demonstrate that you will be a responsible borrower.
Lenders can better understand how their loan fits the needs of your business if you have a plan that outlines how you’ll enter the market, approach consumers, and most importantly make money. Since lenders are mainly concerned with the money, you should focus on explaining your working capital, market development potential, and revenue goals.
Make sure you have a decent credit score
Lenders assess a potential borrower’s credit score to determine how much risk the borrower poses of not paying back in case they lend the money. Higher credit scores increase the likelihood of acceptance for startup business loans because companies with a higher credit score are more likely to make payments on time.
New businesses might not have a credit score since business credit scores are normally available after six months to one year of operations, especially if the startup is brand new.
As a result, lenders typically consider the applicant’s or business owner’s personal credit score when evaluating their application. Loans are frequently personally guaranteed, which means the borrower legally undertakes to repay the debt with their personal funds if the business is unable to do so.
Before you apply for a startup business loan, get copies of your business credit reports and check your personal credit score to get ready for the application process and assess your chances of acceptance.
Select the right type of startup business loan
Small business owners frequently choose to obtain funding from conventional banks and credit unions. However, there are a number of business finance options that can be considered by startup owners. Popular types of loan options for startups include.
Online term loans:
Term loans often come from online lenders and involve a bank providing a lump sum of money that is meant to be repaid over a predetermined period of time at a set interest rate. However, new business owners might not be eligible for larger loans or the lowest interest rates.
A cash advance, merchant, or factoring loan might be your best choice if you require finance for covering a variety of business needs, and have an established track record of revenues. Although alternative loan providers may be able to give you the money you need, their loans frequently have exorbitant interest rates, especially if your credit is poor. However, if you have a strategy for paying back the loan fast, the expense might be justified since it allows you to expand your company quickly.
Credit lines for businesses:
A business line of credit allows the owner to acquire finance as needed from a lender who offers credit up to a certain amount. Only the percentage of the credit line that is used on a monthly basis is subject to interest.
Make sure you have the required documentation:
Each lender has different specific requirements for business loan applications. The majority of lenders do, however, rely on a few specific documents to evaluate and confirm the identity of applicants and the legitimacy of businesses.
For instance, lenders frequently ask for financial documents such as bank statements, accounts receivable, credit card transactions, and outstanding bills from the previous four months, at the very least.
They also frequently ask for tax returns going back at least two years. A thorough business plan can help startup founders increase their chances of getting funding. Using projected future revenue and spending data can show lenders that the startup is financially secure enough to pay back its obligations.
Additionally, lenders could ask for copies of any business permits and licenses that are pertinent to your line of work as well as your banking details for direct deposit.
Choose the right loan and lender
There are many lenders that you can potentially get loans from for starting a business. Here are some things to think about when picking a loan:
Annual percentage rates:
In general, annual percentage rates for business loans can vary widely. Rates may be far higher for some applicants once you get a real quote. Visit each lender’s website or call to find out what rates are really available.
Costs other than fees:
Origination fees can be several percentage points of the total loan amount. So you should consider these fees when choosing a loan. They are used to cover the costs of processing paperwork and checking the information on the loan application. Others charge penalties to people who don’t pay off their loans before the due date or late payment fees to people who don’t pay on time. These fees can make the total cost of borrowing more expensive, so make sure the loan you choose has these costs as low as possible.
Even if a lender seems promising, you should take the time to research them and find out how current and former borrowers feel about them. In the same way, talk to other entrepreneurs in your area to find out what they think of the lender you are dealing with. If your research turns up red flags, like a bad reputation, you might want to choose a different lender.
Placing your loan application:
Once you have gone through all the above-mentioned steps, you are finally ready to officially apply for your startup business loan. Now keep in mind that each lender may have a different loan application process. So you must do some digging to know about the specifics of their loan application process.
In addition, you should make sure that you are ready to answer any additional questions the lender may have at the time or prior to placing the application to increase your chances of securing the startup business loan.
Would you like more detailed information on the various sources of funding for your new business? Check out this video I have created that you’re sure to find helpful.
What if you fail to qualify for a startup business loan?
If your startup business loan application gets rejected by multiple lenders or you simply don’t meet the loan qualification criteria, it’s not the end. You can use alternative financing methods to fund your startup. Here are some financing options for startups other than startup loans.
If a startup’s founders can’t get a business loan, they might have better luck with a personal loan. Not only is it usually easier to get a personal loan than a business loan, but the requirements for getting one are also usually less strict.
Even though the amount of a personal loan may be less than what a business lender can offer, qualified applicants may get lower interest rates with a personal loan than with a business loan.
Personal loans are a great option for new businesses that don’t yet have a steady stream of income from their business. With that said, there is a drawback to using personal loans for your startup, mixing business and personal loan funds can make it harder to keep track of finances, pay taxes, and shield your personal assets from business lawsuits.
Some people don’t have to borrow money to start a new business. If a business owner has enough money saved up, they can use that money to start or grow their business.
Personal savings not only eliminate the need to pay interest and origination costs, but a business owner can also eliminate giving investors equity by launching a startup with cash.
Still, putting your own money into a business can be risky, and if the business fails, the owner could lose their savings. Many people who want to start a business don’t have any extra money to invest in it, let alone enough to launch or grow it on their own.
Family and Friends
Owners of new businesses could also borrow money from friends or family to get their business started. When you borrow money from family, you don’t have to meet the usual qualifications, but this method does have its own problems. Number one is that it can put a strain on relationships.
Crowdfunding gives people who want to start a business a way to raise money for it without having to borrow from banks or friends and family.
Being able to finance your winning idea is a success on its own for entrepreneurs. Startup business loans provide startup founders with the kickstart they need to turn their idea into something big.
By following the steps explained in this article, you can increase your chances of securing a startup business loan. Or you can always try the above alternative financing methods to fund your startup instead.
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