How To Get a Startup Business Loan In 5 Steps?

What Is Startup Business Loan?

A startup business loan is funding to meet the needs of a new business. It can help you cover the initial costs needed to start your new business, including things like working capital, real estate, equipment, supplies, and inventory.

A startup business loan is funding to meet the needs of a new business. It can help you cover the initial costs needed to start your new business, including things like working capital, real estate, equipment, supplies, and inventory.

Many consider the SBA loan programs to be the gold standard for business start-up loans. They offer large amounts of financing, long repayment terms, and low-interest rates, but often require six months to two years of operation and a 20% to 30% cash injection from the borrower. But the SBA isn’t the only path to success. There are other ways to get a business start-up loan if you don’t meet the SBA’s requirements.

MORE: What is a Business loan?

How can a startup loan accelerate my small business?

A start-up loan allows you to invest in your own business. Rather than giving equity to investors, a startup loan preserves your equity while also accessing the working capital your startup needs so you can move into those larger office spaces or order the inventory you need to fill those massive orders, who keep coming back.

MORE: How to Get a Business Loans?

How To Get a Startup Business Loan?

Getting a business loan is more difficult for startups than for established companies, but it is still possible. New business owners can improve their chances of approval by choosing the right type of financing, understanding their credit history, and identifying the most competitive lending options available. Here you can find out how to get a start-up loan.

How To Get A Startup Business Loan

#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:

I. SBA loans

The U.S. microcredit program Small Business Administration is startup-friendly and offers loans up to $50,000 for small businesses looking to start or expand. The average SBA microloan is about $13,000.

SBA microloans are administered by nonprofit community lenders and are typically easier to qualify than larger dollar loans. The downside: Funding may not be sufficient for all borrowers.

The SBA’s flagship 7(a) loan program also offers financing that allows borrowers to start businesses. But SBA 7(a) loans are harder to come by. The loans are usually to well-established companies who can post collateral, a physical asset like real estate or equipment that a lender can sell if you default. The eligibility requirements are strict, and even if you qualify, applying for an SBA loan can take several months.

II. Microloans

A microloan is also available outside of the SBA program, and microlenders and nonprofit lenders can be a less difficult avenue to access startup business credit, especially if you have shaky finances. Many of these lenders focus on smaller or traditionally underserved small business owners and small businesses in communities that are struggling economically.

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Because these startup loans often come from order-based organizations, the terms are likely to be better than a private lender, allowing you to grow your business and build better credit. This can help you qualify for other types of funding later.

III. Personal business loans

New small business owners can also access financing through personal business loans, such as those offered by online lenders. Personal loans are based on your personal credit history, making them a competitive option when your startup is too new to qualify for other business loans.

Personal loans can have high APRs (up to 36%), especially for borrowers with bad credit. This means that this type of business loan is best suited for borrowers with excellent personal credit and strong income.

MORE: How to Get A Personal Loan?

IV. Grants

Small business grants from private foundations and government agencies are another way to raise seed capital for your small business. These are not loans, which can make them difficult to get. But free capital could be worth the hard work for some new businesses.

For example, if you served in the US military, you can access small business grants for veterans. There are also small business grants for women.

V. Friends and family

Perhaps the most common way to fund a new small business is to borrow money from friends or family. Of course, if your credit is bad – and your family and friends know about it – you need to convince them that you can pay them back.

In these situations, the potential cost of failure is not just financial; it’s personal.

Reduce your friends and family list to those who understand your plans and do your best to make sure they are okay with the risks involved.

VI. Credit cards

Many entrepreneurs rely on business credit cards for startups as a means of financing. Use this opportunity as short-term financing for company acquisitions that you can quickly amortize.

Let the balance sit and the interest charges pile up, quickly turning your credit card into an expensive small business loan.

The effective annual interest on your business credit card depends largely on your personal creditworthiness. If you have bad personal credit, you have a higher interest rate.

VII. Crowdfunding

Crowdfunding has become a popular way for small businesses to raise money, thanks to sites like Kickstarter and Indiegogo that allow you to raise funds through online campaigns. Instead of repaying your donors, you give them gifts, which is why this system is also known as reward-based crowdfunding.

Avenues are also available for equity crowdfunding, where you tap a public pool of investors who agree to fund your small business in exchange for equity. With this type of crowdfunding, you can even reach mom-and-pop investors, and not just accredited investors.

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Crowdfunding is a great funding option for business owners who want to test their product or service with a customer base and measure response without going into debt.

#2. Check Your Business and Personal Credit Scores

Lenders assess an applicant’s creditworthiness to assess the risk they pose. Applicants with higher credit ratings are more likely to make payments on time and therefore have a higher chance of approval. Business credit scores are typically available after six months to a year of uptime, so new businesses may not have one, especially if the startup is brand new.

However, loans are often personally guaranteed, meaning that if the company fails to make the repayment, the borrower legally undertakes to repay the debt with their personal funds, so lenders also check the applicant’s/business owner’s personal creditworthiness.

Prepare for the application process and assess your chances of approval by requesting copies of your business credit reports and checking your personal credit history before applying for credit.

MORE: What is Credit Score and How to check it?

#3. Gather and Prepare Required Documents

The exact documents required for a business loan vary by lender. However, there are some documents that most lenders use to assess and verify an applicant’s identity and the existence of a business. For example, lenders often require tax returns that are at least two years old, as well as financial records such as bank statements, accounts receivable, credit card sales, and outstanding bills from the last four months.

As a startup founder, you can also improve your chances of approval by creating a comprehensive business plan. This can show lenders that the company is financially stable enough to repay its debt based on future revenue and expenditure projections. Lenders may also 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 can qualify for a start-up loan through several lenders. To determine the best startup business loans for your needs, consider these factors when comparing lenders:

  • Annual Percentage rate. In general, APRs for business loans start at around 9%, but rates can be higher for business start-up loans and even lower for the most qualified applicants. Visit each lender’s website or contact an account manager to find out the APRs available.
  • Fees and Other Costs. Business lenders often charge processing fees of between 3% and 5% of the total loan amount to cover the cost of processing paperwork and verifying application information. Others also charge prepayment penalties for borrowers who prepay their loans or late payment fees for those who miss their due dates. These fees can add to the overall cost of borrowing, and some lenders eliminate them to remain competitive.
  • Reputation of the lender. Even if a lender looks good on paper, take the time to read online reviews to assess its reputation with 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 a different lender if your research turns up red flags, such as: B. Negative experiences with customer support.
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#5. Submit Your Application

Once you have decided on a lender, familiarize yourself with the application process and make sure you have the right paperwork together. The application and underwriting processes typically vary by lender. Therefore, check whether you can submit an application online or by telephone or whether you have 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 other financial documentation.

What If I’m Rejected for a Startup Business Loan?

If you are rejected for a business loan, there are a number of things you can do to fund your new business. First, contact the lender directly to find out why your application was denied.

This information can provide insight into changes you can make to improve your credit profile and future chances of approval. Then, develop the finances of your business until it’s well established to qualify for a business start-up loan or other financings.

If you don’t have time to improve your credit score or build your business before you apply for a business loan again, consider an alternative form of financing.

Can I get a startup business loan with bad credit?

Startup loans are granted with special consideration of the personal creditworthiness of the entrepreneur. This is one of the aspects that make startup business loans such an accessible financing option for new businesses.

If you have a bad credit history, you can still qualify. Before committing to a startup loan, consider what has historically impacted your credit score. If you have a history of late payments, it is in your best interest to consider whether you can afford this loan and whether you can meet the payment schedule.

For those looking to build credit, a business credit card can be an excellent solution as it provides access to financing and the ability to build credit for your business – and you don’t have to use the capital.