How to Get a Loan to Start a Business: What to Know About Startup Loans

How to Get a Loan to Start a Business: What to Know About Startup Loans

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Getting a startup loan for your small business is not easy, but it is possible. We'll cover and give examples below of what you need to do to prepare for the loan application process, what to do if you’re rejected and what alternative financing options are available.

How to apply

As with many things in life, preparation is key for a successful loan application — particularly if you are starting a business. We outline some of the steps you'll need to take to get ready to apply:

  • Prepare a detailed business plan.
  • Demonstrate your relevant industry and management experience.
  • Get your personal finances and credit in order.
  • Be prepared to offer collateral, a personal guarantee or a cash down payment.
  • Detail what the loan will be used for.
  • Register your business and get the appropriate licensing.
  • Choose a bank or lender you have a relationship with.

Prepare a detailed business plan

Your business plan can be a make-or-break to your loan application. When writing a business plan, include the following elements:

  • An executive summary
  • A company overview
  • Description of products and services
  • Market and competitor analysis
  • Marketing and sales strategy
  • Overview of the management team
  • Detailed financial forecasts

A good business plan should make it easy for your lender to approve your application and give you funds. To get help with writing and refining your plan, new entrepreneurs can consult with local chapters of business associations, such as SCORE or a Small Business Administration (SBA) regional office near you. You may also want to consult a CPA for help in determining your business structure and in preparing or reviewing the financial forecasts.

Show your relevant industry experience

In your business plan, you’ll want to give a detailed explanation of your relevant industry and management experience (and your business partners’ experience, if you have any). You need to make the case to your lender that you and any partners are able to start and grow this new enterprise. To support this, you should prepare resumes for all principals of the new business. If possible, get references from former colleagues or other community members who can speak to your relevant experience.

Get your personal finances and credit in order

Because you don’t have a business yet, your bank or lender will want to take a look at your personal credit report. Check your credit report yourself and take care of any problems first. Banks want to see borrowers with good credit scores who have a mixture of credit and loan accounts (such as credit cards, loans, mortgages, etc.) and several years of credit history. Your credit report will be a big factor in determining whether you can even qualify for financing.

Be prepared to offer collateral, personal guarantee or a down payment

You should be prepared to put up collateral, make a personal guarantee or provide a cash down payment — or all or some combination of the three. Because you won’t have business assets to pledge as collateral, you may be asked to use personal assets, such as your home, vehicles or savings, and/or make a personal guarantee that you’ll repay the loan in the event the business cannot. What’s more, these pledges may be combined with a 10% or more cash down payment on the loan. Startups are risky, so banks want to see that entrepreneurs have some skin in the game, so to speak, to reduce the risk that their money will be lost if the business fails. So if you’re asking for $100,000, a lender may expect you to pony up $10,000 of your own money for the loan.

Detail what the loan will pay for

Most new entrepreneurs make the mistake of not accurately estimating how much money they need. To combat this, make a detailed list of what you intend to use the loan to pay for and how much each line item costs. You should be as specific as possible. For instance, if you plan on purchasing inventory, detail the exact type of inventory and how many units you will need of each type. You can also include the price per unit in your estimates. Be sure to share this list with your lender as it will help your application get approved.

Register your business

Get your business registration, licenses and permits before applying for a loan. You’ll need to file and pay for these licenses, permits and registration through your state government. Generally, you can fill out these applications online.

Choose a bank or lender you have an existing relationship with

Never underestimate the power of an existing relationship when you apply for a loan. An institution who knows you will be all the more likely to work hard to get your application approved, or push their committees for exceptions. We recommend applicants start with the bank, credit union or other lender they already use. If that’s not an option, see if you can get referred to another lender through a mutual connection.

Types of startup business loans

Startup business loans may focus on a specific purpose. Here are some common examples:

SBA 7(a) loans

The Small Business Administration works with financial institutions to help guarantee business loans for various small business types all across the United States. These loans are generally for businesses within the U.S., are for-profit businesses, have invested personal equity in the business and have exhausted other funding options.

Offering loans of up to $5 million and featuring low interest rates, the 7(a) loan program is the most popular type of financing offered by the SBA. With a required down payment of 10% to 20%, though this may not be a realistic option for most startups.

Equipment financing

Equipment financing may be an option for businesses looking to purchase equipment to start a business. The equipment you finance serves as collateral on the loan. This can be beneficial because you don’t have to offer up your own collateral, but it does mean the lender could seize the equipment if you default. Usually these loans are repaid over a fixed amount of time with fixed interest but they do require a down payment.

Business line of credit

A business line of credit could be ideal for startup businesses that aren’t sure just how much funding they need, or those that need an ongoing amount of money. These loans offer access to a lump sum of money to draw on when they need to. Typically, borrowers then only pay interest on the money they actually draw from the line of credit. Additionally, once that drawn amount is repaid, the line of credit replenishes to the original amount.

Business credit card

A business credit card is a good option for businesses just starting out. These credit cards are some of the easiest funding to get. But remember, credit cards come with high fees and you should only spend what you can quickly repay to avoid debt and steep interest.

What to do if you’re rejected for a startup loan

If you’re rejected, ask your banker or lender why. Most banks are willing to share the reasons why your business loan application was rejected. In many cases, the reasons for your rejection are fixable — something like a poor business plan or a lack of collateral can be remedied.

In other cases, when the solution isn’t so simple, consider asking your lender if you are eligible for other types of financing, such as contract, equipment or accounts receivable financing. Perhaps your bank will loan you money once you receive a contract from a client or once you commit to purchasing certain equipment or vehicles.

Finally, consider finding another lender or bank. Just because your loan application doesn’t fit into a bank’s lending portfolio doesn’t mean that another bank won’t approve your application. Many times, it’s a matter of finding a bank that wants to work with borrowers like you.

Alternative startup financing options

If a traditional loan is not an option, here are some alternative startup financing options to consider.

Financing Option
Pros
Cons
Personal savings
  • Debt- and interest-free
  • Avoid giving up equity in business
  • Risk losing your savings if business fails
  • May not be enough to cover startup costs
401(k) financing
  • Debt- and equity-free way to start a business
  • Avoid tax penalties on withdrawn funds
  • Can lose retirement savings
  • Increased chance of being audited by IRS
  • Third-party provider fees
Nonprofit or SBA microloan
  • Startup-friendly
  • Less strict eligibility requirements
  • Low loan amounts
  • Can have higher interest rates
Loan from family and friends
  • Low or no interest
  • Can be a good option for entrepreneurs who have exhausted other avenues
  • Risk ruining personal relationships if you can’t pay back the loan
  • May not be enough to cover startup costs
  • Potential tax implications for lender
Personal or business credit card
  • Sign-up bonuses or rewards
  • Earn cash back or points on purchases
  • No interest if paid off in full every month
  • High APRs if you cannot pay in full
  • Low credit limit compared to traditional financing
  • Will affect your personal credit score
Personal loan
  • Typically unsecured
  • Loans may be easier to obtain than business loans
  • Low loan amounts compared to business financing
  • Need a good personal credit score to qualify
  • Will affect your personal credit score
Reward-based crowdfunding
  • Great for consumer products and creative projects
  • Gain brand recognition and marketing
  • No collateral, personal guarantee or credit check
  • Difficult to raise more than $100,000 to $300,000

Startup business loans FAQs

How do you apply for a startup loan?

If you’re looking for a startup business loan, consider online lenders who often have more lenient requirements about credit, time in business and annual revenue than traditional, brick-and-mortar banks.

Are there business loans for bad credit?

Securing a business loan with bad credit may be more difficult, but it is not impossible. Some lenders may examine more than your credit history when considering whether to grant you financing, but be prepared to pay higher interest rates.

Does the SBA give loans to startup businesses?

SBA microloans are designed for new or existing businesses with limited access to traditional funding avenues. Offering loans up to $50,000, SBA microloans may be a good option to fund startup business costs. Microloans cannot be used to purchase real estate or refinance existing debt, though.