How to Get a Startup Business Loan

A startup loan can be utilized for various things, including inventory purchases, staff hires, and equipment purchases. You may anticipate having the flexibility to utilize the funds for any business purpose unless your application specifies a specific asset that when purchased with the loan will serve as collateral.

Traditional loans are a popular way for entrepreneurs to get the capital they need to launch and expand their enterprises. Remember that if you provide a personal guarantee, you will be responsible for paying back the loan regardless of how well your business does. The startup financing loan is in-effect a personal loan.  

Borrowing for the Present and Future 

Startup companies require capital. It’s pretty uncommon for a new company to be profitable immediately after opening. The outliers are typically more directly related to working for oneself as a freelancer or contractor, rather than starting a company.

Funding should be regarded as necessary to launch a firm and to help it develop. For example, a conventional loan can give your startup the money it needs to finance operations, buy equipment, recruit staff, and to use these things to grow.

Getting a traditional loan can help companies develop a credit history and forge connections with lenders. It’s advisable to seek some level of traditional funding, even if you already have capital from other sources like family and friends. Future results from these connections may be helpful in the future when you need more capital to scale the business. 

Regardless, it’s crucial to thoroughly assess your available borrowing options, comprehend the terms and conditions, and ensure the loan is compatible with your long-term objectives and financial plans.

Types of Small Business Loans

Term Loans

The most popular kind of loan for small businesses is a term loan, frequently used to fund long-term initiatives like buying equipment, buying real estate, or expanding businesses. They are repaid over a predetermined period, typically one to ten years, and have fixed interest rates.

SBA Loans

Banks and other lending institutions provide SBA loans backed by the Small Business Administration (SBA). Compared to different kinds of small company loans, they offer better terms and lower interest rates, but the application procedure might require more time and effort. 

You may be surprised to learn that your bank is the first stop when looking for an SBA loan.  A personal banker, or business banker can help. 

SBA Microloans 

The SBA Microloan program offers up to $50,000 in funds to small businesses, including non-profits.  The Microloan program is facilitated through SBA intermediaries which are located in the community where the business is located.  Each intermediary has its own lending criteria and focus, in addition to the qualification requirements of the SBA. 

Credit Lines for Businesses

Businesses can often get a revolving line of credit which can be used to fill in cash flow gaps or pay for unforeseen needs. However, when a firm needs sporadic access to cash, this is also a flexible and affordable alternative because interest is only charged on the amount of credit used.  Your loan balance can go up during slow times (including seasonal lows) and be paid down during peak positive cash-flow periods.  

Equipment Financing

Equipment financing loans are made to pay for acquiring machinery, equipment, or other assets for businesses. The terms and fixed interest rates are designed to fit the anticipated life of the acquired equipment. Most sellers of machinery and equipment will be able to assist you with financing.  They may even have terms more favorable than you could obtain through a bank loan. 

Factoring for Receivables or Invoices

Factoring is a type of financing that lets you borrow against invoices that have been issued for sales, but not yet paid to you.  With this financing choice, companies can negotiate a lower rate when borrowing against their outstanding invoices, because they are generally considered lower risk to the lender.  The lender then obtains payment from the company’s clients, giving the latter an immediate cash inflow.  Some entrepreneurs don’t like the impression that this gives to their clients, particularly those that do not understand factoring as a lending strategy. 

Eligibility Requirements for Loans to Small Businesses

It’s not easy to get a business loan and in almost all circumstances–including with SBA loans, the borrower will be personally liable for repaying the loan, if the business cannot make its payments.  

Getting a loan on the best terms and conditions will be impacted by the items below. 

Credit Rating

Depending on the loan program, lenders may have a minimum credit score requirement for potential borrowers. For instance, the SBA’s 7(a) loan program requires applicants to have a credit score of at least 680.  That is your personal credit score, not a credit score for the business. 

Business History

Lenders would prefer to engage with companies that have been around for at least two years. Startups could need more proof of their ability to repay the loan, such as additional paperwork or assets and of course a personal guarantee.  

Cash Flow

Lenders will want to make sure that the company has enough cash flow to pay back the loan, which may entail looking over financial records and tax returns, if the business is already established. 

For startups, forecasting positive cash flow in a credible manner is important. Even with a personal guarantee, lenders want to know that your business is setup in a manner that payments can be made from the business. 

Collateral 

To secure a loan, some lenders may demand that borrowers provide collateral, such as property or machinery.  SBA loans often collateralize the things being purchased with the loan proceeds. 

Many lenders will want a personal guarantee that also involves collateralizing your home. Think long and hard about this.  Losing your home is a life-changing event causing stress long-term impact in every aspect of your life.  For collateral, try to exclude your home by using other items such as your car, boat, business property, and personal savings. 

Debt-to-Income Ratio 

This ratio compares the borrower’s debt obligations to their income and is something that lenders may consider. In general, a lower ratio is considered more positive. If you’re thinking about starting a business that will require financing, try to pay down your personal debt as much as possible. 

Getting Ready to Apply for a Small Business Loan

Determining the Loan’s Purpose

Understanding the loan’s objective while preparing to apply for a small business loan is critical.

The reason for the loan, or the reason the firm is looking for money, can greatly impact whether the lender decides to approve the loan application. 

Financing for startup expenditures, development or expansion, inventory purchases, equipment upgrades, or operating capital are some frequent uses for small business loans. The business can ensure that the loan amount asked is acceptable for its needs by explicitly stating the loan’s purpose.

Furthermore, knowing the loan’s objective helps the company make a strong case for why it needs funds. For example, the lender will have more faith in the borrower’s ability to repay the loan if the borrower provides specific information on how the loan will be used and how it will benefit the firm.

Evaluating Your Credit History and Score

When preparing for a small business loan application, it’s crucial to consider your credit history and score. Lenders use this data to assess the company’s creditworthiness and predict the likelihood of loan repayment.

A FICO score forecasts a person’s capacity to repay a loan based on their credit history.  The likelihood that a firm will be approved for a small business loan and receive favorable repayment terms, increases with the credit score of the founder, or borrower. 

Before applying for a small business loan, it’s a good idea to check your credit score and history for any inaccuracies or unfavorable information. Errors or damaging information should be fixed before submitting the loan application.

Your personal credit will impact your ability to get a business loan.  Making on-time payments, lowering your debt, and avoiding new credit inquiries are ways to improve your chances. 

Your Business Plan 

Your business plan will be requested by lenders as well. They want to know that you think strategically, look ahead, and have a plan for success. 

Lenders will expect that your business plan will contain essential information about the company, such as its objectives, processes, financial projections, and marketing plans. 

Your business plan should include an outline of the management team, the services or goods provided, and the financial expectations of the business. Additionally, include a market analysis, information on the competition,  and your target audience. 

Standard financial projections are expected and they should show that you have a plan which includes servicing the loan for which you are applying.  

A cash flow statement, balance sheet, income statement, and a thorough examination of the company’s costs and revenue sources should all be included in your financial projections. The lender will use this data to assess the business’s ability to repay the loan and choose the right loan amount.

You’ll do well to show that you are familiar with how businesses operate and are equipped to handle the risks involved in starting and running a small business.  Engage the services of a small business accountant for assistance and added perspective.  

Assembling Financial Documents

Putting together financial paperwork is essential to being ready to apply for a small business loan. These records help lenders evaluate the company’s financial situation and loan repayment capacity.

Profit and loss statements, balance sheets, cash flow statements, and tax returns are often included in the required financial papers, though this list may vary based on the lender and the type of loan being requested.

You must organize and present these financial papers clearly in order to submit a loan application successfully. This may entail collaborating with an accountant or financial advisor to generate accurate and current financial statements.

Be ready to discuss the company’s financial health with the lender and supply financial records. This entails being able to describe any changes in earnings or costs, as well as any future goals for expansion or growth.

You will demonstrate your company’s financial stability and raise its chances of getting the cash required by submitting detailed and well-organized financial accounts.  Have these items ready even if you are not asked for them.  Once you’re asked, there’s no time to prepare. 

Finding Lenders and Loan Programs

Researching Financial Institutions

To choose the lending institutions that best suit the needs of the business, it is necessary to identify possible lenders and assess their loan programs. Although this process can take some time, choosing the best lender and obtaining the most favorable loan terms is necessary.

Consider interest rates, repayment schedules, fees, and eligibility restrictions while researching lending institutions. While other lenders may offer more loan options, specific lenders may specialize in particular loan categories, such as startup or equipment finance.

Various methods, such as online research, networking with other business owners, or consulting financial consultants, can be used to investigate possible lenders. Reviewing lender ratings and reviews, as well as any accolades or honors they may have won in the past, is also beneficial.

Take the time to find the best lender for you and your business! 

Comparing Potential Loans

Examining the terms of various loan options, including interest rates, repayment schedules, and any fees or penalties related to the loan, is necessary when comparing loan options.

Consider your firm’s needs and how various loan terms could affect its financial stability when comparing loan choices. For instance, a shorter repayment duration can lead to higher monthly payments and lower overall interest. But, does that work for you? 

Consider the lender’s reputation and review any client comments. This ensures the lender is reliable and attentive to the needs of its customers.

The business can make an informed choice and position itself for long-term success by carefully examining the terms and conditions of several loan programs and lenders.

Going Over the Loan’s Terms and Conditions

Examining the interest rate, repayment plan, fees, and any other limitations or restrictions related to the loan is all part of reviewing the loan terms and conditions.  That’s not where it ends.  

As they say, read and understand the fine print.  This can entail speaking with lenders directly and engaging a financial expert and a legal advisor. Keep in mind that loan documents are legal documents involving you, your business, your money, and your personal collateral.

You must fully comprehend the loan’s terms and conditions before signing on the dotted line. This entails figuring out the overall cost of borrowing, accounting for any fees or penalties, and comprehending the repercussions of defaulting on the loan.

The business can choose which loan program is ideal by carefully analyzing loan terms and conditions. By doing so, you can ensure the loan is affordable and won’t put an excessive financial strain on your company.

Starting Your Small Business Loan Application

Applying for a Loan

Filling out the lender’s application form and submitting it along with all required supporting documents, such as financial statements, tax returns, and business plans, constitutes submitting a loan application.

Before sending the loan application to the lender, ensure it is accurate and comprehensive. This can entail checking the data twice and consulting a financial expert or lawyer.

After receiving the loan application, it could take the lender a few weeks to analyze it and decide whether to approve the loan. Communicate with the lender now and be ready to offer more details or clarification as necessary.

It’s crucial to make a strong argument for why the loan is required and how it will help the business if you want to boost your chances of getting a small business loan. This can entail giving thorough details regarding the loan’s objective, the company’s financial situation, and any development or expansion plans.

The firm may improve its chances of success in acquiring the capital it needs to expand and develop by being organized, prepared, and making a compelling case for why the loan is essential.

Getting Ready for the Lender’s Loan Evaluation Process

While there is a proliferation of online lending options, many business loans still involve a face-to-face meeting with your business banker.  They can be your ally, if you are properly prepared.  

Securing a small company loan requires thorough preparation for the application review procedure. The review procedure typically entails a careful investigation of the company’s credit history, financial standing, and loan repayment capacity.

The company should compile and arrange all pertinent financial records, including tax returns, financial statements, and bank accounts, to prepare for the review process. Reviewing and addressing any inaccuracies or unfavorable notes on the company’s credit report is also crucial.

The company should also be ready to present a thorough business strategy outlining its activities, objectives, and winning tactics. The strategy should also include a thorough explanation of how the loan will be used and how it will help the firm.

Monitoring the Status of the Loan Application

Following submitting your loan application, it’s critical to monitor its progress and any potential requests for further information or paperwork.

The business’s interest in and dedication to obtaining the loan can be shown by following up with the lender. It is advised to establish a frequent follow-up schedule to guarantee that the application is being handled quickly and to address any issues or concerns that may surface.

Additionally, monitoring the progress of the loan application may assist in identifying any potential problems that need to be resolved for the loan to be authorized. Following up on the status can help ensure that the relevant materials are supplied as soon as possible, for instance, if the lender requests extra information or documentation.

You should ask for timelines from the lender.  Then, follow up if those timelines are not met. Most importantly, be responsive to anything requested by the lender during this process. 

Five Things You Should Do After Your Business Loan is Approved

Your company loan was approved—congratulations! After receiving the money, follow these five steps for even greater success:

1. Make Your Payments On Time – All of Them.  Create a repayment plan with your accountant or financial counselor. Understand the loan conditions and payback timetable.
2. Spend Wisely: Pay for the business costs you listed in your loan application. Avoid personal and non-business spending.
3. Track Expenses: Budget and track your spending to keep on track with your loan payback plan. This will also help you minimize costs and boost cash flow.
4. Improve Credit: Loan payments enhance credit scores. This can improve your chances of acquiring better loan conditions and other financing.
5. Contact your Lender: If your firm has material changes, inform your lender.  Tell them about a new hire, a new customer. Share both good and bad news. This can improve your credibility with the lender and improve future loan prospects.

Getting a business loan is simply one step toward success. Stay focused and work hard to expand your business.