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As an entrepreneur, when it comes to launching a startup, bootstrapping can be very appealing. There’s a lot to be said for launching a company with no debt and no shared ownership. But the reality is, nearly every company needs outside financing if the goal is to scale. And that typically means a business loan. A startup loan can give you the capital you need for inventory, operational expenses, worker salaries, and other business costs. While it can be difficult to qualify for a traditional business loan when you’re just starting out on your entrepreneurial journey, there are some startup loans that can help you get your business off the ground.
What Can I Use a Startup Business Loan For?
Startup business loans can help you get your business going or expand or grow your business after its initial opening.
Some of the items a small business startup loan can help with are:
- Buying inventory
- Purchasing office equipment, computers, and furnishings
- Salaries for employees
- Paying operational expenses such as utilities, office supplies, or rentals
- Leasing or purchasing office space
As a new business, you may have limited access to business funding to cover your startup costs. You will likely have to get funding from an alternative lender, which can also help you build the business credit you need for future commercial loans.
What Do I Need to Qualify for a Startup Business Loan?
Some of the qualifications for a startup business loan are similar to a traditional loan. Very few banks will loan money to a business unless they have been operating for a few years.
There are also minimal annual revenue prerequisites to consider as well as how much you have for a down payment.
While some lenders require more credentials or better credit than others, others are more flexible, particularly when it comes to online or alternative lenders.
Still, it pays to do your due diligence and have as many of the following requirements met as possible when applying for your business loan.
Before moving forward with any business financing, you’ll want a sound business plan to present to lenders. A business plan should illustrate your ability to repay the loan and other business debts. A good plan will also show how much revenue you expect to bring in as well as any business expenses you expect your business to have to pay out.
Personal and business credit
If you’re a startup owner, chances are you don’t yet have business credit. That can make it harder to qualify with a traditional bank or credit union because those financial institutions will likely want a strong DUNS business credit score before considering a business loan. But some alternative lenders will look at your personal creditworthiness. It’s a good idea to get a copy of your credit reports before applying for a loan so you can know what to expect. Improving your business and personal credit score can help you get a better loan with a lower interest rate.
Financial statements and records
As part of the loan application process, startup business lenders will likely want to review your company’s bank statements, credit card sales and receipts, balance sheets, accounts receivable and payables, and unpaid invoices. Even if you’re a new startup, it’s more than possible you will have some financial recordkeeping because most businesses start small before growing and scaling to the point that they need financing.
If your business has been in business long enough to have previous business tax returns, a lender will want to review them. They will also likely want to see your personal tax returns, especially if you’re a brand-new startup.
Relevant legal documents, business licenses, registrations, etc.
A lender will want you to provide copies of any relevant business licenses, incorporation documents, lease agreements, registration records, or franchise agreements.
Types of Startup Business Loans
Traditional bank loans and SBA loans are challenging to qualify for when you’re just starting out in a new business. To be frank, it can even be hard for established businesses to get qualified.
But there are startup loans for new businesses that can help you get the cash needed to run your business.
Here are the various types of loans available for startups and newer entrepreneurs. Most of these are available through alternative online lenders and suit many needs.
Many startups get their first small business loan through online marketplaces due to the difficulty of qualifying with banks.
Online startup term loans typically have maximum loan amounts of up to $500,000. However, newer startups sometimes can’t qualify for the maximum loan amount.
Short-term loans are straightforward: a borrower receives a lump sum and makes monthly payments over the term of the loan until the loan is paid off.
Like most types of startup loans, rates on short-term loans can vary from lender to lender and are based in part on your credit history. For instance, Biz2Credit’s term loan rates start at 7.99% and are competitive when you pair their loan terms up even against traditional lenders.
Many online lenders prefer that you are operational for at least six months before considering loaning money to a startup business. But once you qualify, you can get the business financing you need to help your startup grow.
Working capital loans
A working capital loan can help you meet short-term expenses and business goals. For instance, you can use a working capital loan to help meet payroll expenses or buy inventory for your business.
The advantage is that you can usually get faster startup funding than you would with a traditional loan. But a working capital loan has a shorter payback time.
The U.S. Small Business Administration (SBA) has a microloan program that offers startup financing to eligible business owners. The max loan amount is $50,000 and typically, you have up to six years of repayment to pay back the loan.
A microloan is the easiest SBA loan for a startup to qualify for. If you have limited financials or if your credit is subpar, a microloan is more accessible, particularly for minorities and women-owned businesses.
Microloans are backed by the SBA but are issued through a microlender that is a financial institution or nonprofit lender. The interest rate for a microloan can range from 8% to 13%.
Many startups depend on company vehicles, machinery, or equipment for their business to operate. But sometimes it’s a challenge to get financing for those items.
That’s where equipment financing comes in. Funds from an equipment loan can help you get cash to buy the heavy equipment needed for your startup.
An equipment loan is also easier to qualify for than some other types of startup loans because the equipment financed serves as collateral for the loan.
The repayment term for an equipment loan is usually limited to the useful life of the equipment being financed. The interest rate on an equipment loan can run from five to 15 percent, depending on your credit score.
Real estate loans
A real estate loan may be easier for a startup business owner to qualify for because the land and commercial building used in the purchase serves as collateral.
But eligibility for the loan and the time it can take to receive funds through a conventional or SBA (7a) loan are two different things.
Many startup entrepreneurs prefer to get their loans through online loan providers because the loan process is much more expedient.
For instance, an experienced startup loan provider like Biz2Credit typically qualifies borrowers for commercial real estate loans within 48 hours, with funds deposited in your bank account soon after. That allows business owners to seize an opportunity faster rather than risk losing out on the real estate they have their eyes on.
Startup business owners sometimes opt to take out a personal loan. Some personal loans have lower interest rates than a business loan might have, so a personal loan might cost you less.
The downside is that unless you have extensive collateral, your total loan amount will probably be less than it would be with a startup loan.
Another consideration is that you risk your personal credit record and assets if you’re unable to pay back the loan. But many startup business loan providers require a personal stake in a startup loan anyway.
Business credit cards
A business credit card is an unsecured type of startup financing, meaning you don’t have to have collateral. It is also a faster type of financing than traditional loans, particularly when you have good personal credit.
The major advantage is the flexibility upon which you can use the credit. You can use a business credit card as needed to help with your business’s cash flow and pay for office supplies, furniture, equipment, legal expenses, and more.
Interest is charged on any unpaid balance when the card’s billing cycle ends, usually once a month.
So a major advantage is you can somewhat control how much interest you’re paying if you pay on your balance before your billing cycle ends.
Other startup funding options
There are additional ways to fund your startup business that doesn’t involve a startup lender. These include Kickstarter and crowdfunding campaigns, business grants, and borrowing from family.
Some startup owners use a combination of funding options to finance their business that include both financing through a lender and the above-mentioned options.
If you have bad credit or poor credit, these funding options are worth considering. Other financing options when you have shaky credit include merchant cash advances and invoice factoring.
If you have a stronger credit record, you may want to consider a business line of credit to help with some of your startup costs.
Is it at all possible for a startup to get a commercial bank loan?
The short answer is yes, it’s possible, but not likely. Banks assume higher risks with startups. Even established businesses have difficulty obtaining a small business loan through a bank. But banks raise the standards even higher for startups to get approved. And when a bank considers a startup business loan, they usually want the loan to be guaranteed by the SBA. The caveat for that is that you have to meet both the bank’s and the SBA’s guidelines, which can be difficult to do under the best of circumstances. Even then, a bank or the SBA will usually only approve business owners who have strong collateral, such as a lien-free home, and two or three months of cash reserves in addition to a 20% down payment for the loan.
What type of credit score do I need for a startup business loan?
Traditional lenders won’t even consider a business loan unless the business owner has a good minimum credit score in the mid-to-high 600s. But most prefer to see credit scores above 700. Alternative lenders have lower minimum credit score requirements, and this can vary from lender to lender and the type of business loan involved. Credit scores under 580 are usually considered bad, while scores ranging from 580 to 669 are considered fair. The higher your credit score, the lower the interest rate will be on your business loan and the more loan options you’ll have. Conversely, higher interest rates are usually charged to borrowers with lower credit scores. Still, some lenders, such as Biz2Credit, offer startup loans for small business owners with credit scores as little as 575.
How much can I get for a startup business loan?
As a startup, you haven’t had enough time in business or an extensive revenue history to get approved for a significant loan amount. In all likelihood, your business credit hasn’t been established.
Startup loan amounts also vary by lender. Some will only loan a small amount of capital while others have higher loan limits.
That said, a startup loan amount can range from $1,000 to $2M or more. But for a hefty loan amount, you’ll likely need collateral or personal assets to use as security in the loan.
The Bottom Line
Startup business loans can help you further your business goals more quickly and efficiently. While a startup loan can be challenging to get through traditional means, some online startup loan providers specialize in loaning money to new entrepreneurs.
It’s a good idea to choose a lender who can help you evaluate your startup needs and choose the right startup loan for your business.
Biz2Credit is a veteran online loan provider and has served business owners since 2007. Consider Biz2Credit client and perfume wholesaler, Navneet Kalra. Kalra has found it necessary to continually adapt to continue to grow and Biz2Credit was a lifeline to keep his business going.