10 Ways To Get A Startup Business Loan

When looking at how to get a startup business loan is like a farmer who has various activities to undertake before an anticipated harvest! The beginning is not easy; just like a farmer needs appropriate and certified seeds for a great harvest… so do startups…and many sweat with the issue of seed capital to invest in their business.

A startup loan is money one borrows to finance a business idea or newly established business. There are many different loans out there; however, various conditions pegged on the loans that one must fulfil make it a hurdle for most startups.

In this article on how to get a startup business loan, we look at specifically: what one needs to know before knocking on the doors of lenders for money, the type of loans available for startups, and examples in some cases of who offers the loans.

We highlight the advantages and disadvantages of some loan types like SBA. We also look at who should look for personal loans, the benefits and drawbacks of personal loans, and finally conclude.

Since most startups have no record of doing business, going to a traditional bank for a loan is more than a herculean task. One may be setting themself up for disappointment unless they have collateral or financial statements with excellent cash flows.

So how do I get that loan for ‘my startup’ you may be asking…

Thank God we have many lenders online or companies specializing in financing from the macro to micro-level; the list is endless, up to you to do your homework! All one must do to get a loan is to show that you will be able to pay in one way or another… their terms are not that stringent.

On the other hand, traditional banks will dig up your credit score, financing history, and that your business should have already been operating for at least two years.

You might say,- well, I can apply for an SBA loan through a traditional bank- and you would be right…However, you will soon learn that it would be better to access the SBA loan through other intermediaries other than the traditional bank.

You will be surprised as a startup that you will still require some form of security if you need a large sum of money from SBA. Also, one might require to show a 5-year business plan that smells nothing less than success, and excellent credit history!

Of course, there is the SBA microloan where you do not have to part with an arm and a leg in conditions, but you can get a maximum of $50,000 in theory; however, statistics show since many people apply, the maximum amount doled out is $15,000 per individual unless otherwise.

What One Needs to Know Before Knocking on The Doors of Lenders for Startup Business Loan

  1. Is your credit score good or bad? Let us be honest, if your credit score is wanting, it does not mean you can not get a loan, but you may need more proof of how you are going to pay for the loan. You may also receive less money than what you may have asked if it is on a higher side. Your personal or business credit score can be used to decide your business creditworthiness
  2. Remember that you are a startup; to get a business startup loan may require at least three to six months in operation.  
  3. One should have a solid business plan to present to the lender you intend to borrow from a startup business loan. The plan should be at least five years—the more detailed it comes to income generation, the better. Also important is the exit strategy should your startup end up in the doldrums.
  4. Which type of loan do you need? Different loans have their conditions and how much one can apply. Is your startup capital intensive?
  5. One needs to be conversant with different lender requirements, make an informed decision, and collect required support documents or proof for payment before applying.

What Do Lenders Look for From Eligible Borrowers for a Business Startup Loan?

To get the dialogue going for a startup loan before filling out any application form, the lenders may request some of the following documents or information.

  • Documents of registered business and licenses in your state.
  • If your startup has been running for a while, tax returns, and IRS documentation.
  • Bank statements and other financial statements are needed for lenders to decide whether to grant a startup business loan or not.
  • Personal tax accounts including other owners if the business is owned by more than one person, personal documents
  • Up to date business plan
  • The lender will check for your credit score from the three available credit bureaus.
  • Any legal contracts for operating your startup, for instance, are you a  franchise or a corporation.

Once you know what you need to get a startup business loan and what the lenders require in general, it’s time to narrow down to the specific type of loan you need and the lender. If things are perfect, you can then make an application and wait to be contacted.

Remember, each method of financing may have its approach, for instance;

 A business startup’s loan application will involve the lender scrutinizing your credit history, any debts you may have, and personal financial information.  For crowdfunding, all one needs is to register on a crowdfunding platform that has its regulations. Simultaneously, one needs only their social security number and or ID for the federal tax to apply for a business credit card.

To pick out a type of lender to borrow a startup business loan from, you need to be familiar with the kind of financing options available.

Below Are More Than Ten Ways of How to Get a Startup Business Loan

1. SBA Microloans

U.S Small Business Administration (SBA) microloans are available for startups, just like other small businesses. However, SBA does not loan out directly, but through Community Development Financial Institutions (CDFIs). The CDFIs receive the money at a discount, and that is how their interest rate is reasonable. Find an SBI intermediary in your state or city to contact a startup business loan. The maximum amount awarded is $50,000.

How To Get A Startup Business Loan?
Source: sba.gov

1.1 The Advantages of SBA Microloans

  • The interest rates are low.
  • Great if you are new in the country and your credit history is limited.  
  • One has a long repayment term; hence you can break down the monthly payment installments in a sum one can manage to pay without straining their finances.
  • Most people doing business or startups are eligible for the SBA microloans.
  • If you are a sole proprietor or with few employees, SBA microloans are a great option.
  • SBA microloans come in handy for those disadvantaged in one way or another, like the disabled, veterans, women, and minorities.   

1.2 The Disadvantages of SBA Microloans

  • Processing of the loan is not instant like some online lenders but takes some time.  
  • One can only apply up to a maximum of $50,000 and not more.
  • If you have an unfavorable credit score, you will need someone to co-sign on a loan. You will also require collateral.
  • One can not use the money for real estate acquisition or take care of unpaid debts.
  • One must have a business plan that smells nothing less than success.

2. Business Credit Cards

One can acquire a business credit card. What is needed is a favorable credit score and your personal and business income. Business credit cards are essential in that they provide a  quick line of credit for an unsecured loan.

A general rule of thumb is to look for 0% introductory offer cards where you can begin payment even after 9-15 months while building your business.

Startups with six months or less time in operation qualify for a business credit card from financial providers like Capital One, American Express, Chase, etc. One can also take advantage of reward programs and bonuses that come with business credit cards.

2.1 Who Should Get a Startup Business Credit Card?

  • If you need access to reward programs and bonuses that are available with business credit cards.
  • Suppose one has less than two years in business and relies on personal credit. In that case, a business credit card is a viable option to get a startup business loan.
  • The fastest access to a line of credit to finance your startup.  

2.2 Below Are Three Business Credit Cards Providers That Could Be an Option for Your Startup

As already stated, if you have no business history and, at the same time, you want to build your business credit, then applying for a business credit card might be a viable option.

2.2.1. Capital One Spark Classic for Business

 The Spark Classic from Capital One has no foreign fee transactions, no annual fee. One also earns a 1% cashback on all purchases.

One can apply for the card even with a low personal credit score.

Worth noting is that Spark Classic reports it’s customers spending to credit bureaus, so make sure not to miss making payments.

 2.2.2.  American Express Blue Business Cash Card

 The American Express Blue Business Cash Card is a worthy choice for those who want to save through a reward program like earning cashback.

For any eligible purchases of $50,000 per year, there is a cashback of 2% and after that 1% cashback on other purchases. Annual Percentage Rate

The card also has no annual fee and a long 0% APR (Annual Percentage Rate) period. You will need a minimum of 660 credit score, though.

The American Express Blue Business Cash Card then becomes useful with its long APR intro period for those who want to spend large during the first year with the card.

Aso, since the card reports your credit to the business credit bureaus, one can build business credit.

 2.2.3. Ink Business Unlimited Credit Cards

 Ink Business Unlimited credit card from Chase bank is cost-effective and straightforward. It has a welcome bonus plus a flat-rate 1.5 % cashback.

The card also offers 0% intro APR  (Annual Percentage Rate) for the first 12months purchases; then aftermarket rates are applicable. Besides, they offer free employee cards and no annual fee.

Like for the other cards, one gets to make purchases for their startups while building their credit history.

3. Friends/Family Funding

If you are a startup that can not secure a startup business loan for whatever reasons, you can turn to family and friends for a loan. Just make sure whatever agreement you come up with, not default on payment. If the loan is not paid, one can be in an awkward situation with family members.  

 4.  Personal Financing

One can turn to personal financing of their startup business loan because of a bad credit score.

4.1   IRA Savings

One can borrow a business startup loan using their 401(k). You can also, with great precaution, borrow /withdraw some money from your retirement plan if you have one. Some people divert part of their retirement money to their startup business through the ROBS (Roll Over for Business Startup) plan.

4.2 Personal Credit Cards

For one reason or another, one may not be able to secure a business credit card. In such a case, you can turn to personal credit cards. Just keep in mind that personal credit cards will not help you improve your business credit score.   

4.3 Savings

One can turn to personal savings to get a startup loan, for instance, asking the lending institution to grant you credit/loan against your home equity.

4.4 Benefits of Using a Personal Loan for Business

For those with an income and a favorable credit score, considering financing your startup using a personal loan when all else has failed or taking time should not be an issue.

4.4.1 Four Advantages of  Applying for A Personal Loan for Business:
  • One will not need collateral but commit oneself personally to repay the loan.
  • One is not limited when it comes to spending the funds from startup loans as opposed to other financing methods.
  • Lower APRs (Annual Percentage Rates) with longer repayment rates. Also, one can have a schedule for payment that is monthly with lower interest rates.
  • A personal loan is more straightforward to qualify for than a business loan, what with the many requirements from the traditional banks.
 4.4.2 Disadvantages of Applying for  a Personal Loan for Business
  • The personal loan may be small and not able to cover all your startup needs.
  • One can not build their business credit with a personal loan for financing their startup.
  • Suppose you default on the personal loan payment. In that case, you risk having your assets seized by the creditor plus jeopardizing your personal credit history!

5. Investors/Venture Capital

Venture capitalists and business angels are always on the lookout for the next hot startup to support in the hopes of minting more money. If your startup meets the angel investors’ requirements and venture capitalist firm, don’t hesitate to pitch your idea. One has to have been in operation with an incredible 5-10  year business plan.

6. SBA 7(a) Loans

We already looked at SBA ( U.S Small Business Administration) microloans to apply for an amount maximum of $50,000. If you need more than $50,000, you will have to apply for the SBA 7(a) loans. 

One can apply to a maximum of $5,5000,000  from SBA 7(a) loans, but the process takes a while. However, one can apply for the SBA Express loan that is ‘somewhat’ fast, only that the maximum loan to apply for is reduced to $350,000.

To up your chances of getting an SBA 7(a) loan, ensure that you have a minimum FICO SBSS credit score of 155 and are an expert in the area in which your startup is operating under.

 There are other SBA loans that one can apply when for businesses participating in international trade, real estate, or looking for equipment/machinery financing.

How To Get A Startup Business Loan?
Source: sba.gov

7. Invoice Financing

One can get a startup business loan against customer invoices. One does not need much paperwork, and the funds are available in a day or two.

8. Equipment Financing

The loan is specifically for purchasing machinery/equipment for your startup business. Most financiers will not need collateral. However, if you default payment, your Equipment could be seized by the lender and sold to recover their money. One can apply for equipment financing from SBA, Crest Capital, etc.

8.1 Advantages of Asset-Based Lending (Invoice and Equipment)

  • Compared to other methods of financing, it is easier to qualify for.
  • One can apply for the loan as an excellent way of covering working business capital. 
  • Since the assets on one balance sheet act like collateral, there is reduced personal risk.
  • Asset-based loans like invoice financing are a flexible alternative compared to bank loans.

9. Other Microcredit Institutions

One can turn to microcredit finance institutions for a startup business loan. For instance Finca, Kiva, Accion among others. Most of these microcredit institutions are online and are more lenient than traditional banks when it comes to business credit requirements.

10. Crowdfunding

When it comes to crowdfunding, all one needs is to register on the crowdfunding platform and describe what the would-be contributors stand to gain.

Bonus: Supplier Credit

One can look into ways to defer payment for supplies delivered by the supplier through a credit/loan arrangement with the supplier(S). One can wait before making payment for at least 45 days.  One should strive to come up with a supplier credit agreement that is interest-free.

Conclusion

As we have seen, collateral, credit score, and a business that is in operation for up to two years are some of the requirements that established lenders ask when assessing startup loans applications. In contrast, most startups are just that, ‘startups’, particularly those that are yet to launch operations but with sound business plans and cannot meet traditional lending institutions’ requirements.

How to get a startup loan for a business may not be the easiest thing for most people; however, it is not impossible. We hope our informative article will equip you with all the information needed to identify which lender and financing options are appropriate for your startup.

Remember, the application process and requirements, as earlier stated, depends on who is the lender and what method of financing you have chosen.

And just like the farmer analogy, who must sow good seeds for a bountiful harvest. Following the directions in this post to get a startup business loan should be like good seeds or foundation that will culminate in a profitable business in the future. The ball is in your court!