Getting a startup business loan can be challenging without a track record of success in your company. Lenders want reassurance that you will repay what you borrow, and there’s no way to gauge the risk of default if you haven’t yet launched your business. 

That said, conducting research and following the proper steps can open the door to first-time business loan opportunities. Here’s what to do.

How to get a loan to start a business

If you’ve got a great idea for startup and are ready to apply for funding, follow these steps to simplify the process of landing startup financing.

1. Determine how much funding you need

Some business owners make the critical mistake of requesting far more funding than they need to get operations up and running. They might get approved for a hefty sum, struggle to manage the loan payments and end up paying a fortune in interest or defaulting on the loan. A too-large request can also result in rejection by a lender.

You can avoid both unfortunate circumstances by creating a financial forecast with line items for projected income and expenses. By running the numbers, you’ll know exactly how much you need to borrow to keep operations afloat until the revenue starts coming in and your business can sustain itself. 

These financial projections form an important part of your business plan.

2. Decide what kind of loan you need

These types suit different business needs — for example, lines of credit are a flexible funding source that works similarly to a business credit card, while equipment financing is a lump-sum loan where the machinery or other equipment you purchase acts as collateral securing the loan.

Loan type Amount Details
Term loans Small to large Term loans can be used for  a variety of business purposes and are repaid over a specified period as a fixed, monthly payment, which is determined by your bank, credit union or online lender.
Business lines of credit Small to medium With a business line of credit, business owners are given access to a line of credit they can draw from to cover various business expenses, including payroll and inventory.
Commercial real estate loans Small to large Available through banks, online lenders and the U.S. Small Business Adminsitration, commercial real estate loans can be used to purchase commercial property, such as a hotels, office buildings and warehouses.
SBA loans Small to large SBA loans offer competitive interest rates and can be used to cover many business expenses and projects.
Equipment financing Small to large Loan funds are disbursed in one lump sum and can be used to purchase business equipment, including commercial trucks, medical devices, and machinery.
Microloans Small Smaller lump sum loans funded by the SBA or nonprofits that may be available to startups.

3. Check your eligibility

The next step is to check your eligibility for a startup business loan. 

Qualification criteria vary by lender and the type of funding you’re applying for. However, most will evaluate the following when you apply for a startup business loan to make a lending decision:

  • Personal credit score. You’ll typically need a good or excellent credit score to qualify for a startup business loan.  Some lenders offer funding solutions to credit-challenged business owners with scores in the 500s and 600s, but they come with higher borrowing costs to offset the risk. If you are in immediate need of a startup business loan, there are a few ways you can improve your personal credit score, including increasing your credit card limit and paying down debt.
  • Business credit score. The lender may peek at your credit rating if you’ve already begun building business credit. Still, your personal credit history is usually more important to small business lenders, especially when you’re just starting your business. In some instances, you’ll also have to provide a personal guarantee that you’ll repay the loan if the business defaults. 
  • Time in business. It’s not uncommon for bank lenders to require two or more years of business experience to qualify for a loan. This is problematic if you haven’t yet launched, so you’ll likely be better off with an online lender that extends financing to startups. However, some online lenders may require a minimum of six months in operation.
  • Annual revenue. Lenders also have minimum revenue criteria that business owners must meet to qualify for funding. If you do enough legwork, you may find a lender willing to waive this requirement. Otherwise, getting a little experience under your belt and starting to generate earnings may be enough to get you approved. 
  • Debt-to-asset ratio: Do your current debts exceed your assets, or are they manageable? Lenders will analyze your debt load to determine if you can afford more debt. You can check this yourself with a debt-to-asset ratio calculator.

4. Compare lenders

Online lenders offer the higest odds of approval for startup business loans, but you should compare loans from all types of lenders, including traditional ones. 

Don’t just review each lender’s interest rates, terms and loan amounts. Dig deeper by evaluating the application process, funding times and fees you’ll incur by doing business with the lender. If you can, get prequalified to confirm if the lender is an option and how much the startup business loan may cost. 

5. Gather documents and apply 

When you’re ready to apply, have this information and documentation handy: 

  • A copy of your driver’s license or other government-issued photo identification
  • Your employment information (if applicable) or proof of other sources of income (if applicable)
  • A company of your company’s business license and formation documents from your state
  • Your company’s employer identification number (EIN)
  • A business plan that includes financial projections and a breakdown of how you’ll use the loan proceeds 
  • Tax returns from the past two years
  • Three most recent bank statements 
  • Business insurance policy documents (if applicable) 

Be mindful that this list isn’t all-inclusive. If possible, contact the lender beforehand and inquire about documentation requirements to avoid hiccups in the application process.  

Bankrate tip
A well-crafted business plan doesn’t just give you a roadmap to success. It can also impressive lenders, possibly increasing your chances of getting approved for funding. Ideally, it will provide the details necessary to assess if the business can thrive and potential annual revenue.

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

Before giving up or pumping the brakes on your new venture, reach out to the lender and inquire about the reason for the rejection. It could be a result of conflicting information in the application or a credit-related issue. Either way, you’ll know what’s needed to improve your chances the next time you apply. 

You can also apply with a lender that has more lenient requirements to test your luck. Or you can wait it out and apply again with the same lender at a later date. 

Startup business loan alternatives

If you need a startup business loan ASAP or prefer to explore other options to fund your new venture, consider these alternatives: 

  • Use a crowdfunding platform. Create a campaign using a crowdfunding platform, like Kickstarter or Indiegogo, to raise money for your new business. Depending on your campaign type, donors may receive equity in your business, a reward or a repayment with interest over time. You’ll pay a fee to use crowdfunding services. 
  • Borrow from friends and relatives. You can also raise the funds you need to get started from your personal network. It may be possible to secure interest-free or no-interest loans without jumping through hoops. However, you could damage your relationships if you delay or fail at repaying. 
  • Use a business credit card. If you have good or excellent credit, you may have luck getting a small business credit card, even if you’re starting out. Approvals are typically based on the cardholder’s credit score, and the application process is far less involved. Still, this form of funding comes at a higher cost unless you get a credit card with an introductory interest rate and pay off the balance before the interest-free period ends. 
  • Tap into your personal savings. Using your own funds to start your business could also work, but this strategy is risky. You won’t pay any interest since you’re using your own money. That said, depleting your cash reserves can damage your finances if your startup fails. 

FAQs about startup business loans

  • Most traditional banks and credit unions don’t offer business loans to startups. However, you may have luck with an online lender. Or, you can wait until you meet the financial institution’s requirements to qualify for funding.
  • The eligibility criteria vary by lender. Most require you to meet minimum credit score, annual revenue and time in business requirements. Inquire with the lenders you’re considering to learn more about their guidelines.
  • Getting a startup business loan can be challenging if your company isn’t yet established. But that doesn’t mean it’s impossible, and you may find funding solutions with a bit of legwork.
  • Startup business loan amounts range from $1,000 to several million, depending on your type of loan. The amount you’re approved for is usually determined by your personal credit score, business credit score (if applicable), time in business, annual revenue and debt-to-asset ratio.
  • Yes, but you’ll likely have fewer options to choose from. Consider an online lender, as they tend to be more lenient. That said, the borrowing costs will probably be higher to offset the risk of default.
  •  A credit score in the mid-600s is usually enough to qualify for funding. Some lenders will approve you with a credit score in the high 500s, but expect a higher interest rate.