How to get a startup business loan: 5 steps
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Key takeaways
- Startup business loans can be challenging to obtain since most lenders set minimum requirements for time in business
- You may be eligible for different types of loans that can serve specific purposes, such as a startup SBA loan
- Before applying, you’ll want to determine how much funding you can afford by assessing your business budget and current debts and expenses
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. Because of this, it can be difficult to obtain funding from a lender as a startup business, though it’s not impossible.
According to the 2023 Small Business Credit Survey, 40 percent of businesses aged five years or less were fully approved for funding. By comparison, 53 percent of businesses between six and 20 years old were fully approved.
For the best chance at getting approved for a loan to start a business, you’ll want to look for a lender with low time in business requirements, such as three or six months. You’ll also want to follow a few steps to ensure you apply for the right type of funding, loan amount and lender.
How to get a startup business loan
If you’ve got a great idea for a startup and are ready to apply for funding, follow these steps to simplify the process of landing a loan to start a business.
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 of business loans suit different business needs. For example, lines of credit are a flexible funding source that works similarly to a business credit card. Meanwhile, equipment financing is a lump-sum loan where the machinery or other equipment you purchase acts as collateral to secure the loan.
Startups often use alternative sources of financing to fund their business or weather financial challenges. According to the 2023 Small Business Credit Survey, 36 percent of startups under five years old used personal funds or borrowed from friends and family to fund their businesses. Startups are more likely than older businesses to use these funding sources.
Despite startup business owners often using alternative funding, it’s still possible to find multiple business loans that would serve your needs without having to dip into other sources like personal funds. Here’s a rundown of the different types of startup business loans you can apply for.
| Loan type | Typical amounts | Details |
|---|---|---|
| Term loans | $10,000 to $10 million | Term loans can be used for general business purposes, including to finance buying equipment, land, acquiring a business or another purchase. They are repaid over a specified period as a fixed, monthly payment with fixed or variable interest rates. |
| Business lines of credit | Up to $250,000 | With a business line of credit, business owners are given access to a set amount of money that they can draw from to cover various business expenses, including payroll and inventory. These tend to be revolving, which means business owners can reuse the available credit as needed. |
| Commercial real estate loans | Up to $10 million | Available through banks, online lenders and the U.S. Small Business Administration, commercial real estate loans can be used to purchase commercial property, such as hotels, office buildings, warehouses and land. The loan is secured by the property being purchased. |
| SBA loans | Up to $5.5 million | SBA loans are offered through SBA-approved lenders and partially guaranteed by the U.S. Small Business Administration. They offer competitive interest rates and can be used to cover everything from operational expenses to equipment purchases or real estate renovation projects. |
| Equipment financing | Up to $500,000 | Loan funds are disbursed in one lump sum and can be used to purchase business equipment, including commercial trucks, medical devices, and machinery. The loan is secured by the equipment being purchased. Because it’s secured, the lender may offer lower interest rates than unsecured loans. |
| Microloans | $50,000 to $150,000 | This loan pays out a small lump sum and offers fixed repayment terms, much like a standard term loan. Microloans may be funded by the SBA or nonprofits that may be available to startups and bad credit borrowers. |
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. The most common criteria you’ll find on a lender’s website are its requirements for your time in business, personal credit score and annual revenue.
But lenders look at a range of factors to determine whether you’re eligible and can manage the loan repayments. The areas that the lender may evaluate include:
- Personal credit score. Some lenders offer funding solutions to credit-challenged business owners with scores in the 500s and 600s, but they come with higher interest rates to offset the risk. Lenders with relaxed credit requirements this low tend to be online lenders. If you are in immediate need of a startup business loan, you can improve your personal credit score by 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.
- Personal guarantee. With business loans, you often have to provide a personal guarantee. This guarantee states that you’ll repay the loan from your personal assets if the business defaults and can’t repay the loan. This puts you legally on the hook for your business loan.
- 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. Many online lenders may require a minimum of six months in operation, while only a few offer loans to startups with three months or less in business.
- Annual revenue. Lenders also have minimum revenue criteria that business owners must meet to qualify for funding. Many lenders want to see that your business has $100,000 to $250,000 in annual revenue, with online lenders requiring the most lenient amounts of revenue. Some lenders like PayPal go below this revenue threshold.
- Debt obligations: 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. They may also assess your business’s debt service coverage ratio, which takes into account your net profit divided by your annual debt.
4. Compare lenders
When looking for where to get a startup business loan, online lenders usually offer the highest odds of approval, 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.
Some of the best startup business loan lenders include:
| Lender | Minimum time in business |
|---|---|
| Taycor Financial | 3 months |
| Funderial | 2 months |
| Credibly | 6 months |
| Accion Opportunity Fund | 12 months |
| PayPal | 3 months |
| Bank of America | 6 months for its Cash Secured line of credit |
| SMB Compass | 6 months |
5. Gather documents and apply
When you’re ready to apply, you will need to gather loan documentation for a startup business loan, including these documents:
- Personal information, such as your name, address and Social Security number
- A copy 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
- Business loan proposal, outlining how much you need and plan for repayment
- Business and personal tax returns from the past three yearsReceipts from quarterly tax payments
- Balance sheet
- Cash flow statements
- Profit and loss statements
- Up to one year of recent business bank statements
- Personal bank statements
- Schedule of business debts
- Outstanding invoices if applying for invoice factoring
- Personal guarantee
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.
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 that your business loan was denied. 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:
- Business grants. You can apply for free funding through federal, state or local business grants, allowing you to get funding that you don’t have to repay. You will need to meet the grant’s qualifications, and funding isn’t guaranteed or fast. You will have to compete with other businesses and potentially pitch your business to investors as part of the competition.
- 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.
- Use a personal loan for business purposes. If you don’t qualify for a business loan, you could get a personal loan to finance your business. The downside is that this loan also makes you personally responsible for repaying the loan. You will need to verify that you can use the funds for business, as some personal loans restrict how you can use the funds.
Bottom line
Getting a startup business loan is similar to getting a standard business loan, except that you’re looking for a lender that’s friendly to businesses without much time in the market. When deciding which lender is best, you’ll also need to assess how much funding you need and your eligibility.
A few ways to calculate how much you can afford is to analyze your business budget and debt obligations. You can calculate your business debt-to-income ratio and your debt service coverage ratio. Then, you can see which loans fit your purpose for funding, such as a business line of credit for covering operational expenses or a real estate loan to cover purchasing a building.
However, it’s possible you may be denied a business loan because you’re a startup. If you don’t qualify for traditional debt financing, consider alternative funding sources such as a business grant, personal loan or crowdfunding. It’s common for startup businesses to use alternative funding sources, including their own personal finances.
Frequently asked questions
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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.
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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.
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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.
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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.
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