Business startup loans work slightly differently from loans for established businesses. As the business’s debts and revenues cannot be considered for a loan yet, the lender will look into personal finances such as credit scores.
A loan for a business startup can fund the initial expenses, speed growth, builds business credit, and requires no selling to equity. As small businesses are ever-increasing and adapting, startup loans make a lot of sense.
Generally speaking, most lenders will require you to have at least 6 months in business and a minimal annual revenue of $100,000. However, in some cases, some lenders will offer loans to startup businesses that are yet to open their doors.
How do I qualify for a business startup loan?
The first thing you will need to do is to create a business plan. This will include all of the necessary funding that you need to start the business.
This funding will cover attracting customers, how to make money, and marketing amongst other things. Your business plan will determine whether they think your business deserves a loan, and if so, how much.
You will then have to consider everything your business will pay for in an itemized list. This will include:
- Rent and utilities
- Employee benefits
- Services, items, materials
- Market research
- Extra expenditures (stacking vending machines, whether the company covers commute and lunch costs, coffee, etc.)
Then, you will have to provide proof that you qualify for a loan. The lender has no proof that your business is succeeding if it hasn’t started, so they will look into your personal finances.
This includes personal and business credit scores, collateral, assets, how much income is paying off debt, and your time in business.
As there are so many startup businesses looking for loans, lenders are more likely to give out loans to the people who provide the most proof of their finances.
This is because lenders aren’t looking for the “next big thing” - instead, they see every new startup business wanting a loan as a risk.
The next thing you need to do is to choose the loan type. There are many different startup business loans available, so you’ll want to find one where you can meet the terms.
Traditional loans offered by banks usually offer the best rates, but it’s not easy for startup businesses to get these.
Online lenders are the most popular lenders for startups as they can help to build up your business credit - provided that your loan reports to credit agencies.
Types of loans
SBA loans are loans administered by the Small Business Association and are one of the most common loans for startups. They offer competitive rates, disaster relief, equipment financing, long-term loans, real estate loans, an SBA microloan program, and more.
To qualify for an SBA loan, you should have a minimum of 2 years in your business and a minimum annual revenue of $100,000. You will also need a minimum credit score of 680.
Whilst their eligibility requirements are strict and not suitable for startups who are yet to open their doors, SBA loans offer low-interest rates.
Cash loans are the best option for those with a lower credit score than the credit score requirements for other loans (like SBA loans). This loan is also best for short-term finances.
Once your borrowers pay their invoices, the loan automatically begins to pay off. This is the most efficient loan option for those with bad credit scores. However, make sure to remember you will be liable for any unpaid invoices.
Lines of credit
This loan type works similarly to credit cards, wherein you only pay off what you use from the chosen loan amount. This is most ideal for those who don’t have a clear itemized financial plan, as it means you’re not overborrowing or overspending more than you need.
Merchant cash advance
Often referred to as MCAs, these loans are ideal for those who are tight for cash and if you sell goods. These lenders take a percentage of the profit you make from selling products to help pay back the loan.
However, MCAs are only recommended for short-term loans because of their high APR.
If your startup business will require buying equipment (from heavy machinery to office equipment or coffee shop equipment), this type of loan is ideal for covering the costs of valuable equipment with low-interest rates. This loan somewhat works as collateral.
Who is eligible for a startup loan?
The first two big requirements of eligibility for a startup loan are 1. If you have started a new business, or 2. Your business has been trading for less than 2 years. You must also have a right to work in your chosen country, in this case, the United States.
As there are several different types of loans for startup businesses, there are different requirements for eligibility. As one of the most common startup loans are SBA loans (Small Business Administration), here are the requirements for eligibility:
- Your startup must be for-profit
- You must have a good amount of owner equity
- Your startup must do business in the chosen country (the United States)
- You must have tried other methods of funding and use this somewhat as a last resort
- You must have proof and evidence of how you intend to pay the loan back
As the future of small businesses and startups is continuing to boom, lenders are becoming less likely to hand out loans to every new business.
Instead of convincing lenders of why your business needs to exist in the market (for example, why people need to be aware of your new production company), you have to convince them that you’re not going to play around with their money.
You must come up with an itemized list of finances, personal financial information, and a clear plan of how you intend to pay the loan back. It is important to give the lenders as much information as possible to increase your chances of qualifying for the loan.
Can anyone get a startup business loan?
In an ideal world, anyone with a dream startup business would be offered a loan the moment they are ready to open. In reality, this isn’t the case.
Anyone can technically get a startup business loan, but you have to prove that you can pay it with a clear and structured business plan.
Lenders are approached regularly by startup businesses, so the best way to stand out from the crowd is to give a detailed plan and evidence that you know how to pay back your loan and succeed with the business past the loan.
Possibly the best way to get a startup loan is through your personal or business bank. Traditional bank loans offer the best rates, but it can be tricky for startup businesses to get these. To see if you are eligible for this loan, the Bank of America requires:
- The type of business
- The address of the business and when it moved in
- Tax ID
- Your phone number
- When the business was established
- The annual net profit
- The number of employees
- Annual gross sales
- List of outstanding payments, including debts and loans
You will then have to provide detailed proof of yourself and other business owners, guarantors, and controlling managers.
As for who can apply for a startup loan through the Bank of America, you don’t need to have an existing Bank of America account to apply. You can apply online, on your phone, or in person at a branch.
How long does it take to receive a startup loan?
Each loan will vary in terms of when the business owners receive the loan money. If we look at SBA loans, the average time a business will receive its money is between 30 days to a couple of months. This is why they should be prepared in advance.
If you prepare in advance, this loan can be worth the wait as you can receive anything from several hundred dollars to $500,000. The reason the wait can be so long is that it depends on your lender as well as yourself and your other business owners.
In short, it’s not too difficult to apply for a startup business loan. Lenders are willing to give out loans to new businesses, but only if you prove to them that you have the means to pay back the loan.