Starting a new business is an exciting opportunity to explore your passions. As you work out the details of creating a business website, drafting a business plan and announcing your new venture to the world, another consideration to make is how you’ll obtain funding.
Startup loans are a common path to realizing your dream of owning a business, but they aren’t as simple as walking into a bank, getting approved and taking out money. Check out these tips and insights that every entrepreneur needs to know about how to get a business loan.
How to get a startup business loan
01. Build a strong loan application
Getting a business loan is an exciting step in starting a business, but the process can be a little bit confusing, especially if you're brand new to the world of business funding. Start by assessing your financial readiness and gathering the following information:
Your loan requirements and business objectives
An estimate of the amount you need to borrow
A list of what you intend to use the money for
Personal and business financial statements, tax returns and a business plan
At this stage, you’ll be better prepared for the application process. Your loan application is your ticket to financing, so be thorough—and thoughtful—about the information you provide. Writing a compelling business plan should be your first step. Include key elements like:
A summary of what your business does and how it will make money
Your intended use of funds
Earnings projections for the next two to three years
Proof of your repayment ability
Your mission statement
Company information (objectives, market analysis, competition, etc.)
Current cash flow/income and growth initiatives
Quotes for relevant supplies, equipment and staffing needs
Your proposed method of payment
Your requested loan amount, its purpose and expected repayment terms
Make sure you highlight the strengths of your business and unique selling points so that potential lenders understand how your company is different from others on the market. An effective way to do this is to provide use cases that demonstrate how you clearly solve a problem for your target customers.
02. Improve your loan approval chances
To increase your chances of getting approved for a loan, there are several things you can do. First, focus on improving your personal and business credit score by paying bills on time, keeping your debt-to-income ratio low (ideally under 35%) and having a consistent cash flow.
You can further improve your chance for approval by offering more collateral or providing a personal guarantee. For example, putting up an asset like a home or property shows lenders that you're willing to take on risk and that you’re serious about paying them back.
Don’t discount the value of partnerships and endorsements. Reach out to contacts who can vouch for you like business owners, banks or peers to see if they’d be interested in investing or becoming a co-signer or guarantor for your loan.
03. Follow the loan application process
Once you've done all your preparation and homework, it's time to find funding sources. Start with local business groups and organizations like your local Chamber of Commerce. Request an in-person meeting or telephone call so that you can introduce yourself and explain why you want to borrow money.
When you're ready to submit a loan application, you should have all your materials ready to go—this is where all your research and background work really pay off. Filling out the application should be simple since you've already gathered the information you need, but make sure to double check your information for accuracy before submitting it. Mistakes or inconsistencies might result in a rejected application.
Once your applications are submitted, follow up with lenders to ensure that they've received everything. This is also a good time to address any issues or questions the lender has and demonstrate that you're readily available.
04. Navigate loan negotiations and terms
Congratulations and take a deep breath—you've received an offer (in theory). But you're not done yet. You’ll need to read the loan documents thoroughly and make sure that you understand the terms and conditions of your loan.
Pay close attention to interest rates, fees and repayment schedules. Look for additional associated costs to avoid surprises, such as closing costs, processing fees or penalties.
If your loan agreement is reasonable and you can afford the monthly payments, then you should accept the loan offer. If not, negotiate with the lender for more favorable terms. You're not completely powerless here—lenders are often willing to negotiate rates and other aspects of a loan package because they want your business.
You don't have to go it alone, either. If you feel like you need help in understanding loan contracts and terms, or just want a second opinion, don't hesitate to get professional advice from an accountant or financial advisor. This is a big decision and it should absolutely be an informed one.
05. Pull the trigger on your startup business loan
If everything looks good, you can sign the loan agreement and any legal documents associated with it. This is the finalization process and is a good time to review everything. Depending on the type of financing you accept, you may be able to start using the funds immediately (or, at least, very quickly).
As with most things that come with running a business, nothing is ever truly finished. You should continue researching and learning about the startup funding process—including potential grants and tax incentives so that you can take advantage of every opportunity available. Staying informed about current market trends and news also helps you remain competitive (and helps you make better financial decisions). Finally, having a budget in place helps you anticipate potential financial needs and meet your goals.
Once you have a loan agreement in place, you should revisit your budget, establish a way to track your finances and focus on what you want your business to look like in the next six, 12 and 18 months. This will keep you on a healthy financial track for the long run.
Startup business loan options
Informing yourself about the different types of small business funding sources and their various terms, interest rates and repayment options can help you find the best loan for your unique situation. Below is a list of the most common startup business loan options and other funding sources.
Bank loans and online lending
The most common types of loans for small businesses come from banks and online lenders. These can be secured or unsecured loans. Interest rates fall within a wide range depending on the loan amount, your credit score and other factors like repayment terms. Note that since unsecured loans aren’t backed by collateral, rates tend to be significantly higher to hedge against the risk of default. The current interest rates for secured versus unsecured loans range from:
Repayment terms for business loans vary as well. Again, this will be contingent on the type and amount of your loan. Generally, long-term loans have repayment periods of up to 25 years, while short-term loans can have repayment periods of 18 months or less.
SBA loans, which are backed by the U.S. Small Business Administration, have repayment periods of 10 years for working capital and equipment, and up to 25 years for large assets (e.g., land, facilities, etc.). Most business loans require immediate repayment, which means the payment cycle starts within 30 days of receiving the funds.
Business line of credit
A business line of credit (LOC) is a flexible loan that behaves like a credit card, enabling business owners to borrow and repay funds as needed. Business lines of credit can be as low as $1,000 to as high as $500,000. You’ll draw on these funds, pay them back and they become available again throughout the duration of the loan.
Interest tends to skew higher for business LOCs, ranging as much as 10% to 99%. The exact terms of the LOC is dependent on your credit score, loan amount, the lender’s policies and other financial nuances specific to the lender and your circumstances. One benefit about this loan type is that you only pay interest on what you use, so if you’re approved for $25,000 but only use $5,000, you’ll only pay interest on the $5,000.
Business lines of credit often require you to be operating for a certain length of time and meet an annual income requirement, but new businesses can absolutely qualify for a LOC. You’ll need a good personal credit score (at least 680, though it will vary by lender) and you’ll likely need collateral if you’ve yet to open or don’t meet the time-in-business criteria. Repayment is immediate. That is, once you start using a business LOC, you’ll need to start paying it off monthly as you would a credit card.
Crowdfunding is a popular way to gain capital and visibility for your startup. It's designed to obtain funding from multiple sources (individuals, businesses, investors, etc.) by leveraging two effective marketing tools—word of mouth and the internet.
Business crowdfunding websites like Kickstarter and Indiegogo connect startups to potential investors who can be individuals, companies, banks/lenders and nonprofits. They give entrepreneurs an easy way to raise money without having to deal with the complexities of traditional small business loans.
Crowdfunding gives you a way to market your new idea or business by creating buzz and interest in a soon-to-launch product or brand. There are different types of crowdfunding (reward, donation, equity, etc.) with different requirements you must meet depending on your business type, your location and the platform you use.
Venture capitalists and angel investors
Venture capitalists and angel investors are financial professionals, organizations or high-net-worth individuals who provide capital in exchange for some type of control in your business.
Angel investors like to invest in early-stage companies and use their own money. In exchange, they often require equity or a seat on your company's board. Venture capitalists, meanwhile, can be banks, pension funds, insurance companies or other financial entities that manage funds that invest in startups. They usually invest in later-stage companies, have more available capital than angel investors and also often require a seat on your board.
Small business grants
While not technically a loan, it’s worth mentioning that small business grants can help fund your startup with no strings attached. Grants provide non-repayable funds and usually come from the government, private foundations or corporations. They often involve a comprehensive application process and are much more competitive.
Eligibility depends on factors such as the type of business you plan to start, your location and/or personal characteristics (women-owned business, minority-owned business, etc.) Some grants require additional funds be put toward your business as a condition of the grant.