fbpx

How to Get a Startup Business Loan

Financial pressure is almost unavoidable for new businesses. A startup business loan can help reduce that pressure and provide some much-needed breathing room.

By Hannah Donor • Aug 30, 2022

One of the biggest hurdles to overcome early in your business journey is funding. Most new businesses don’t have a large budget until they start to bring in consistent revenue, so finding alternative ways to get your feet off the ground is essential.

Fortunately, there are many startup business loans available to entrepreneurs that can give your business the boost it needs to get going.

What is a Startup Business Loan?

Startup business loans are specifically for brand new businesses in need of financing to cover the cost of starting their business. They typically can be put towards any expenses, from supplies and equipment, to real estate or merchandise. By getting a startup loan for your small business, you can scale your business early on, rather than waiting until you have the savings to do so on your own.

Startup Loan vs. Business Loan

Because startups don’t have the capital or credit history to back up an application, they may not qualify for standard loans for starting a business through bank financing. This is where startup loans are necessary. These first time business loans are for new businesses that don’t have the clout to secure larger loans from banks.

What Are The Requirements?

As far as business assets, you don’t need much to qualify for a startup loan. You often can get a startup business loan with no money at all, as it tends to be based on your personal credit history and business potential. In certain cases,  it’s possible to qualify for startup loans with poor credit history, but you may be required to provide further collateral.

What Types of Loans Are Available to Start a Business?

There are several small business loans available for startups. You’ll want to consider all the benefits and risks involved before applying. Any loan you take on for your business should suit your capital needs and growth potential while also having a payback timeline that you can make work. Take note of the following features for any loan you consider:

  • Total loan amount
  • Interest rates and any associated fees
  • Application and processing time
  • Repayment timeline
  • Collateral requirements and any penalties for late or missed payments

Every viable startup business loan should be able to provide you with this information, if it’s not available before applying then it should be when the loan is offered.

SBA 7(a) Loans

Amount: Up to $5 million

Term: Varies

One of the largest support systems for small businesses in the United States, the Small Business Association (SBA), is an excellent resource for acquiring startup loans. Their most common program is 7(a) loans, which are ideal for small businesses that involve a real estate purchase. It can also be used for short and long term working capital, to refinance a current business debt, or to purchase furniture and other supplies.

These loans are guaranteed in part, have capped interest rates, and limit fees involved, making them a competitive option for qualifying businesses. Because of their popularity, you will likely need a strong personal credit score to qualify as a first time business applicant. You also need to be able to demonstrate reasonable invested equity in your business separate from the loan. 

504 Loans

Amount: Up to $5 million

Term: 10 or 20 years

504 loans only provide financing “for major fixed assets that promote business growth and job creation.” This includes construction, the purchase of land or real estate, buying long-term machinery and equipment, or remodeling existing facilities, parking lots, etc.

You cannot use a 504 loan for working capital, inventory, refinancing another debt, or rental real estate. This tends to make it less attractive for startups unless your needs fit these specific requirements, but the long-term, fixed rate structure is still appealing.

Microloans

Amount: Up to $50,000

Term: Varies

Because not every small business needs millions in order to start up or grow, the SBA also offers microloans through “designated intermediary lenders.” Because this lending goes through external lenders, the qualifications and terms will vary. Usually, they will expect some form of collateral along with a personal guarantee from you as the business owner.

These smaller loans can be used for any business need – working capital, inventory, equipment, etc. – except for paying existing debts or purchasing real estate. They are also available to certain nonprofits, while the 7(a) and 504 loans are not.

Pilot Loan Programs: Community Advantage

Amount: Up to $350,000

Term: 10 years (working capital) or 25 years (real estate)

The SBA frequently offers limited time “pilot” loan programs that may or may not become permanent fixtures in their loan programs in the future. Through September 2024, their focus is on the Community Advantage (CA) loan program that assists small businesses in “underserved markets.”

If you have been in business for less than 3 years and have struggled to qualify for other lending, this loan could be exactly what you’ve been looking for. Due to its focus on mission and community, collateral and profits will not determine your eligibility.

How to Secure a Loan

Preparedness is necessary when it comes to applying for startup business loans. If you’re concerned about how to get a startup business loan, use this plan to get your business ready before you apply.

1. Have a Solid Business Plan

Lenders want to know how you’re going to use their capital, so the ability to demonstrate a strong business plan and potential for profit will take you far. Prepare a detailed business plan to share with lenders, including potential growth and cashflow details along with how you intend to earn money and pay the loan back. Explicitly identify your financial needs and what you intend to do with the loan.

2. Prepare Necessary Documentation

Before you begin applying for—or even researching—startup loans, get all of your ducks in a row. Register your business with your state and secure a DBA if necessary. Prepare all records and official documents relating to your business, along with your personal credit history and financial records, so that you can submit them alongside your loan application.

3. Be Prepared to Offer Collateral

As a startup, you likely don’t have business credit history or cash flow reports to show. Because of this you’ll need to be ready to offer some form of collateral that gives the lenders confidence that they’ll still get repayment if you default. Some startup loans will accept a personal guarantee of repayment from the borrower, and many SBA loans are guaranteed by the SBA in part, giving you extra security against failure to repay.

If you’re willing to agree to a blanket UCC Lien, this can increase your chances of acquiring a loan. This form of collateral states that the lender has the right to seize all of your business assets if you fail to keep up with the repayment plan. It sounds risky—because it is—but it also is a way to use your business as collateral when you don’t yet have a business to lose.

If you are ever at risk of failing to make loan payments, communicate with your lender up front to come up with an alternative plan. They may offer you a break in payments due to hardship, giving you time to get back on your feet. 

4. Look for Smaller Loans

Don’t borrow more than you need! Search for smaller loans (like the SBA’s microloans) that can give you just enough for the equipment or moving capital that you need to boost your business from starting up, to thriving.

Smaller loans are generally less particular about who they accept and may require less in the way of guarantees or collateral.

5. Don’t Overapply

Business loans are not college scholarships where you want to apply for as many as possible. Over-applying for business loans can put a strain on your credit score and actually decrease your chances of getting the loan you need.

Instead of applying for every loan in sight, be selective. Focus on finding the most ideal loan for your needs and apply solely for that. If it doesn’t work out, move on to the next best loan on your list. This one-at-a-time approach can save your credit score from plummeting and will save you the stress of tracking multiple applications.

Loan Alternatives for Business Funding

Loans are not the sole means of financing your new business. There are other ways you can fund your startup that may not even require repayment, making them much more appealing than interest-accruing debts.

Crowdfunding

If you have a business idea that you think other people will be excited about, like an innovative product, this approach may work for you. Crowdfunding can be based on donations, equity, debt, or even rewards (where investors get certain perks based on how much they invest).

Two of the most popular platforms are Kickstarter and Indiegogo, which have hosted crowdfunding for everything from new tech companies to creative board games.

Investments

With a business idea that has great profit potential, seeking investors is another way to secure funding toward your startup’s future. This can take place through crowdfunding, private investors, or even by asking family and friends to support you. Unlike a loan that will require repayment over a specific term, investors won’t expect to make anything back until your company turns a real profit.

Grants

Need the capital without the risk? Apply for small business grants! Grants are provided by federal and state agencies as well as private companies, and don’t require any payback whatsoever. Consider it a scholarship for your business.

Grants are often catered toward specific industries or business owners and exist to help underserved communities to find entrepreneurial success. If you’re a minority, veteran, or woman, for instance, you will find many grants available to you.

Loans and Your Business Financial Management

If you decide to apply for a startup business loan, you should have your finances in order before taking on the extra capital. One of the best ways to ensure your loan financing is used properly (i.e. only for your business) is to have a dedicated business bank account.
By opening a business bank account, you can more easily organize your expenses and build up a good credit score for your business. With a Lili account, you also have the added bonus of fee-free overdraft protection of up to $200 on your debit card purchases, keeping you free of other debt worries. Apply for a Lili Account today to start managing your new business’s finances with ease.

Written by
Hannah Donor

Hannah Donor is a freelance copywriter and social media strategist with 5+ years of experience helping small businesses authentically curate the written word to reach and inspire their target market. Learn more at hannahleedonor.com.