Getting a business loan is more challenging for startups than for established businesses-but it’s still possible. New business owners can improve their approval odds by choosing the right type of financing, familiarizing themselves with their credit scores and identifying the most competitive lending options available. Here’s how to get a startup business loan.
1. Evaluate What Kind of Loan You Need
Many small business owners opt for financing through traditional banks and credit unions. However, there are several types of business financing that can help startups get off the groundmon types of startup business loans include:
- Online term loans. Term loans are generally issued by online and traditional lenders, and involve a bank extending a lump sum of cash, repaid over a set period of time, at a set interest rate. Annual percentage rates (APRs) on the best small business loans start around 9%, and maximum limits typically extend from $250,000 to $500,000. That said, startup owners ounts and most competitive interest rates.
- Business lines of credit. With a business line of credit, a lender extends funds up to a certain amount and the business owner can access the financing on an as-needed basis. Interest only accrues on the portion of the credit line accessed from month to month. Furthermore, the borrower can access funds repeatedly after making payments during the draw period.
- SBA 7(a) loans. The 7(a) loan program is offered through the U.S. Small Business Administration (SBA) and extends business loans up to $5 million to eligible applicants. Funds can be used to cover working capital, equipment purchases and business expansion expenses, and interest rates range from 2.25% to 4.75% plus a base rate.
- SBA Microloans. SBA Microloans are available to eligible business owners up to online payday loans in MA $50,000. Loans are typically offered to startups in disadvantaged areas and to those owned by minorities and women. Repayment terms may be as long as six years, with interest rates ranging from 8% to 13%, depending on the lender.
- Asset-based financing. Asset-based financing is a form of secured business financing that lets startup owners borrow against valuable assets like inventory, machinery and equipment, accounts receivable and real estate. This type of financing is less risky for lenders, so the terms are often more competitive than other types of loans. However, secured financing means the bank can repossess the collateral if the borrower defaults.
2. Check Your Business and Personal Credit Scores
Lenders evaluate an applicant’s credit score to gount of risk they pose. Applicants with a higher credit score are more likely to make on-time payments and, therefore, have higher approval odds. Business credit scores are typically available after six months to one year of operations, so new businesses may not have one, especially if the startup is brand new.
That said, loans are often personally guaranteed-meaning the borrower legally agrees to repay the debt with their personal funds if the business fails to repay-so lenders also look at the applicant/business owner’s personal credit score.
Prepare for the application process and gauge your approval odds by requesting copies of your business credit reports and checking your personal credit score before applying for a loan.
3. Gather and Prepare Required Documents
The exact documents required to get a business loan vary by lender. However, there are some documents that most lenders use to assess and verify an applicant’s identity and a business’ existence. For example, lenders often request tax returns going back at least two years, as well as financial records like bank statements, accounts receivable, credit card sales and outstanding invoices from the past four months-at a minimum.