Starting a small business is a noble venture. With over 28 million small businesses in the U.S. startups are an essential part of our economy. According to the Small Business Administration (SBA), 99% of businesses in the United States are small businesses with 500 or less employees.
This means that small businesses are the most important means for economic growth and employment in the country. It also means, there are many resources to help you succeed.
In fact, 39% of new jobs were from small businesses with less than 50 people. Perhaps that’s why small business owners have many opportunities for financing as well. As a nation, we depend on startups to spawn new jobs in our market.
The downside is, when startup businesses fail, it is often due to a lack of funding. A study by the U.S. Bank showed that 82% of business failure was due to “poor cash management.” However, with the right resources and know-how, you could create a long lasting business, which all begins with a strong foundation.
According to statistics by the SBA, small businesses usually require a minimum amount of about $10,000 in startup capital. As a startup founder, cash flow is essential, so it’s important to understand which types of funding options are available to provide the strong start you need.
What is a Startup Business Loan?
There are typically four reasons small business owners seek financing:
- Starting a business
- Purchasing inventory
- Expanding the business
- Strengthening the firm
Since nearly every new business owner needs capital to get the business going, as a startup founder there are several financing options available to you. From small business loans, short term loans and lines of credit, to crowdfunding, investors, and SBA loans, there are many options to explore. What you choose depends on your funding needs.
Many small business owners rely on their own savings to start their business and then use their personal assets as collateral to apply for small business loans. The type of loan that is best for your business depends on your revenue, time in business, experience and personal financial history.
If you’ve been in business for at least six months and you have a strong financial record, with a good personal credit history, you will have a lot of options for financing your startup.
How can I get financing to start a business?
Before you choose a startup loan or other method of financing for your business, you must first calculate startup costs, your budget, and your potential profits.
Consider how much you’ll need to launch your business successfully and what your budget will be each month. Once you know how much it will cost to run your business, next you’ll need to determine your revenue.
Calculating your revenue and profits will provide a clear view of how much money you’ll have to pay down any potential debt you’ll incur from your startup expenses should you choose to take out a startup loan. Next, create a breakdown analysis of these financials. That way you have it available for potential investors and lenders.
What are the requirements for a startup business loan?
In order to apply for a startup business loan you’ll need a breakdown of your business financials and history, credit score, bank statements, business license, tax returns, and proof of collateral.
Startup business owners will also need to have a clear vision of what they plan to do with the loan funds and a realistic plan to pay them back. When you meet with a lender they will ask how much money you’d like to borrow and what you plan to do with it. Startup loans can be used to buy equipment and inventory, hire staff, or cover other startup costs.
Lenders like banks tend to have more capital for small business loans, but they often cap loan amounts at $1 million. Alternative lenders can finance up to $500,000 for a small business. Microloans are also available through the Small Business Administration (SBA) for $50,000 or less.
The amount needed for your startup varies, so it should be no surprise that the repayment terms and payment schedule will also vary depending on your loan type. If you have a budget outlined clearly, making this choice will be easier. The SBA has a worksheet to help you calculate your startup costs.
How to get approved and qualify for a startup loan
The most important thing you need to know about getting approved is, you must have all of your paperwork in order. In order to qualify for a startup loan, every business owner needs your:
- Business plan
- Credit report
Make sure you check your credit history prior to taking out a startup loan. Check for errors so you won’t find any surprises or mistakes in your financial history before meeting with a lender. With a sound business plan, healthy credit report, and some collateral, your chances of getting a loan will be better.
Can you get a startup business loan with bad credit?
If you’ve done your homework, you will know what your credit score is prior to trying to get a loan. If you have bad credit, which is defined by FICO as 300-579, you may have a hard time getting a small business loan. If your FICO score is 580-669, your credit score is considered “fair” so you will be a subprime borrower.
For those with “poor” or “fair” credit scores, there are a few options available to you. You can get a secured credit card, which is a credit line secured with a deposit that acts as your collateral.
You may also try a short-term loan or personal that you pay off quickly to improve your credit score. In all three of these instances you’ll improve your bad credit by showing you have the means to repay debt.
A business credit card or secured credit card can help you pay for your business expenses in the event that you cannot qualify for any loans. Choose your credit card carefully; too many credit cards can lower your credit score.
Bad credit can severely affect your ability to take out a loan. It also leads to higher APRs for loans and shorter terms for your lending options. The key to building good credit is being responsible about your debt and not taking out more than you can repay. Choose only the best option for your business, not several.
How hard is it to get a loan for starting a business?
There are many factors that affect a business owner’s ability to get a startup loan. Your financials, type of business, and your business experience will greatly influence you ability to get a loan.
SBA loans and traditional bank loans are the most difficult to get because they have the highest standards. Other loan types like a merchant cash advance, business credit line, equipment or invoice financing, and short-term loans, may be easier to get, but these require a minimum projected annual revenue of $50,000 or more.
How to find the best startup business loan
The best way to find a startup loan is to align your business needs with the right type of loan and then find a lender with terms that suit your budget. If you meet the requirements for that lender, than this is the best startup loan option for you.
How to apply for a startup business loan
Applying for a startup loan begins with gathering all of your proper documents and supplying those to your lender. Once you choose which type of loan you’d like to apply for, choose a lender that supplies your loan type. Many lenders have online applications you must fill out. If you’re approved, be sure to review the requirements of the loan and make sure they fit your business needs before you sign. Good luck!