Tips for Getting a Small Business Loan for a Startup

Tips for Getting a Small Business Loan for a Startup

Understand the Different Loan Options

There are many different types of small business loans available, each with its own qualifications and ideal borrower. Do your research to find the ones that best match your business goals and financial situation.

Some top options for startups include:

• SBA 7(a) Loans – The SBA guarantees a portion of these loans made by banks and other lenders. They can be used for nearly any business purpose.
• SBA Microloans – The SBA provides funds to nonprofit lenders who then make microloans up to $50,000. The application process is streamlined.
• Equipment Financing – Funding to purchase equipment like machinery and vehicles. The equipment serves as collateral.
• Business Credit Cards – Easier to qualify for than term loans. Use for smaller and short-term needs.
• Personal Loans – Riskier but may be an option if you have strong personal credit and collateral.
• Crowdfunding – Raise smaller amounts from a large pool of investors. Useful for gaining exposure too.

Improve Your Personal Credit

Lenders view your personal credit reports and scores as an indication of how you’ll handle the business loan. Having a good personal credit profile makes approval more likely.

Before applying, take steps like paying down debts, correcting errors on your credit reports, and keeping credit card balances low. Avoid taking on new debts as well. Aim for a credit score over 700 if possible.

Have a Solid Business Plan

An in-depth business plan is crucial for both getting a loan and launching your startup successfully. Thoroughly explain all key elements of your business:

• Your product or service and target market
• Competitor analysis
• Marketing and sales strategies
• Operations plan and timeline
• Management team and staffing needs
• Financial projections

Show the lender you’ve done your homework and have a viable concept. Having a complete business plan demonstrates you’re organized, passionate, and ready to execute.

Know Your Personal Finances

Lenders will review your personal finances to assess your ability to repay the loan. Be ready to provide tax returns, bank statements, investment account details, and anything else related to your financial health.

Make sure your personal finances are in good shape before applying. Lenders want to see you’re managing money responsibly.

Have Collateral to Offer

Collateral is an asset that secures the loan. If you default, the lender can seize the asset to recover losses. Having collateral signals you’re confident in repaying and serious about your business.

While not all small business loans require collateral, offering it improves your chances. Assets like real estate, equipment, and savings accounts can potentially be used.

Seek Out a Cosigner or Investors

If your personal credit or collateral are lacking, bringing on a cosigner with stronger finances can help. You may also look for investors willing to provide some startup capital in exchange for partial ownership.

This demonstrates that others already believe in and are willing to stake money on your business concept. Just be sure you are comfortable with the equity or control you may have to give up.

Check Your Own Finances

Before seeking a loan, make sure you have “skin in the game” too. Lenders like to see you’ve invested your own money in the business.

Even small amounts help. Use personal savings, retirement funds, credit cards with rewards points, or cash from friends and family. Don’t expect the lender to take all the risk.

Choose the Right Lender

With so many options – big banks, community banks, alternative lenders, non-profit lenders – it’s important to find one that is the best fit.

Look for lenders that specialize in startup and small business loans. Having experience with early-stage companies will make them better equipped to properly evaluate your application.

Talk to Multiple Lenders

Never assume you won’t qualify just because one lender turned you down. Every lender has its own criteria and risk tolerance. Shop around and apply to several to increase your chances.

If you are turned down, ask for specifics on why so you can improve your application for the next lender. Be persistent and keep trying!

Be Ready to Guarantee the Loan

Don’t be surprised if lenders require a personal guarantee, meaning you promise to repay the loan yourself if the business can’t. This is standard practice for small business loans issued to startups and young companies.

While guarantees add risk, they are part of getting financing. You’ll need to weigh the risks and potential rewards of moving forward.

Use the Loan Wisely

Getting approved is only the first step. You’ll also need to use the loan proceeds strategically and judiciously once they are in your account. Stick to your business plan and budget so the money is spent effectively.

Prioritize investments that will kickstart operations and generate revenue quickly. The faster your business can turn a profit, the easier it will be to repay the loan.

Make All Payments On Time

Nothing hurts your chances of getting approved for a loan like missed payments on past debts. Set payment reminders and automate them whenever possible.

Even if business is slow some months, do everything to make at least the minimum required payment. Failing to make payments will destroy your credit and make future financing very difficult.

Be Patient and Persistent

Securing a small business loan for a startup can take time. Have patience with the process and be willing to start small if needed. Build a track record with a microloan before seeking larger financing.

Stay persistent even when faced with rejection. With the right preparation and discipline, you can eventually find the funding your startup needs. Don’t let obstacles stop you from pursuing your dreams.