According to the National Small Business Association. “One in four individuals in the total U.S. population is part of the small-business community.” Since so much of the population relies on small businesses, we want to help small business owners learn how to qualify for a startup business loan.
While money can’t buy happiness, it sure can provide peace of mind when your blooming startup business has enough working capital to get by. But as anyone living on a budget knows, money can dissipate quickly. But if you’re smart about how you spend and save money, a loan can provide you with much-needed financing to really help you get off the ground.
Obtaining a small business loan to start a business can be difficult in that there is a great deal of preparation that goes into applying for the loan before you even choose a lender. Regardless of which type of small business loan you choose, ensure you have all of the needed materials for your loan approval before you ever fill out the application.
How to Get a Startup Business Loan
There are some steps you will need to take to get approved for a startup business loan.
# First, you will need to create a business plan.
One of the first items a lender requests for a start up small business is a written business plan. If needed, hire a business plan writer to assist you in putting the plan together. Lenders aren't willing to hand out a loan to just any startup, so you must be able to present a compelling business plan. A business plan should include financial projects such as future sales, income cash flow, profit and anything else you would like to add, to shows lenders that you have a solid idea of how you expect the business to earn money and to repay the loan.
# Second, Itemize your business costs
This sounds simple enough, but it actually requires meticulous detail. You have a lot of startup business costs to consider, after all. Some recurring costs include things like rent, utilities, salaries, employee benefits, supplies, and any other materials, services, items, etc. that you need. You’ll also need to look at one-time costs like conducting market research, outside training, consultant fees, office furniture, etc. And it’s important to look at hidden costs so that nothing gets left behind. Like does the company pay for Joanne’s lunch? Or stock the vending machines? Or provide coffee? These may seem like simple, benign details but those charges can quickly add up. You want to ensure that you’re both careful with your money and that you know how much money to ask for when applying for funding.
# Third, speak with your personal bank
Approach the bank where you have your personal accounts. Since you have an established relationship with the bank, you have a better chance of obtaining a business loan from it. Find out if the bank offers small business loans, and ask for an application and approval guidelines for small business start-up loans.
Aside from the steps mentioned above, make sure your credit score is decent enough. If you don't have a credit score that reflects your reliability in paying your bills on time, you should first work on building a higher score. Before a lender even approves you for a loan, they check to make sure your business is registered with your local government agency, so be sure to do that before applying for a loan.
Review the lender's loan guidelines and work on fulfilling each one. Each lender has different criteria it expects small businesses and the small business owners to meet in order to qualify for a small business loan. Review the bank’s guidelines carefully, so you can prepare the documents, application and other information required to improve your chance for approval.
Once you have completed the application and met all of the requirements, submit your complete loan application to the bank. Include a copy of the business plan with your application package.
Determine the type of loan you need
So you’ve finished your business plan and are ready to prove you’ll be an ideal borrower. Now it’s time to be choosy with the type of loan you apply for. You want to ensure you can meet the loan terms, after all. The good news? There are many business loans for startups.
If you’re able to qualify, apply for a traditional loan through a bank because you’ll likely get the best loan rates. However, it’s difficult for startup businesses to qualify for a traditional bank loan. So if your bank is a no-go, consider some alternatives, most often provided through online lenders. These alternatives can also help you build your business credit—just make sure that your loan reports to the Big 3 (that is, the credit agencies). If your loan and payments don’t show up on your credit report, you won’t build your credit. And that would be a shame.
How Do You Build Credit for a New Business?
Establishing business credit can seem overwhelming. However, it's important to separate your business credit from your personal credit history. If you have some negative reports against your personal credit, it usually won't impact your business credit, but it depends on the lender you choose. The first step is to become a Limited Liability Company (LLC) so it shows your company is seen separately as a business entity. Next, get a federal Employer Identification Number (EIN). An EIN is used in place of a Social Security number and can be used with business documents and taxes. Open a business bank account with your legal, registered business name.
Search United States Small Business Administration (SBA) startup loans offer competitive rates for those who qualify. They offer an SBA microloan program, disaster relief, long-term loans, real estate loans, equipment financing, and more. But their qualifications are strict: you’ll need at least two years in business, $100,000 in annual revenue, and a minimum credit score of 680. Plus, you must have exhausted other financing options. But their low interest rates and favorable terms make them worth the application if you can qualify. The average microloan from SBA is $13,000.
Are you in an area affected by the coronavirus? The U.S. Small Business Administration is offering Economic Injury Disaster Loans. If you qualify, you can get up to $2 million and a 3.75% interest rate. You can visit the SBA website or your local SBA office to apply.
When you need financing for a variety of needs, a cash loan may be your best option. While alternative loan providers can provide you with much-needed money, their loans often come with high interest rates, especially if you have bad credit. However, if you’ve got a plan to repay the loan, the cost could be worth it if it helps you grow the business. You could also consider taking out a microloan to improve your credit report so you get better rates in the future.
Banks don't typically offer high amounts for a business loan. However, if you have a good relationship with your bank, see if they will offer a loan to secure equipment financing. This type of loan is specifically for purchasing machinery and equipment and is similar to conventional loans.
Aside from SBA microloans, you can go through other microlenders like Accion who offer up to $10,000 with a credit score of 575 or higher and KivaZip, offering up to $5,000 for struggling entrepreneurs who don't have access to other lending opportunities.
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