Small Business
May 13, 2024

How to Get a Loan to Start a Business in 5 Simple Steps

Acquiring startup loans is among the most efficient ways to raise money for any business.

Recent statistics indicate that around 43% of small businesses in the U.S. applied for a startup loan in 2022.

This shows how many startups rely on a business loan instead of using their personal savings for capital funding.

If you’re ready to jump-start your new venture but unsure where and how to get a loan to start a business, this guide will walk you through the step-by-step process, including tips for finding the best loans that align with your business plan.

Importance of Getting Startup Business Loans

Business loans help cover startup costs and venture expansion. It allows business owners to execute their operational plans within their projected timeframe.

Here’s a quick overview of the specific benefits you’ll get when getting a loan:

  • Covers equipment financing, both its setup and maintenance cost
  • Pays for land acquisition or office lease
  • Pays for utilities within a specified timetable
  • Helps with cash flow management
  • Pays for talent fees and employee wages

How to Get a Startup Business Loan in 5 Simple Steps

You have several sources for getting a business loan, but they don’t always match all business structures.

Choosing the right lender includes assessing your business credit and matching it with entities that offer the best terms and interest rates.

Before signing up for any business loan agreement, ensure you get all these steps right to avoid paying more than you intend based on your business cash flow projections.

1. Evaluate Your Financial Projections

How much funding do you need? This is the first thing you’ll need to determine when borrowing money to start a business. Knowing the figures allows you to set a realistic amount for lenders to review. When evaluating your startup costs, you can look at your projected equipment loans, permits, business licenses fee, office supplies, furniture, etc.

After the initial setup, you must consider taxes, employee wages, rent, and all succeeding expenses your business will incur. Reviewing these items should be a breeze if you already have your business plan.

2. Assess Your Credit Scores

This applies to both your personal credit score and business credit. Banks, online lenders, credit unions, and most lending entities have standard credit score rating requirements to assess your ability to pay the loan on a given term.

Providing proof of business credibility is difficult for startups as they have yet to establish their industry reputation. For a short-term loan provider, this means examining your personal assets and credit history as a guarantee that you’re capable of repaying debts from personal funds.

A credit score of 680+ is a generally acceptable range for getting a higher approval rate. In contrast, bad credit almost always gets you denied.

3. Identify What Loan Program Fits Your Needs

Lenders have varied terms and conditions. For instance, a traditional business loan may take longer to process than acquiring cash issued by online lenders. This is due to the stringent background checks the former conduct before they let you borrow money.

An established financial institution often has more requirements compared to smaller lending entities. If you need the money fast, it might be worth checking who can issue it best at a reasonable interest rate. Here are the most common loan sources or programs to check out:

  • Business Line of Credit: If you’re the type of business owner who needs a portion of a predetermined loan amount instead of getting it as a lump sum, then this option is for you. Borrowers can withdraw anytime and only pay interest on that amount.
  • Merchant Cash Advance: This is the fastest source of funding fit for small business owners. There are no fixed monthly installments for loan repayment. You pay the loan as more cash flows into your business through debit or credit card sales.
  • Microlenders: Often tied with non-profit organizations, this is recommended for a startup business that wants low-interest rates with a long-term repayment schedule.
  • Personal Loans: These loans rely on your personal credit score and can be helpful for small business owners with significant assets. Personal loan lenders will require these as collateral in case your business fails.
  • SBA Loan: Offered by the U.S. Small Business Administration, this has the lengthiest payment terms among the options on our list. You can borrow as much as $5 million and pay it for up to 25 years.
  • Business Credit Card: This works like a personal loan but with more perks and benefits. Your business credit report and personal credit scores greatly influence approval.

4. Search and Compare Lenders

It’s possible to take multiple startup business loans from different entities. The more important question is how do you spot the right ones?

Before deciding on a loan provider, take some time to consider the following factors:

  • Interest Rates: Consider checking if the lender offers fixed or flexible interest rates based on the borrowed amount. This plays a significant role, especially when you plan to repay earlier than the agreed terms, which should help save money.
  • Management Fees and Hidden Costs: Always read and ask before signing anything. Some lenders may charge a service fee if you pay your loan earlier than agreed. Annual fees, especially for business credit cards, should also be checked.
  • Payment Duration: Choose a payment frequency that you can commit. Be realistic in your business income flow and see if paying the loan earlier fits your cash flow projection.
  • Loan Approval Process: Consider the lender’s eligibility requirements for a brand-new business. Some offer a startup business loan as fast as 48 hours, while others can take weeks.
  • Minimum and Maximum Loanable Amount: Not all lenders can offer your needed amount. However, you can always apply for multiple loans to acquire your target figure. The key is to stick to a reasonable agreement.
  • Lender’s Reputation: Go for entities with a proven track record of providing small business loans to entrepreneurs. This tells you they’re legal and that they honor their signed agreements with small ventures.

5. Identify and Gather All Required Documents

Once you’ve chosen the lender you want to partner with, you need to list all their requirements. This differs from each lender, but standard documents include financial projections, financial statements, business debt reports, bank statements, account details, and a business plan.

Additional supporting documents like your business licenses and permits may be required to prove your business compliance with legal and regulatory bodies in your state or county.

Frequently Asked Questions

Is It Hard to Get a Business Loan?

The application process is straightforward. It’s the approval process that takes time. Multiple factors play a role in getting approved, but a common requirement for all lenders is a strong personal credit score.

For established businesses, a healthy business credit history is often always required. As long as you can show them proof of your ability to pay, lenders can help you with options.

Can I Still Get a Loan Without a Business History?

Yes, you can. Some lenders, like online entities and venture capital, can provide you with funding for startup businesses, even if it’s your first time running a business.

Even traditional lenders like your bank or credit union can grant you a loan if you submit supporting documents highlighting your personal assets.

How Do I Improve My Credit Score?

There are a few ways to improve your credit score. Common practices include:

  • Paying on time
  • Keeping old accounts open to maintain the length of your credit history
  • Keeping your credit utilization rate low

Reviewing credit reports is another way to improve your score. This ensures there are no existing inaccuracies in your records and no unpaid accounts.

Limit opening new personal or business credit cards. This only decreases the length of your credit history, which may cause issues in achieving the minimum credit score.

Other Important Things to Know When Starting a New Business

Getting a loan is one of the most crucial steps in starting a new business. However, there are other things you must learn before you start executing your plan. Here are topics worth checking out to kick-start your entrepreneurial journey.

  • How to Start a Business: Apart from ideas, services, business lines, and products to sell, knowing the step-by-step process of starting a business helps you organize the execution of your plan.
  • How Much Does It Cost to Start a Business: Getting ballpark figures on how much you need to spend for your startup’s initial setup helps you create better budget projections.
  • How to Start a Small Business at Home: If you prefer starting small, knowing how to make your personal space business-ready helps run your business smoothly.

Wrapping Up

Now that you know where to get business capital, it’s time to hit the ground running!

Polish your business plans and scout for the best lenders in your area. Remember that you can take multiple loans from different entities.

The key is to calculate how much you need to pay and for how long in relation to the amount they let you borrow. Take advantage of the benefits of a business loan by following our guide.

Do you have other recommended funding sources? Let’s hear about them in the comments!