How to Apply for a Startup Business Loan

A startup business loan, or new business loan as it’s sometimes referred to, is a type of loan for small, new businesses.

Applying for a startup loan can be challenging, especially if a business owner has little to no business credit. There can be a lot of documentation that a potential borrower has to gather and narrow qualifications. Here’s how business owners can prepare themselves for the process of start-up business funding.

Step 1 – Check Relevant Loan Types

For those who are just starting out in business and applying for a startup loan, here are a few types of loans that may be worth looking into:

  • SBA loans: There are several types of SBA loans, the most common of which is known as an SBA 7(a) loan. SBA loans may be easier for a new small business to qualify for as they don’t have strict criteria around business credit scores and length of time in business. These types of loans also come with capped interest rates. However, SBA loans are not without their downsides. For example, SBA loans often require a down payment which can run between 10% to 20% of the loan. Even with a down payment, some lenders will require that borrowers offer collateral as well. For SBA 7(a) loans, borrowers must put down collateral for loans above $350,000.
  • Line of credit: An alternative to a business loan is a line of credit. Lines of credit work similar to credit cards. In this scenario, a lender would provide a borrower with an approved credit limit, charging interest only on what the business owner would take out on a monthly basis.
  • Asset-based funding: This type of loan, which is also called a secured loan, allows for business owners to borrow using collateral. This makes the loan much less risky for lenders and can increase a borrower’s chance of approval. However, should the borrower default on the loan, the lender can seize the collateral.

Step 2 – Check Your Credit Score

A borrower’s credit score can be one of the key indicators as to how easy it may be for them to qualify for a startup loan. Lenders often use credit scores as a way to measure a potential borrower’s creditworthiness and the likelihood that they will be able to repay a loan. The better the score, the lower the risk the lender perceives on providing a loan to that borrower.

  • Personal and Business Credit Scores: When considering a business loan, lenders often examine a person’s business credit score and, in some cases, their personal credit score, too. Lenders will take into account someone’s personal credit score if they don’t have much of a business credit history.
  • Good Credit Scores: When checking their credit score, business owners should keep in mind that a good business credit score is considered to be 80 and above. On the other hand, a personal FICO score of 670 and above is considered by lenders to be a good credit score.
  • Credit Score Improvement: Before applying for a business loan, potential borrowers will want to work on getting their credit scores up to increase their chances of getting approved by a lender. To increase their business credit score, potential borrowers can open up business financial accounts that are separate from their personal ones, pay their bills on time, and work with suppliers who report payments to the credit bureaus.
  • Paying Down Debts: If the business owner also needs to work on their personal credit score, they can work on it by paying down current debts as well as making sure they pay their personal bills on time.
  • Where to check? To check their business credit score, business owners may have to pay a fee to the credit bureaus. Business credit scores are monitored by Dun & Bradstreet, Equifax, and Experian. Personal credit scores, which can be checked for free, are supervised by Equifax, Experian, and TransUnion.

Step 3 – Prepare the Required Documents

Because most lenders require that potential borrowers provide documentation and verify the information provided in their application, it can help streamline the new business loan application process if a borrower knows what documents to prepare ahead of time.

While it may seem redundant, these documents provide lenders insight as to whether that potential borrower has a solid business plan that can impact their ability to repay the loan. In other words, The lender needs to make sure that you meet the requirements for a startup business loan. However, keep in mind that this is all information a business owner may already have in place.

Other questions a lender may ask during the startup loan process are the following:

  • Why do you need this startup loan?
  • How do you plan to use this loan?
  • What are your current business debts?
  • What is your business plan?
  • What is your business experience or background?

To verify the answers to these questions, lenders may ask that business owners provide the following documentation:

  • Accounts receivable and accounts payable
  • Balance sheets
  • Bank statements
  • Business credit report
  • Business licenses
  • Business plan
  • Cash flow
  • Collateral documents
  • Government issues identification
  • Income tax returns
  • Income statements
  • Leasing contracts
  • Resume

Keep in mind while applying for start-up business funding that, in most cases, loan application processes will vary. Each individual lender may have different requirements that potential borrowers will need to research and be prepared for. Business owners may need to contact lenders before filing a loan application in order to gather the financial documents they may need.

However, while every lender has its own unique approach and standard, the required documentation for a startup loan may be similar across numerous lenders. This can be advantageous to business owners looking to take out a loan. By gathering these business and financial documents, they may be able to streamline the process and provide these documents to multiple lenders in a short time period.

Step 4 – Compare Top Lenders

Business owners looking to take out a startup business loan should avoid feeling obligated to agree to the first loan they are approved for. Even if that borrower feels confident in the lender that’s approved them, it doesn’t hurt to compare the details of that loan to what other lenders may offer.

Here’s what to look out for:

  • APR: Annual percentage rates (APR) is the yearly rate lenders charge for a loan. Oftentimes, APR rates are determined by a borrower’s credit score with the better the credit score, the lower the APR the borrower must pay. This, however, may depend on the type of loan. For instance, a borrower may be provided competitive APR rates by a lender even if they don’t have the best credit score if they provide valuable collateral.
  • Collateral: If a borrower is required to provide collateral for a loan, they will want to research why the criteria for that collateral is and what kind of documentation they will have to provide for it. When providing collateral for a startup loan, it’s important for the business owner to ask if they can afford to lose that collateral if they are unable to repay the loan.
  • Loan criteria: Some lenders may have steeper requirements for a loan than others. For example, some lenders require that a business be in operation for a certain time and have a certain amount of monthly revenue. This may make it difficult for some businesses to qualify for, particularly if they are new to the market.
  • Lender reputation: Before signing any documents, it’s important for business owners to research a lender’s reputation. Borrowers will want to avoid ending up in a legally binding agreement with a lender that has a less than stellar record with treating their borrowers fairly, has poor customer service, or has a history of not upholding their end of the bargain.

Step 5 – Submit Your Application

Once a business owner has chosen the lender that they want to get a startup business loan with, it’s time to submit their application. Each lender will have its own application process, though most will allow potential borrowers to apply online. However, before being officially approved for a startup loan, business owners may have to come in person to the financial institution (depending on the type of lender). This may be required if the borrower goes through a credit union or traditional bank.

  • Double-check the info: After filling out the required information, applicants may want to go back and make sure all the information provided is correct so as not to cause hiccups in the approval process.
  • Verification by the lender: Once the application is submitted, the applicant will be contacted by the financial institution. In this next step of the process, the lender will want to verify the information the business owner provided in the application.
  • Business plan and documentation: This is where having the documentation mentioned earlier will come in handy. Typically, lenders will want to know the applicant’s business plan, how they intend to use the funds for their business, how that loan could help them make their business more profitable, and how they plan to repay the loan. Lenders will also want to see financial documents like balance sheets, cash flow, and income statements. The timeline of this process will vary from lender to lender. SBA loans, for instance, can take a longer time for approval.
  • Loan Approval: After a lender has ironed out the verification process, the financial institution will make the decision as to whether or not to approve a borrower for a startup loan. If that business owner is approved for a loan, they will receive the funds shortly after; however, the timeline between when a borrower is approved for a loan and the time it takes to receive funding depends on the lender. 

Conclusion:

While starting a new business can be a challenging feat, a startup business loan can help to ease some of the financial hurdles. By researching what type of loan would best suit their needs as well as gathering any required documents, borrowers can streamline the process and cut down on the timeline it takes to get a loan. And of course, comparing lenders before finally submitting their application can save business owners both money and future headaches.

Borrowers will want to pay attention to details like APR rates, loan amounts, loan terms, fees, time until funding, and collateral criteria.

While these steps won’t guarantee business owners are able to land a startup loan, they will give them a clearer picture of what to expect and how to prepare.

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