Businesses of all sizes at some point in time need access to more funds. But obtaining financing can be challenging for startups.
That’s because many lenders are cautious about approving loans to small businesses that lack a well-established financial track record. Start-up businesses typically must rely on personal credit and finances to secure funding.
How start-ups can get approved for a small business loan
Here are several ways start-ups can increase the chances of getting approved for a small business loan.
1. Have a solid business plan
Business plans are still relevant and here is why:
- New businesses lack a track record for banks to rely upon. A well-written business plan is the instrument that can convince banks it’s a smart decision to fund your business.
- For start-ups, a business plan helps to focus strategies, ideas and concepts allowing management to save time and concentrate on delivering value to customers.
- Business plans don’t have to be lengthy. A good plan can be anywhere from 5 to 20 pages and should be concise, including all the important factors about your business.
2. Improve your personal credit scores
Check your personal credit reports before you start the application process. Some lenders may use your personal credit history, especially if it’s a new business, to help them in the decision process. Fix credit report errors before applying and you’ll be ahead of the game. If your credit report shows legitimate negative items such as bankruptcy or late payments, include a letter of explanation.
The letter should explain the circumstances surrounding the negative entries and how you’ve made improvements so it will not occur in the future.
3. Check your business credit scores
Make sure your business credit reports are accurate and check your business credit score before submitting a small business loan application. Business credit scores may not be available for every business, especially startup ventures. It might take a few months to build business credit.
There are several Net-30 day companies that offer business credit to new companies. Business credit scores will be needed at some point as various entities, including lenders, suppliers, insurance underwriters, and other organizations, use business credit scores to help make decisions about partnering with your company.
4. Offer collateral
Providing collateral can demonstrate to lenders that you are a dependable and creditworthy business owner who can effectively handle your finances. Describe in detail what collateral you have to secure the loan. This may include equity in the business, borrowed funds, and available cash on hand.
5. Be prepared to provide financial statements
Financial statements will be required for a small business loan which may include all owners, partners, and officers. The financial statements should include a schedule of debts with balance owed, payment schedules, maturity of loans and collateral. If your business is currently operational, attempt to increase your sales prior to seeking financing to reassure lenders that your company is a trustworthy investment.
6. Explain your loan request
It may not be required but prepare a detailed report of the amount of money you are requesting and how the loan funds will be used. The report should include the type of loan you want and the amount of working capital you currently have on hand. Being able to thoroughly explain why financing is needed is crucial to obtaining a loan.
Lenders want to be assured you are requesting money that will be properly applied toward acceptable uses of the requested financing. Failure to properly explain why you need the money may cause red flags in a lender’s decision.
Here are some common reasons businesses seek financing:
- Real Estate Loans – Used for house-flipping, acquisition, construction, or improvement.
- Start-Up Loans – Most lenders will want to see at least a 25% contribution of personal capital towards the financing requested.
- Equipment Loans – Used to purchase equipment assets
- Working Capital Loans – Money used for operating cash and to produce profitable revenues.
- New employees and other staffing.
- Small business debt pay off.
7. Beat your own drum
Portray a determined and confident business owner. Be enthusiastic about your venture and talk it up. Never allow rejection to deter you; if you get a denial, politely ask why? If possible request an opportunity to correct any issues and ask for reconsideration. There could be fixable issues like:
- Improving your credit score
- Paying down debt
- Increasing business revenue
- Revising your business plan
Types of startup business loans
There are various types of business start-up loans that entrepreneurs can explore to fund their new ventures. Some of these include:
SBA loans are backed by the U.S. Small Business Administration and provide financing for small businesses with favorable terms and interest rates. The SBA 7(a) loan program offers small business loans up to $5 million with repayment terms of up to 25 years for a variety of purposes:
- Short- and long-term working capital
- Refinance current business debt
- Purchase furniture, fixtures, and supplies
Business lines of credit
Draw money as needed with a business line of credit. Withdraw funds up to a predetermined limit, instead of borrowing a lump sum. Similar to a credit card, a line of credit is revolving, allowing you to borrow, repay, and borrow again. Additionally, you are only charged interest on the amount you withdraw, making it an ideal choice for managing cash flow.
This type of loan is used to purchase or lease equipment needed for the business, such as machinery or vehicles. As equipment is used as collateral, these loans may be more accessible than unsecured business loans.
Entrepreneurs can use personal loans to fund their businesses. Personal loans may be simpler than business loans as most personal loan providers solely examine your personal credit score.
Merchant cash advance
A merchant cash advance (MCA) is an expensive form of financing and technically not a loan. With a merchant cash advance, the lender provides a lump sum of cash to a business owner in exchange for a percentage of their daily credit card and debit card sales. The MCA company partners with the business’s credit card processor to collect the payments.
To obtain an MCA, the business owner usually needs to have a substantial volume of daily credit and debit card sales. The MCA company will review the business’s sales history and determine the amount of funding they are willing to offer and typically provide funding very quickly.
Business credit cards
Business credit cards can be used to make purchases and manage expenses, and some offer rewards programs and cash back. A business credit card functions similarly to a personal credit card, but it is intended for business purposes.
Almost any business is eligible to apply for a business credit card. However, startups will likely need to provide a personal guarantee using their own personal credit score unless the business owner builds business credit separate from personal credit.
As businesses typically spend more than individuals, business credit cards often come with rewards, points, and other perks. If you are contemplating a business credit card with a yearly fee, ensure that the rewards it provides are worthwhile enough to justify the expense.
This involves raising funds from a large number of individuals through online platforms such as Kickstarter, GoFundMe or Indiegogo.
Angel investors and venture capitalists
These investors provide financing to start-ups in exchange for equity in the business.
- What are angel investors. Individuals, such as family members or friends, or a group of investors who pool their resources to search for investment opportunities can serve as angel investors. Since they invest their own funds, it is recommended that they meet the criteria set by the Securities and Exchange Commission (SEC) to be considered accredited investors. However, meeting these standards is not mandatory, but it is a useful gauge for potential fundraisers to evaluate the credibility of angel investors.
- What are venture capitalists. Venture capitalists provide funding to high-growth startups and early-stage businesses with the potential for significant returns on investment. They typically invest in businesses that have already shown some level of success or potential in the form of a strong business plan, proven product or service, and a talented team. Venture capitalists may provide funding along with guidance and support to help the startups grow and achieve its goals. In exchange for their investment, venture capitalists typically receive an equity stake in the company and expect a share of the profits or a successful exit through an acquisition or public offering.
Small business grants
Small business grants are typically provided by federal, state, or local governments, corporations, or foundations. The primary advantage of a grant is that it does not have to be repaid. Nevertheless, small business startup grants may face significant competition, and as a result, you may need to devote a substantial amount of time to the application process with little or no guarantee of receiving funding.
Invoice factoring is a financing option where a factoring company purchases a portion of an invoice’s face value. The company typically provides 70% to 90% of the invoice’s value upfront and then collects payment from your customers. Once payment is received, the remaining balance of the invoice is paid to you, minus a predetermined fee. Invoice factoring can be a useful tool to obtain cash quickly, but not all businesses are eligible.
Compare lenders to get the best offer
It can be thrilling to receive a loan offer, but it’s crucial to compare lenders and their terms to find the loan that suits your needs with the most favorable rates and fees.
Fundera is an online loan marketplace that helps small businesses find and compare loan options from various lenders. The process typically involves filling out a loan application on Fundera’s website, which includes providing basic business information and financial details.
Once the application is submitted, Fundera matches the business with potential lenders who meet their financing needs. The business owner can then review loan offers from these lenders and compare rates, terms, and fees to choose the best option for their business.
Fundera also provides guidance and support throughout the loan application and funding process, helping businesses to navigate any challenges and make informed decisions.
More Small Business Resources
- Check out how to establish business credit without a personal guarantee.
- Check out business loan options for bad credit.
- Discover the best online business checking accounts that can be opened from the comfort of your home or office.
- Find out why microloans are a good option for small business owners with bad credit.
- Get quick funding with a merchant cash advance.
- Find business checking accounts that don’t use ChexSystems for entrepreneurs with ChexSystems records.