Anyone starting a new business will likely need financial capital to launch their new endeavor. Startup business loans may be harder to qualify for, or require business owners to flee to alternative sources, but they are possible to obtain. Startup business loans can be secured or unsecured or they can even be in the form of a line of credit. There are other types of startup business loans such as inventory financing, crowdfunding, and so forth. Unsecured business loans are an ideal option for startups as they don’t require a down payment or collateral. Startups often struggle qualifying for loans because they may lack time in business, established revenues, or assets. Some lenders may specialize in lending to startups, although rates may be high. Startups should view their SMBscore to determine if they’re eligible for a business loan, find lenders willing to help, and learn what steps to take to put them in a better position to get approved for a loan.
Startup business loans come in various forms, including loans, equity lines of credit, equipment loans and more. Banks can sometimes be hesitant to loan to startups since businesses have often been operating for a shorter period of time and have less collateral to offer. While they can be difficult to qualify for, there are several alternative methods like grants, crowdfunding and business credit cards for those who can’t get a traditional startup business loan. The specifics on how they work will depend on the type of loan. Below we will review various types of loans and a brief overview of how they work.
There are several kinds of business loans entrepreneurs can obtain when starting their businesses. As you consider which type of loan is right for you, the following funding options might be available to you:
Each business owner will have different needs for a business loan. But with so many options available, there are several things to consider before selecting the one that’s best for them. It’s recommended that startups should be in business for at least six months before trying to secure a loan. This will ensure you have access to the most options to choose from, and will more likely qualify. Those with less than six months of business can opt for a business credit card or personal loan. To determine which loan is best for you, visit mySMBscore to view credit data through the eyes of a lender. MySMBscore is a platform designed to empower small business owners to make educated financial decisions. If you need startup equipment financing with bad credit then consider VFI.
Most startup business loans are under $250,000, but can go as small as $1,000, depending on the type of loan you opt for. If you’ve only been in business for a few months, you’ll have difficulty securing a loan larger than $250,000, which is reserved for more established businesses. The best way to find out what you qualify for is to start checking offers with various lenders. Checking your SMBscore can also help you understand what you might qualify for.
While it is more difficult to get a loan if you’re just starting your business, it’s still very attainable. Since there is no established track record for your business, lenders can be hesitant to loan money. The key to getting a startup business loan will be demonstrating a solid business plan and likely a personal guarantee.
Furthermore, to improve your chances, you should review both your personal and business finances before applying. As you review the various quotes and shop around, you’ll better understand what you can afford and what type of loan will benefit you the most.
Each lender will have different requirements to obtain a startup business loan. However, most will set a minimum time in business and an annual revenue requirement to be considered. It’s generally recommended that you should be in business for at least six months before attempting to apply for a startup business loan. It’s also recommended you’ve already started earning revenue.
Finding the best loan for you and your business will depend on several factors. A few questions to ask yourself when narrowing down your options include:
While it may simply come down to what you qualify for, you should do what you can to make the best possible arrangement to ensure the financial health of your venture. If you’ve only been in business for a few months, you might want to opt for a business credit card or personal loan that doesn’t depend on your business's success. Many startup business loans, like term loans and business lines of credit, will require a specific time the business has been operational and a specific revenue amount. There are also alternative financing options like merchant cash advances or invoice factoring that don’t require collateral to qualify.
While amounts can vary greatly, the average startup business loan from private lenders is between $20,000 and $80,000. However, according to the Small Business Administration, the average microloan in 2021 was $16,557. The microloan program is popular for startups since they are easier to obtain and don’t require collateral to qualify.
Some startup business loans require no down payment, like SBA microloans, a business line of credit, and some commercial equipment loans. However, most traditional bank loans will require a down payment ranging from 10% to 30%. Each lender will have different parameters though, so make sure to shop around and understand all your options.
The amount of down payment needed will depend on the type of loan, the amount of money requested and the borrower's financial history. You might have to put a higher down payment down if you have bad credit.
A bad credit score can make obtaining a startup loan difficult - but not impossible -. FICO defines any score under 630 as bad credit, with scores between 630 and 689 as fair credit.
If you have bad credit and are still trying to obtain a startup loan, some online lenders have tailored offerings to those with subprime credit. However, these loans will have a higher interest rate as there’s more risk for banks. Additionally, some local community financial institutions have developed offerings for those with poor credit.
While qualifications will vary by lender and loan type, make sure you do your due diligence before applying. You should have access to:
If you don’t qualify for a traditional term loan, there are other options to obtain funding, like a business credit card or some personal finance loans, which have less strict qualification requirements. To better understand what lenders look at to qualify businesses for a loan, check your SMBscore.
To prepare to apply for a startup business loan, you should understand first what it takes to qualify and what the lender might request. As you prepare to apply for a startup business loan, there are a few essential things to consider to qualify:
At mySMBscore startup business owners can check their SMBscore and unlock key financial drivers used by lenders, all with no credit impact. Our user-friendly platform allows business owners to identify ways to improve the likelihood of qualifying for a line of credit. Through the mySMBscore platform you can unlock offers for a business line of credit, business term loan, and more. The SMBscore was developed to create an industry specific, tailor-made risk assessment that can be used to determine the financial stability of small and medium-sized businesses (SMBs). Our score represents the risk of a company having financial difficulties in the next three years, thus empowering lenders and business owners. With access to key lending metrics, you can use the knowledge to unlock the best loan offers for your business.