How to get a startup business loan: 5 steps
Key takeaways
- Startup business loans can be challenging to obtain since most lenders set minimum requirements for time in business
- You may be eligible for different types of loans that can serve specific purposes, such as a startup SBA loan
- Before applying, you’ll want to determine how much funding you can afford by assessing your business budget and current debts and expenses
Getting a startup business loan can be challenging without a track record of success in your company. Lenders want reassurance that you will repay what you borrow, and there’s no way to gauge the risk of default if you haven’t yet launched your business. Because of this, it can be difficult to obtain funding from a lender as a startup business, though it’s not impossible.
According to the 2023 Small Business Credit Survey, 43 percent of businesses aged two years or less were fully approved for funding. By comparison, 47 percent of businesses aged six to 10 years old and 54 percent of businesses 11 to 15 years old were fully approved.
For the best chance at getting approved for a loan to start a business, you’ll want to look for a lender with low time in business requirements, such as three or six months. You’ll also want to follow a few steps to ensure you apply for the right type of funding, loan amount and lender.
How to get a startup business loan
If you’ve got a great idea for a startup and are ready to apply for funding, follow these steps to get a startup business loan.
1. Determine how much funding you need
Some business owners make the critical mistake of requesting far more funding than they need to get operations up and running. They might get approved for a hefty sum, struggle to manage the loan payments and end up paying a fortune in interest or defaulting on the loan. A too-large request can also result in rejection by a lender.
You can avoid both unfortunate circumstances by creating a financial forecast with line items for projected income and expenses. By running the numbers, you’ll know exactly how much you need to borrow to keep operations afloat until the revenue starts coming in and your business can sustain itself.
These financial projections form an important part of your business plan. These projections help you estimate how much revenue you may bring in and when you’ll be net-positive in your business growth.
2. Decide what kind of loan you need
These types of business loans suit different business needs. For example, lines of credit are a flexible funding source that works similar to a business credit card. Meanwhile, equipment financing is a lump-sum loan where the machinery or other equipment you purchase acts as collateral to secure the loan.
Here’s a rundown of the different types of startup business loans you can apply for. Each type of funding comes with its own pros and cons, so you’ll want to decide which one suits your funding needs best.
| Loan type | Typical amounts | Details |
|---|---|---|
| Term loans | $10,000 to $10 million | Term loans can be used for general business purposes, including to finance buying equipment, acquiring a business or another purchase. They are repaid over a specified period as a fixed, monthly payment with fixed or variable interest rates. |
| Business lines of credit | Up to $500,000 | Business owners are given access to a set amount of money that they can draw from to cover various expenses, including payroll and inventory. These tend to be revolving, which means business owners can reuse the credit as they pay back past loans. |
| Commercial real estate loans | Up to $10 million | Available through banks, online lenders and the U.S. Small Business Administration, commercial real estate loans can be used to purchase commercial property, such as hotels, office buildings, warehouses and land. The loan is secured by the property being purchased. |
| SBA loans | Up to $5.5 million | SBA loans are offered through SBA-approved lenders and partially guaranteed by the U.S. Small Business Administration. They offer competitive interest rates and can be used to cover everything from operational expenses to equipment purchases or real estate renovation projects. |
| Equipment financing | Up to $10 million | Loan funds are disbursed in one lump sum and can be used to purchase business equipment, including commercial trucks, medical devices, and machinery. The loan is secured by the equipment being purchased. Because it’s secured, the lender may offer lower interest rates than unsecured loans. |
| Microloans | $50,000 to $150,000 | This loan pays out a small lump sum and offers fixed repayment terms, much like a standard term loan. Microloans may be funded by the SBA or nonprofits that may be available to startups and bad credit borrowers. |
In some cases, startups may use alternative sources like crowdfunding to avoid the risks of debt financing. According to the 2023 Small Business Credit Survey, 28 percent of startups under two years old used personal funds to fund their businesses. The survey also found that startups are more likely to use loans from family or friends to get started than older businesses.
Despite startup business owners often using alternative funding, it’s still possible to find multiple business loans that would serve your needs without having to dip into other sources like personal funds.
SBA loans are friendly to startup businesses. As of August 7, 2024, 15.8 percent of SBA 7(a) loans were given to startups just opening their doors in FY2024. The amount funded totaled about $4.47 billion. Another 17.2 percent of SBA 7(a) loans went to startups with less than two years in business, totaling $3.56 billion, according to the SBA weekly lending report.
3. Check your eligibility
The next step is to check your eligibility for a startup business loan.
Qualification criteria vary by lender and the type of funding you’re applying for. The most common criteria you’ll find on a lender’s website are its requirements for your time in business, personal credit score and annual revenue.
But lenders look at a range of factors to determine whether you’re eligible and can manage the loan repayments. The areas that the lender may evaluate include:
- Personal credit score. Most lenders require a credit score of 600 to 670 or higher to be eligible. Some lenders offer funding solutions to credit-challenged business owners with scores in the 500s, but the loans come with higher interest rates to offset the risk. Lenders with relaxed credit requirements this low tend to be online lenders.
- Business credit score. The lender may peek at your credit rating if you’ve already begun building business credit. Still, your personal credit history is usually more important to small business lenders, especially when you’re just starting your business.
- Personal guarantee. With business loans, you often have to provide a personal guarantee. This guarantee states that you’ll repay the loan from your personal assets if the business defaults and can’t repay the loan. This puts you legally on the hook for your business loan.
- Time in business. It’s not uncommon for bank lenders to require two or more years of business experience to qualify for a loan. This is problematic if you haven’t yet launched, so you’ll likely be better off with an online lender that extends financing to startups. Many online lenders may require a minimum of six months in operation, while only a few offer loans to startups with three months or less in business.
- Annual revenue. Many lenders want to see that your business has $100,000 to $250,000 in annual revenue, with online lenders requiring the most lenient amounts of revenue. Some lenders like Funding Circle go below this revenue threshold, requiring just $50,000 in annual revenue.
- Debt obligations: Lenders will analyze your debt load to determine if you can afford more debt. They may also assess your business’s debt service coverage ratio, which takes into account your net profit divided by your annual debt.
While many business loans require money upfront for a down payment, you may be able to get a business loan with no money. In this case, lenders will want to see a source of steady revenue or at least a well-crafted business plan that shows how you will generate revenue.
4. Compare lenders
When looking for where to get a startup business loan, online lenders usually offer the highest odds of approval. However, you should compare loans from all types of lenders, including traditional ones.
Start by comparing the lender’s interest rates, terms and loan amounts on the lender’s website. If these features seem agreeable to you, see if you can prequalify with the lender. Prequalification allows you to see the loan offer you might qualify for without a hard check on your credit. As you evaluate the loan offer, read the fine print and pay attention to the fees and the total cost of the loan.
Some of the best startup business loan lenders include:
| Lender | Minimum time in business |
|---|---|
| Taycor Financial | 3 months |
| Accion Opportunity Fund | 12 months |
| Lendzi | 6 months |
5. Gather documents and apply
When you’re ready to apply, you will need to gather loan documentation for a startup business loan, including these documents:
- Personal information, such as your name, address and Social Security number
- A copy of your company’s business license and formation documents from your state
- Your company’s employer identification number (EIN)
- A business plan that includes financial projections and a breakdown of how you’ll use the loan proceeds
- Business loan proposal, outlining how much you need and plan for repayment
- Business and personal tax returns from the past three yearsReceipts from quarterly tax payments
- Balance sheet
- Cash flow statements
- Profit and loss statements
- Recent personal and business bank statements
- Schedule of business debts
- Outstanding invoices if applying for invoice factoring
- Personal guarantee
Be mindful that this list isn’t all-inclusive. If possible, contact the lender beforehand and inquire about documentation requirements to avoid hiccups in the application process.
What to do if you’re rejected for a startup business loan
Before giving up or pumping the brakes on your new venture, reach out to the lender and inquire about the reason that your business loan was denied. It could be a result of conflicting information in the application or a credit-related issue. Either way, you’ll know what’s needed to improve your chances the next time you apply.
You can also apply with a lender that has more lenient requirements or wait it out and apply again once you’ve improved.
Startup business loan alternatives
Startup business loans are helpful because you can get funding without needing much time in business. But if you don’t have established sources of revenue, you could struggle to make debt repayments, which could lead to small business failure.
To avoid debt financing and explore other options, consider these alternatives:
- Business grants. You can apply for free funding through federal, state or local business grants, allowing you to get funding that you don’t have to repay. However, grants tend to be competitive among small businesses and are not a guaranteed form of funding.
- Use a crowdfunding platform. Create a campaign using a crowdfunding platform, like Kickstarter or Indiegogo, to raise money for your new business. Depending on your campaign type, donors may receive equity in your business, a reward or a repayment with interest over time. You’ll pay a fee to use crowdfunding services.
- Borrow from friends and relatives. You can also raise the funds you need to get started from your personal network. It may be possible to secure interest-free or no-interest loans without jumping through hoops. However, you could damage your relationships if you delay or fail at repaying.
- Use a business credit card. If you have good or excellent credit, you could get a business credit card, which often comes with rewards or a low introductory interest rate. You may also be able to avoid interest if you pay off the balance in full each month.
- Tap into your personal savings. Using your own funds to start your business could also work, but this strategy is risky. You won’t pay any interest since you’re using your own money. That said, depleting your cash reserves can damage your finances if your startup fails.
- Use a personal loan for business purposes. If you don’t qualify for a business loan, you could get a personal loan to finance your business. The downside is that this loan also makes you personally responsible for repaying the loan. You will need to verify that you can use the funds for business, as some personal loans restrict how you can use the funds.
Bottom line
Getting a startup business loan is similar to getting a standard business loan, except that you’re looking for a lender that’s friendly to businesses with little time in the market. When deciding which lender and type of funding is best, you’ll need to assess how much funding you need and your eligibility.
If you don’t qualify for traditional debt financing, consider alternative funding sources such as a business grant, personal loan or crowdfunding. It’s common for startup businesses to use alternative funding sources, including their own personal finances.
Frequently asked questions
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The eligibility criteria vary by lender. Most require you to meet minimum credit score, annual revenue and time in business requirements. Inquire with the lenders you’re considering to learn more about their guidelines.
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Getting a startup business loan can be challenging if your company isn’t yet established. But that doesn’t mean it’s impossible, and you may find funding solutions with a bit of legwork.
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Startup business loan amounts range from $1,000 to several million, depending on your type of loan. The amount you’re approved for is usually determined by your personal credit score, business credit score (if applicable), time in business, annual revenue and debt-to-asset ratio.
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A credit score in the mid-600s is usually enough to qualify for funding. Some lenders will approve you with a credit score in the high 500s but expect a higher interest rate.
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