Startups cost money. And yet founders don’t always have all the capital they need to cover these expenses up front. That’s where business loans for startups come in.
A business loan could help you cover those startup expenses and launch on the right foot.
Why Consider Business Loans for Startups?
While many startups turn to venture capital or angel investments to fund their launch, others don’t want to give up control of their company to others, or share equity. Without the capital to cover startup expenses as well as ongoing overhead, these independent business owners may struggle.
A mistake many startup founders make is assuming they will reach profitability quickly. In fact, it could take three to five years to bring in profits. In the meantime, your business will have expenses that you’ll have to cover. How will you pay your vendors if your own clients haven’t paid what they owe you?
In both cases, business loans for startups can provide the needed capital without you having to give up equity or keep your vendors waiting.
Let’s look at your startup financing options and what you need to apply for a loan.
Types of Startup Business Loans
When it comes to financing for startups, there are several options you’ll want to consider.
Traditional Bank Loans
Banks, both online and in person, offer business loans. You can typically borrow up to $1 million, though the limit will depend on the bank and your qualifications. Also, local credit unions may have special business loan programs for local businesses.
Many banks and credit unions require that your business has been in operation for at least two years. If you run a startup, that’s one of the first requirements you should ask about.
SBA (Small Business Administration) Loans
Business owners love SBA loans because they offer low interest rates and long repayment terms. The Small Business Administration offers several different types of loan programs, including 7(a) loans, 504, and microloans.
Startups may be eligible for some of the SBA’s loan programs. You’ll need a solid business plan and you’ll need to demonstrate a clear need for the funds.
Online Lenders
Online lenders come in all shapes and sizes. There are those that specialize in bad credit or no credit loans, which may be helpful if you run a startup that doesn’t yet have a credit history. Others offer microloans for businesses that just need a small amount of money to get started. In some cases, you might save money by going with an online lender. Without a network of physical branches to maintain, their overhead costs are lower and that equates to savings they often pass along to their customers in the form of lower rates and fees.
Business Credit Cards
While business credit cards aren’t exactly business loans, they can be helpful in covering startup expenses like equipment and office supplies. Interest rates tend to run higher for credit cards compared with installment loans. For that reason, a credit card may serve you better as a tool of convenience that allows you to make purchases that you can already afford to pay off.
Alternatives to Traditional Loans
In addition to those traditional financing options, here are a few alternatives you could explore.
Crowdfunding
Crowdfunding allows you to raise funds from anyone who’s interested in supporting your startup without having to offer them equity. There are online platforms where you can create a profile and a compelling presentation of your business or product idea. You can then market your campaign to attract investors.
Angel Investors and Venture Capital
Angel investors are typically individuals who invest their own money. Venture capitalists are professionals who invest on behalf of a firm. Both angel investors and venture capitalists can infuse needed cash into your startup, and they may do so if they believe they’ll earn a return on their investment. Both will require some equity in your company (they’ll become part owners) in exchange for their investment, and they may want to be involved in decision-making.
Grants and Competitions
Grants and competitions are opportunities for startups to be given money that doesn’t have to be repaid. The amount of money tends to be smaller, and competition may be high.
Preparing to Apply for a Startup Loan
Once you choose to apply for a business loan, it may take several weeks to get the funds. You can do quite a few things to prepare in advance to make the application process smoother.
Assess Your Financial Needs
Start by determining how much funding you need and what you’ll use it for. It can be helpful to create a budget that includes a timeline for when and how you’ll spend the money.
Build a Strong Business Plan
If you’re planning to apply for business loans for startups through a bank or the SBA, you’ll need a business plan. Having a business plan will also be useful in keeping you focused on where you want to take your business for the short and long term.
Understand Your Credit Score
Both your personal and business credit scores can impact whether you are approved for a loan, and the terms. If your business doesn’t yet have a credit history, the lender may look at your personal credit report.
You can check your credit reports ahead of time so that you’ll know what the lender will see. Get them for free from each of the major credit bureaus (Experian, Transunion, and Equifax) by visiting AnnualCreditReport.com. If you happen to notice any errors on any of your credit reports, you can request correction by disputing that item while viewing your credit report online.
Applying for Business Loans for Startups
You’ve done the hard work by preparing for the application process. Now you’ll need to gather the required documents, which may include financial statements, tax returns, and your business plan.
Carefully read the process for applying with a given lender so you don’t make a mistake that could cost you time. Once you submit your application, you may be asked for further documents. Provide those quickly so your application can be processed sooner.
Once you’ve been approved, you’ll be required to sign the loan agreement. This document outlines the amount you’ll borrow and the interest rate you’ll pay, as well as the timeline for repayment and the monthly payment amount.
The next step is for the lender to deposit the loan funds in your bank account. Some lenders are able to fund loans within a few days, but it could take longer.
Managing Your Startup Loan
Now that you’ve got a large sum of money in your bank account, use it purposefully. Stick to the budget you created. If you use the entire loan immediately, be sure your budget includes a prudent reserve. Even businesses need an emergency fund to buffer against unexpected cashflow interruptions.
Consider putting the money you aren’t ready to use in an interest-bearing business savings account so it earns interest while it’s not being used.
Monitor your personal and business credit. Your credit score may drop slightly after you apply for the loan. On-time monthly payments and steadily decreasing debt can help you build and maintain a good credit standing. Over time, this may help you qualify for lower interest rates on financing.
Business loans for startups allow you to start your business with the cash it needs to thrive. Take your time exploring your financing options, then prepare your business to be a solid candidate for a loan. After you get the funds, spend the money wisely, have a plan for repaying the loan, and review your plan regularly.
