Although it’s harder for startups to obtain a business loan than it is for more established companies, it is still doable. By selecting the best sort of funding, being familiar with their credit scores, and locating the most affordable lending choices, new business owners can increase their chances of approval. Here’s how to apply for a loan for a new business.
1. Determine the Type of Loan You Need
Small business owners frequently choose to obtain funding from conventional banks and credit unions. However, there are a number of business finance options that might aid in the launch of new businesses. Typical types of loans for new businesses include:
Online loans for the term. Term loans typically come from traditional and online lenders and involve a bank providing a large sum of money that is repaid over a predetermined length of time at a predetermined interest rate. Maximum loan amounts normally range from $250,000 to $500,000. The finest small business loans have annual percentage rates (APRs) that start at around 9%. However, starting business owners might not be eligible for the largest loans or the lowest interest rates.
Credit lines for businesses. A business line of credit allows the owner to acquire finance as needed from a lender who offers loans up to a certain amount. Only the percentage of the credit line that is used on a monthly basis is subject to interest. Furthermore, after making payments during the draw term, the borrower has many access points to funds.
7(a) SBA loans. The U.S. Small Company Administration (SBA) offers the 7(a) loan program, which provides qualified applicants with access to business loans worth up to $5 million. Interest rates, which vary from 2.25% to 4.75% plus a base rate, can be utilized to pay for working capital, equipment purchases, and business expansion costs.
SBA Microcredit. SBA Microloans for up to $50,000 are available to qualified business owners. Startups in underserved communities, as well as those owned by minorities and women, are frequently awarded loans. Depending on the lender, repayment terms might last up to six years, with interest rates ranging from 8% to 13%.
Funding based on assets. Asset-based finance is a type of secured business financing that enables entrepreneurs to borrow money against valuable assets, including real estate, machinery, and equipment, as well as inventory and accounts receivable. Since this form of financing presents less risk to lenders, the conditions are frequently more favorable than those of other loans. Secured lending, however, allows the bank to seize the collateral in the event that the borrower defaults.
2. Review your personal and business credit ratings
Lenders assess a potential borrower’s credit score to determine how much danger they represent. Higher credit scores increase the likelihood of acceptance for applicants because they are more likely to make payments on time. New firms might not have one since business credit scores are normally available after six to one year of operations, especially if the startup is brand new.
As a result, lenders also consider the applicant’s or business owner’s personal credit score. Loans are frequently personally guaranteed, which means the borrower legally undertakes to repay the debt with their personal funds if the business is unable to do so.
Before asking for a loan, get copies of your business credit reports and check your personal credit score to get ready for the application process and assess your chances of acceptance.
3. Compile and prepare the necessary documents.
Each lender has different specific requirements for business loan applications. The majority of lenders do, however, rely on a few specific documents to evaluate and confirm the identity of applicants and the legitimacy of businesses. For instance, lenders frequently ask for financial documents such as bank statements, accounts receivable, credit card transactions, and outstanding bills from the previous four months—at the very least. They also frequently ask for tax returns going back at least two years.
A thorough business plan can help startup founders increase their chances of getting funding. Using projected future revenue and spending data can show lenders that the company is financially secure enough to pay back its obligations. Additionally, lenders could ask for copies of any business licenses and registrations that are pertinent to your line of work, as well as your banking details for direct deposit.
4. Examine and contrast lenders
You can be eligible for a startup loan from several lenders, depending on your personal and business credentials. When comparing lenders, take the following criteria into account to find the best startup business loans for your requirements:
Percentages are expressed annually. The average annual percentage rate (APR) for company loans is roughly 9%, while rates may be higher for startup loans and even lower for the best eligible borrowers. To find possible APRs, go to each lender’s website or speak with a customer service agent.
Taxes and other expenses. To cover the costs of completing paperwork and confirming applicant information, business lenders frequently assess origination fees that can range from 3% to 5% of the entire loan amount. Others impose prepayment costs or late payment charges on borrowers who repay their loans early or skip the due date, respectively. These costs can push up borrowing costs overall. Therefore, some lenders cut them out to stay competitive.
Lender standing. Even if a lender appears promising on paper, spend some time reading internet reviews to determine how well-regarded the company is with current and previous consumers. Likewise, speak to other individuals in your professional network to find out about their encounters with the financial institution. If your investigation shows any red flags, such as poor customer assistance experiences, think about selecting a different lender.
5. Send Your Application
Once you’ve decided on a lender, acquaint yourself with the application procedure and make sure you’ve assembled all the necessary paperwork. Look into if you can apply online or by phone—or whether you’ll need to visit a branch—as application and underwriting procedures frequently vary per lender. After you submit your application, a lender representative can get in touch with you to ask for more information, including collateral verification or more financial documents.
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