How to Get a Loan to Start a Business

Self Employed Personal Loans

You’ve got an idea for a new business and the determination to make it work. But you’re likely wondering what steps you need to take to secure funding.

A business loan can help you start a company and access capital that can be used to invest in initial purchases and operating expenses for your business. There are many financing options available but qualifying can be an intimidating process. 

Use this post to guide you through the process of approval for a loan to start a business

What are the steps to getting a business loan to start a business?

Create a business plan and calculate your startup costs  

Before you approach a bank or financial institution for a loan, you’ll need a business plan to help support your loan application and calculate the cost of starting your business. 

Depending on the type of business you start, you may need to consider the cost of equipment and machinery used for production, business vehicles, permits and licenses, insurance policies, office supplies, office space, payroll, computers, and software. 

A business plan will show lenders how your business will generate revenue, forecast sales and expenses, and analyze the risk factors of starting your business. In addition, you may be required to show proof of licenses and permits in place.

Decide what type of business loan you need

As a business owner, you’ll have many options to apply for a loan. It’s important to budget how much you can afford to repay each month according to your projected sales, compare different types of business loans and find the best lender to suit your financial needs. Here are some of the different types of loans you could be eligible for:

  • Bank loans: To obtain a bank loan, you’ll need a credit score to qualify, and you may need to back the loan with personal or business assets. Bank loans can be an affordable option and you can borrow larger amounts, although the application process can take several weeks.
  • SBA loans: Small Business Administration loans (SBA loans) can start from $30,000 and are partially guaranteed by the Small Business Administration. Depending on the type of SBA loan you take out, loans are designed for specific business needs and there are restrictions on how you can use the money. For instance, certain loans can only be used for purchasing fixed assets such as land, machinery, and equipment while other loans could be used to fund inventory purchases. 
  • Term loans: Term loans can range from three to 18 months for short-term loans and go up to 10 years for long-term loans. Interest rates can be high, going up to as much as 30% for medium-term loans and 80% for short-term loans.

    Business term loans are offered by banks, credit unions, and online lenders. The turnaround time for online lenders can be as little as two weeks, or within 24 hours for short-term loans. 
  • Business lines of credit: A line of credit allows the borrower to have access to a safety net of emergency cash. The line of credit works like a credit card, where you can borrow up to a set amount at the applicable interest rate. You can keep borrowing until you reach your limit, and you will be charged interest for what you use.

    A line of credit has the flexibility of being able to use the funds as and when you need it. You can fund many aspects of your business such as payroll, inventory, and equipment purchases.
  • Equipment financing: When starting a business, you’ll likely need to fund equipment or machinery. Equipment financing can help you cover the upfront cost of buying commercial vehicles, trucks, computers, cash registers, manufacturing equipment, and more. The loan is collateralized by the equipment, where if you default on the loan, the lender will sell the equipment to recover the funds owed.

    Many lenders allow you to finance up to 100% of the cost of the equipment. Interest rates will depend on the borrower’s credit history. 
  • Invoice financing: With invoice financing, your business can borrow money against invoices that are due from customers. The invoice serves as collateral for the loan, and the money can be used to pay for short-term cash flow shortfalls.
  • Merchant cash advances: With a merchant cash advance, a business owner can borrow money against future credit card sales. The lender is paid back a percentage of daily credit card sales. For businesses that have a high volume of expected credit card sales and require cash quickly, this can be an attractive option.

Determine if you qualify for a business loan

When applying for a business loan, there are multiple factors that lenders take into consideration. Here are a few that you should look out for:

  • Credit score: Borrowers that have a higher personal credit score of at least 680 or above are likely to benefit from lower interest rates. Personal credit history is important because a new business will not yet have an established credit history. Short-term loans can have less stringent credit requirements, often accepting credit scores in the range of 550 – 600.
  • Time in business: Many small business loans require a minimum of one year in business, and bank loans can require two years or more. If your business has less than one year in business, your options are limited however it could be worth looking into startup funding options. 
  • Revenue: Lenders will have different requirements for the minimum annual revenue, starting from $50,000 and going up to $250,000. If you have lower revenue, it could be a good idea to look at short-term loans and equipment financing options. 
  • Collateral: Using collateral to secure your loan lowers the risk for the lender and can therefore lower the interest rate. Having an asset such as a home or car to back your loan can improve your chances of getting approved.

How to choose your lender

When starting a business, it can be time-consuming trying to find the best lender for your business loan. Here are a few factors to consider:

  • Reputation: If an interest rate seems too good to be true, it usually is. Be mindful to check online reviews on lenders before taking out a loan. There are many predatory lenders to watch out for, so it’s best to go with a lender that has a strong reputation. 
  • Loan amount: Many lenders have minimum and maximum loan amounts. Ensure that you calculate your borrowing requirements, and find a lender that can meet your financial needs.  
  • Applications timelines: Different lenders have different requirements for the application and processing times. Some online lenders can take as little as 24 hours while larger banks could take several weeks. Be mindful of your funding requirements and time constraints. 
  • Interest rate: The interest rate will depend on many factors including your creditworthiness, the term of the loan, and whether the loan is collateralized. Compare interest rates from multiple lenders so that you can be sure you’re getting the best loan at the lowest rate possible. 
  • Fees: There may be origination fees applied to the loan which can reduce the principal amount you receive from the lender. Read the terms and conditions so that you’re not caught out by any unexpected fees, such as late payment or prepayment penalties. 

Complete your loan application

Depending on the lender you choose to best fit your business loan needs, you’ll be required to gather documents to support the loan application. Familiarize yourself with the process of your chosen lender. Documents can include business and personal tax returns, financial statements, business legal documentation, and a business plan. 

Many lenders allow you to apply for a loan online, however, an application with a bank or credit union is likely to require an in-person visit to the branch.

This is the final step in the process. It’s important to keep in mind that an application for a business loan will require a hard credit check which can temporarily ding your credit score. It’s best to only apply for one or two loans at a time. 

If you are approved for the loan, you will receive a loan agreement to sign. Ensure that you fully understand the obligations of the loan before signing on the dotted line. 

Can you get a loan to start a business with bad credit?

When you apply for a loan to start a business, the majority of lenders will take your creditworthiness into account. If you have bad personal credit, your options for taking out a loan can be limited. 

Here are a couple of ways to improve your chances for approval:

  • Collateralized loans: Merchant cash services, invoice financing, and equipment financing loans can increase the chances of approval without the use of personal assets such as a home or a car. 
  • Improve credit score: Take steps to improve your credit score such as reducing your debt-to-income ratio, making on-time payments, and correcting any mistakes on your credit report before you apply for the loan.  

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