Starting a new business is difficult at the best of times. But if you’re short of cash, it can be almost impossible. Unfortunately, this is a catch-22 for many entrepreneurs. You can’t get financing without assets or an established business, and you can’t start a business without a small business loan for startups.

Thankfully, there is an option out there for new businesses. A small business loan for startups can be used for purchasing equipment, leasing premises, marketing, hiring employees, and all the other common startup expenses you have to cover. To be eligible for a startup loan, you don’t need to demonstrate a long history of trading, but there are a few things you need to know before applying for this type of finance.

How to get a small business loan for a startup

Before you search for a business startup loan, investigate all your funding options. Can you find an investor? Are you eligible for a state or federal grant? Small business financing isn’t cheap, and it can be a drain on a business’s resources at such an unpredictable time.

If you’ve determined that a small business loan is your best option, there are a few issues to consider.

Determine how much money you need from small business financing

It’s important not to borrow more money than your business needs. You pay interest on every dollar borrowed, so borrowing too much hits you with an unnecessary expense before your business gets going.

Before you approach lenders, make sure you have a fully costed business plan. How much do you need for premises, equipment, marketing, hiring, materials, inventory, etc? How much cash do you have now? And what is needed to make up the shortfall?

Here are a few tips for deciding how much to borrow:

  • Choose a business model to establish projected costs
  • Analyze the costs incurred by similar startups in your sector
  • Determine how much you can raise from private investors
  • Create a detailed list of all your startup costs
  • Create a detailed list of your operating costs
  • Forecast when you’re likely to become profitable (you may need funds to cover costs until your total revenue covers all your expenses)

What are the common requirements for a startup loan?

Before you apply for startup business loans, ensure you can meet the common requirements. Lenders won’t lend based on a great idea alone. They’ll start by checking your credit file, so make sure it’s as healthy as it can be.

The other fundamental requirements are:

Age of business.

Traditional lenders will usually need to see a year’s worth of accounts — sometimes more. Marketplace lenders are much more relaxed about the age of a business, however.

Annual revenue.

Is there enough total revenue to cover your costs and your loan repayments? Will this still be the case in a year or two?

Personal debt-to-credit ratio.

A lot of lenders will want to see your personal credit file before making a lending decision. If you have a high personal debt-to-credit ratio, lenders might be suspicious that you’ll turn to your personal credit when your business needs cash.

Net income.

Lenders need to be sure that you have enough money at the end of every month to repay your loan. If you’re barely breaking even, where are your repayments coming from? Traditional lenders often insist that your net income is at least 1.25 times your total expenses.

Collateral.

Startup loans are risky for lenders. Banks in particular will usually insist on collateral, whether it’s owned by the business or by you. You’ll need to provide proof that you own the asset, as well as an independent valuation.

Business plan.

You’ll also need an in-depth, long-term business plan with estimated costs and revenue projections for at least the first three years. Lenders will want to see a track record in business, as well as proof of your current financial situation. They may also want to see evidence that you can save money in order to finance business ventures. Make sure you gather all the documentation pertaining to your application before you begin.

Check your credit report

Check your credit file for missed or late payments. If you don’t have a demonstrable history of using business credit, your lender will want to check your personal credit. To qualify for a startup loan for a new business, you’ll probably need a credit score of over 650. If yours is lower, consider approaching a marketplace lender.

Tip: Use the tools provided by credit agencies such as Experian to clean up your credit file as much as possible.

Create a comprehensive business plan

A comprehensive, detailed business plan can persuade even the strictest of lenders to approve your application for a business startup loan. Make sure yours includes projected sales, total revenues, pre-tax profit, bottom-line profit, cash flow, and costs. The SBA has a very good guide to writing a persuasive business plan.

Here are a few tips for creating a great business plan:

  • Use a traditional business plan template (there are several available for free on the internet)
  • Start with a summary of your business, its goals, and your target consumer
  • Create a formal company description
  • Create an index for easy access to subsections
  • Perform some market research
  • Describe your products and services
  • Describe your target customer
  • Detail how you’ll acquire sales (website, store, brand reputation, etc.)
  • Include sales projections with reasoning, ie competitor comparisons, historical data, size of the market
  • Create a detailed list of cost of goods sold (COGS)
  • Create a detailed list of expenses
  • Finish with a summary and an appendix

What is the difference between banks and marketplace lenders?

Banks take deposits from customers and use the proceeds for investments. They lend to their clients from their balance sheets. The money comes solely from the bank, so the entire risk lies with the bank. A marketplace lender facilitates lending between investors and borrowers — through the infrastructure required to facilitate funding arrangements or they will directly provide the financing to the business.

Pros and cons of using a bank for a business startup loan

Banks perform a range of stringent checks before approving a small business loan application. While these checks can delay the process, they help to protect the borrower from making unwise financial decisions. Banks can offer very low interest rates over relatively long repayment periods.

But banks are notoriously strict when it comes to approving small business loans for startups. Turnaround times don’t always suit entrepreneurs in need of quick cash. And there’s not a great deal of choice when it comes to the types of long-term startup loans to offer.

Pros and cons of using a marketplace lender

If a bank turned you down for a small business loan, a marketplace lender could be a great option. They provide tailored products for businesses with little or no trading history. There are also options for people with bad credit. Turnaround times are faster, and there are various online tools that help you to shop around for the best deals.

But inexperienced entrepreneurs can make hasty financial decisions if they don’t have the right guidance. A business will need to make sure that the terms and rates associated with the financing are the right fit for the business.

What are the most commons types of business startup loans?

There has never been a wider selection of startup business loans. But how do you decide which of them is best for you? The most popular types of startup loans are:

Small business loans

A small business loan is a lump sum of working capital that’s used to cover business expenses and expenditures. It offers a fixed repayment amount every month, although some lenders allow monthly, daily, weekly or bi-weekly repayments. This type of startup loan offers terms of up to five years.

Bridge loans

Applying for relatively large loans — particularly from banks — can be a long, drawn-out process. If your business experiences short-term cash flow problems while you’re waiting for funds, a bridge loan might be the answer. The application process is relatively straightforward, and loan terms of up to 60 months are available.

SBA loans

SBA loans are long-term, low-interest business loans that are partially funded by the US Government. While the interest rates on offer are very low in comparison with other small business financing options, this type of loan is only available for companies with fully established and substantial revenues. Loan terms of up to 10 years are available.

Other small business financing options

If your startup doesn’t meet the qualifying criteria for a loan, there are a couple of additional options. For example, you might be eligible for a business credit card. Alternatively, you can apply for a personal loan if your credit is in good standing.

Apply for a startup loan for a new business

Application processes vary from lender to lender. Before you apply, make sure you have all the necessary documents. Ask your preferred loan provider for a checklist. However, most lenders will require copies of accounts as proof of how long you’ve been in business. You should also gather bank statements that cover at least the last four months.

Other important documents you might need include:

  • Personal and business tax returns
  • A copy of your personal credit file
  • Annual profit-and-loss statements
  • A business plan
  • Any necessary business permits and licenses
  • Proof of collateral (if required)
  • Copy of your commercial lease
  • A business debt schedule

Summary

Banks and other traditional lenders are risk-averse, so they’re often reticent about lending to unestablished businesses. That said, if you have good credit, a sound business plan, and a history of success, you can still find small business financing for your startup.

But you’re far more likely to secure the capital your startup needs from a marketplace lender. Their criteria for acceptance are broader and more forgiving. And they’re more interested in your business’s potential than its past. Terms tend to be more flexible, and decisions are made faster — ideal if your plans are time-sensitive.

Find a small business loan from a trusted provider

A small business loan for startups can give your new venture the impetus it needs for long-term success. But there is a plethora of options available, both from banks and marketplace lenders. Choosing a trusted lender with a proven track record of customer satisfaction is crucial. Reach out to Rapid Finance today, and let us help you find the startup loan you need for long-term success.