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Securing Funding: How to Get Startup Business Loan?

By Alison K Plaut

Published on 6 Sep 2023 Updated on 1 Mar 2024 6 min read Updated on 1 Mar 2024

Startups don’t have an established business with cash flow to show to lenders, so securing a loan can be challenging. When you understand the different types of loans, tips to build both personal and business credit scores, and financing options, you’ll improve your chances of approval. 

Whether you plan to start a business at home or plan to build a company with thousands of employees, you need funding to get started. Read on to learn how to get startup business loan, including tips to improve your approval chances.

What Are the Different Types of Startup Business Loans Available?

Regardless of your business goals, from an LLC for startups to businesses you can start with $1,000 to businesses you can start with $50,000; funding is essential for business owners. Fortunately, there is a vast array of possible funding options, such as:

1. Business Line of Credit 

A business line of credit is a flexible loan that provides access to a set amount of capital that can be used as needed. A business line of credit functions similar to a business credit card with a limit. Businesses can withdraw funds from a business line of credit whenever needed and pay interest only on the amount borrowed.

2. Small Business Administration (SBA) Loans

Small Business Administration (SBA) loans are backed by the government through the SBA and often offer favorable terms and lower interest rates. These loans allow financial institutions to offer favorable business loans or use flexible underwriting criteria than conventional loans.

3. Equipment Financing

Equipment financing is a type of loan specifically for purchasing or leasing equipment needed for the startup. This type of loan offers vital startup funds to purchase expensive equipment like vehicles, machinery, or other technical equipment. 

4. Term Loans

Traditional loans with a set repayment term are typically used for larger expenses or investments. A term loan is repaid in regular intervals over a set period of time with either set or variable interest rates. Term loans usually last between one and 10 years but can also last as long as 30 years.

5. Business Credit Cards

Credit cards are designed for business use, and can provide a revolving line of credit to businesses. These business credit cards offer greater flexibility for businesses to meet cash flow needs and often come with additional benefits or rewards. 

6. Invoice Financing

Invoice financing allows businesses to borrow against their outstanding invoices to improve cash flow. Also, sometimes called invoice factoring, this option is especially useful for businesses with long payment terms or many outstanding invoices. 

7. Microloans

Microloans are small loans typically offered by non-profit organizations or community lenders designed for low-income entrepreneurs or startups. Microloans typically range from $5,000 to $50,000. 

8. Crowdfunding 

Crowdfunding is a method of raising capital by collecting small amounts of money from many individuals through online platforms. Crowdfunding sites have launched many popular businesses and even million-dollar companies like Oculus VR. 

With thousands of crowdfunding sites in the US alone, startups who can get the masses excited about their business proposition can secure significant financing. Major crowdfunding sites include Patreon, Kickstarter, GoFundMe, and Wefunder. 

9. Merchant Cash Advances

Merchant cash advances are based on future credit card sales and are ideal for startups with high volumes of credit card transactions. Merchant financing service companies are less stringent than traditional lenders. Instead, a company’s daily transaction determines the terms, payback time, interest, and loan amounts. 

10. Personal Loans

Personal loans are obtained by individuals and used for their startup business, often relying on personal credit history and collateral. Personal loans are based on the individual’s credit score and credit history rather than that of the business. Terms, interest rates, and repayment periods vary by lender and individual criteria. 

How to Get Startup Business Loan in 4 Steps?

If you’re ready to apply for a startup business loan, here are the steps to take:

1. Identify the Financial Needs of the Business

Before applying for a startup business loan, determine how much loan your business needs. You’ll want to balance total cash needs without taking too much extra, as you’ll have to pay interest on the total amount borrowed. 

2. Find the Right Lender

Explore different lending options and compare offers to choose the right one for your needs. You can secure a lower interest rate or more favorable repayment terms by comparing multiple lenders. 

3. Apply for a Startup Business Loan

To apply for a startup business loan, you’ll need to:

1. Gather all required documents, including government-issued IDs of applicants, business tax returns, and business financial statements, if available. 
2. Research and compare lenders.
3. Submit your application. Be careful to fill out everything accurately and completely.

4. Secure and Manage a Startup Business Loan

Strategies for improving your chances of loan approval include putting up business collateral, demonstrating significant funding, savings, or other investments, and having a strong business plan. You can have a trusted mentor or advisor look over your loan application and make suggestions to improve the strength of the application. Remember you also have the option to negotiate loan terms and conditions.

After securing the loan, plan to properly manage the funds acquired from the loan for the best business use. In that, consider total monthly repayment costs and opportunities to create positive cash flow for the business. 

Tips on How to Qualify for a Startup Business Loan

To increase your chances of qualifying for a startup business loan, consider each of the following:

1. Establish a Strong Personal Credit History

When you’re just starting a business, a strong personal credit history can carry the loan and increase the chances of approval. To start, you can check your credit report at annualcreditreport.com. Be sure to check the accuracy of all the information and dispute any incorrect information with the relevant credit bureau. 

Then, if you need to raise your credit score, consider the following: 

• Pay off debt or aim to keep total available credit utilization below 30% of available credit.
• Pay all bills and credit cards on time each month.
• Get a secured credit card to build a positive credit history.
• Consider a credit-builder loan to build credit.
• Become an authorized user on the card of someone with a good credit score.
• Get a rent reporting company to get credit for past on-time utility or rent payments. 

2. Build a Strong Business Credit Profile

Once the business is established with an EIN, building a strong business credit score can help secure further funding. To do this, pay creditors on time, as on-time payments are one of the main factors in business credit history. A strong business credit history can approve loan approval rates. 

3. Show Collateral or Personal Investment

If you show banks the option for collateral or personal investment in the company, it can also increase the chances of loan approval. The investment shows your commitment, and collateral offers additional security to lenders. 

4. Provide Additional Documentation if Required

Lenders may ask for additional documentation such as pre-orders, cash flow statements, personal tax returns or savings, a co-signer, or outside investment. To increase the chances of securing a loan for a startup, provide all required documentation. 

Securing Startup Business Funding

As the list above demonstrates, entrepreneurs working to create a startup have many options to secure funding. From micro-loans and crowdfunding to government grants, SBA loans, or traditional loans, building a successful business requires persistence, but you’re not without resources. 

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