The idea of business loans for startups is kind of vague. I mean, a business that isn’t even operating yet can’t exactly get a business loan. The people who want to start the business can get a loan to get going, but it will technically be a personal loan, not a “business” loan in terms of a loan to the business directly.
Business Loans for Startups: Do They Exists and How Do You Get Them?
The truth is, a startup isn’t just a business that hasn’t started yet. The term startup also includes any business that is still in its beginning stages. For example, they may be in their first round of financing, or still trying to get ramped up. Surprisingly, some businesses stay in the startup phase for up to 2 or 3 years.
Why does that matter? Because, if they have been operating for any amount of time, that changes the game. They could then potentially have business credit, which could help them get the funding they need on the merits of their business more so than their personal credit. These would be what we call business loans for startups. For many reasons, it’s harder for startups to get business loans.
Business Loans for Startups: Traditional Lenders
Not surprisingly, a lot of startups will not qualify for business loans from traditional lenders. Some will, but most will have to go the SBA route if they qualify at all. The SBA, or Small Business Administration, offers loan programs through partner lenders. More startups will qualify for these loans. The reason is, their programs are government backed.
As a result, the lenders are able to be a little more relaxed when it comes to eligibility and approval. There is a lot of red tape involved, but it can be worth it if you qualify. Here are some examples of SBA loan programs that may work well for startups. They mainly want a 680 minimum FICO score to qualify.
This is the Small Business Administration’s main loan program. It offers federally funded term loans up to $5 million. The funds can be used for expansion, purchasing equipment, working capital and more. Lenders include banks, credit unions, and other specialized institutions in partnership with the SBA who process these loans and disburse the funds.
There is a down payment requirement of at least 10% for the purchase of a business, commercial real estate, or equipment. The minimum time in business is 2 years. In the case of startups, business experience equivalent to two years will suffice.
This is by far the most popular of the SBA loan programs, and the funds are available for a broad range of projects, from working capital to refinancing debt, and even buying a new business or real estate.
These loans are also available up to $5 million and can buy machinery, facilities, or land. They are generally used for expansion. Like 7 (a) loans, private sector lenders or nonprofits process and disburse these funds. They work well for commercial real estate purchases especially.
Terms for 504 Loans range from 10 to 20 years. Unfortunately, funding can take up to 90 days. The collateral is the asset it is financing. There is also a down payment requirement of 10%, which can increase to 15% for a new business.
There is also 2 year in business requirement, or equivalent experience for management, if the business is in the startup phase.
Microloans are available in amounts up to $50,000. They work for starting a business, purchasing equipment, buying inventory, or for working capital. Community based nonprofits handle SBA microloan programs as intermediaries.
Interest rates on these loans are 7.75% to 8% above the lender’s cost to fund, and the terms go up to 6 years. Similar to other programs, they can take up to 90 days to fund. The minimum credit score is 640, and the collateral and down payment requirements vary by lender.
SBA Express loans
These loans max out at $350,000. They have a maximum interest rate of 11.50%. In addition, terms range from 5 to 25 years, and the SBA guarantee is less than it is with their other loan programs at 50%. To qualify, you must have a debt to service ratio of 1.1 or higher. If the loan is greater than $25,000, collateral may be necessary. It depends on the lender.
The turnaround for express loans is much faster. The SBA takes up to 36 hours to give a decision. Also, necessary paperwork for application is less. As a result, express loans a great option for working capital, among other things, if you qualify.
Business Loans for Startups: SBA CAPLines
There are 4 distinct CAPline programs that differ mostly in the expenses you can use them to fund. Each carries a maximum amount of $5 million and an interest rate that ranges from 7% to 10%. Funding can take 45 to 90 days.
The four different programs include:
- Seasonal CAPLines -Financing for businesses preparing for a seasonal increase in sales.
- Contract CAPlines -Financing for business that need funding to fill a contract.
- Builder’s CAPLines -Financing for businesses taking on a real estate or construction project.
- Working capital CAPLines -Financing for businesses that are struggling with a short-term slump in sales.
There is no minimum time in business requirement unless you are getting a seasonal CAPline. That one carries a one year in business requirement.
The SBA offers these programs, and a lot more, for small businesses. Find out more about the SBA and what they offer here.
Business Loans for Startups: What You Need to Apply
There are several things that lenders will look at, whether you are applying for an SBA loan or not. Some of it, like credit reports, you cannot control. What you can control is the presentation you make in the form of a business plan. It needs to look professional and be well written and complete. That may mean pulling in some outside help in the form of consultants, writers, or both. In general, a well put together, complete business plan includes the following.
An Executive Summary
This is a complete summary of the business idea.
The description goes into further detail than the summary, describing the business. What type of business is it? What product or service will it offer? This is where you work to get others excited about your business. Note that this is important even if your business is already operating. It will just be in the present rather than the future tense.
Layout your plan for getting started. Do you have a marketing plan, area in mind for location, or idea of how many employees you will start with? What is your ramp up plan? Again, already operating businesses will state the current operating strategy.
This actually includes two parts. All that market research you did goes here:
Analysis of audience
What need will your business fill, and for who? Are you a child care facility filling a need for affordable child care for working moms? Are you an eatery filling a need for a lunch spot for those working downtown? How will your business fill the need? All of that information goes in this section.
Is there already a business working to fill this need? Is there room for more? How do you plan to compete with them?
If you are not a new business, this will be a market analysis that supports your need for funding, or that shows your business is strong and growing.
Plan for Design and Development
How is all of this going to play out, from start to finish. What steps are you going to take? This is more detailed than your strategies section.
Plan for Operation and Management
Who will own or does own the business and who will run or currently runs it from day to day. This could be as simple as stating that you are the sole owner and operator, or as complicated as laying out a complete partnership plan or board or directors’ format. It just depends on how your business works.
This section includes current financials, projections, and a budget plan for the loan funds you are applying for. Lenders need to see that you know how to handle the funds you get, and that you have a plan for paying them back.
Private Lender Options for Business Loans for Startups
Regardless, any traditional lender is going to check personal credit history. They are also going to look for a higher credit score. If your personal credit score isn’t the best, consider looking at private lender options.
These are alternative lenders that have less strict eligibility requirements. They do have higher interest rates and less favorable terms than traditional loans however, so choose wisely.
If you have been in business for at least 6 months and have $120,000 annual revenue, you may qualify for a loan from BlueVine. Amazingly, the credit score for a line of credit can be as low as 600. Furthermore, if you want invoice factoring, you can get approval with a score as low as 530.
Kiva is a little different. For example, the interest rate is 0%, so even though you have to pay it back it is absolutely free money. They don’t even check your credit. However, there is one catch. You have to get at least 5 family members or friends to throw some money in the pot as well. In addition, you have to pitch in a $25 loan to another business on the platform.
If your personal credit is okay, Accion may be a good fit for small business startup loans bad credit. It is a microlender, a nonprofit, that offers installment loans to both startups and already existing businesses. The minimum credit score is 575. In some places they will go as low as 500. You don’t have to already be in business, but if you are not, you must have less than $500 in past due debt. In addition, your business needs to be home or incubator based.
Loans are from 6 to 60 months and interest rates range from 7% to 34%. A personal guarantee, and sometimes specific collateral, is necessary in most circumstances.
Credibly is also a good option for business loans for startups if you are already generating some revenue. They offer short term loans for both business expansion and working capital. You must be in business for at least 6 months to qualify, and they will approve loans to those with credit scores as low as 500.
Business Loans for Startups: Other Options for Startup Funding
Typically, a business is going to need to combine more than one type of funding to start and run a business. Of course, traditional investors are the funding source of choice. However, investors are not an option for everyone. Here are a couple of other options.
What is the newest innovation in small business funding? It is actually quite an arousing invention. Crowdfunding sites allow you to pitch your business to thousands of micro investors. Anyone who wants a piece of the action can buy a piece of the proverbial pie.
Investors pledge amounts on a broad spectrum depending on the campaign and the platform used. They may give $80, they may give $150, or they may give over $500.
Though not always required, most entrepreneurs offer rewards to investors for their generosity. Most often, this comes in the form of the product the business will be selling. Different levels of giving result in different rewards. For example, a $50 gift may get your product A, and a $100 gift will get you and upgraded version of product A. Find out more about crowdfunding here and here.
Angel investors come in all shapes and sizes. From investment firms to your mom, virtually anyone can swoop in and lift a company up financially. Some of the top angel investments have become companies that change the world. Learn more about this option here.
Business Loans for Startups: Work on Overall Fundability
You need to start working on business fundability from day one, before you even think about business loans for startups. There are several reasons for this, but the most important one is that it fundability is starting long before you realize it. So much goes into it that you probably do not even realize. In fact, some of it is not even related to your business. Learn more about fundability, how it starts, and how to make it strong here.