Millions of people went from fully employed to self-employed during the pandemic. They saw the pandemic as a chance to fulfill a dream and become their own boss.
For all of the hopes and dreams you have of running your own business, you have to come back to reality. It takes money to start a business.
Some estimates suggest it takes between $30,000 and $40,000 to start a business and get through the first year.
That’s why you need to know how to get a loan for a startup business. It allows you to launch your business and build enough momentum to survive on your own.
What does it take to get a loan for a startup business? Read on to discover exactly what you’ll need to get approved for a startup loan.
Write a Business Plan
Every lender wants to see one document before they lend money to businesses: the business plan.
Getting a loan for a startup business means you’re transferring risk from yourself to a bank. You could fund the business yourself, but you’ll take on all of the risks.
If the business fails, you’ll lose all of that money and the business.
Banks aren’t in business to lose money. They’ll take on the risk, but they want to assess whether a business is likely to survive before they approve a loan.
The business plan has to include basic information about the business, the operations, and the management team.
You need to demonstrate that the funds are in good hands. The business plan should address the market, competition, and positioning of the business.
A financial plan shows lenders how the funds will get spent and how long it will take for the business to turn a profit. You’ll also figure out how much money you need to borrow to start the business.
Assess Your Personal Finances
Since you’re getting a business loan, you don’t need to worry about your personal finances, right?
Believe it or not, lenders weigh your personal credit score. They’ll use your personal credit score if you’ve been in business for less than a year.
If your startup is over a year old, they may take both business and personal credit into consideration.
Check your personal credit score. Lenders generally want to see scores above 680. Review your credit report and make sure there aren’t errors on it.
You’ll want to pay down existing debts to lower your credit utilization rate. That is the best way to raise your credit score quickly.
Learn the Types of Startup Business Loans
Did you start to research startup business loans? There are a lot out there and it’s difficult to know which one is best for your startup.
If you need less than $50,000 to start your business, consider a microloan. This is a loan backed by the Small Business Administration. The loans get distributed by non-profit organizations instead of banks.
Is the loan for purchasing equipment? You could get equipment financing to make the purchase and pay it off over time.
Peer-to-peer lenders are individuals who look at business loans as an investment. They lend the money to you and make money from interest paid on the loan.
If you need more than $50,000, a bank loan or SBA guaranteed loan is your best option.
There is the traditional route of finding outside investors instead of getting a loan for a startup business. Instead of having to pay back a loan, you receive money and the investor gets shares in the business.
Startup founders have to be aware of the valuation of the business and the impact it has on taxes. You may have to pay taxes on capital gains because the valuation of the business is much higher than when you started.
You could take an 83(b) election which could limit your tax liability. This guide will help you learn more about the process.
Shop for Lenders
Lenders may offer the same startup loan products, but they don’t offer the same terms or services. This is why shopping for a business loan is so important.
You’re essentially taking on a business partner, even though you’re paying back the loan.
Read the terms of the loan carefully. You may end up getting a loan that is secured by collateral. That means if you default on the loan, the lender has the right to seize your assets.
Once you settle on a lender, you’ll have to endure the application process. The application process is long and tedious.
You’ll need to provide your business plan, personal and business tax returns, bank statements, recent invoices, and sales statements.
They may ask for additional information like business licenses and operating agreements. It can take anywhere between 10 and 30 days for a lender to approve your loan.
Successfully Manage Your Startup Business Loan
You have money in the bank. Woo-hoo! You’ll be tempted to burn through it and buy software and equipment you don’t need to run the business.
Don’t make that mistake. You need those loan funds to last as long as you can, so you better have a plan to manage the startup business loan.
Keep your business plan and financial forecasts handy. You’ll want to compare your initial expectations with reality.
The most important factor is to review the cash burn rate of the business. This tells you how fast you’re using the loan funds and when you’ll run out.
That allows you time to plan how you’ll get enough business to operate when the loan funds run out.
How to Get a Loan for a Startup Business
It’s a long process to get a loan for a startup business. Write a solid business plan, decide which loan is right for you, and shop for the best lender. Get your credit and documentation in order and you’ll get approved.
Now that you know how to get a loan for a startup business, check out the blog for more entrepreneurial tips and insights.
