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By Leslie Mackenzie | Reviewed by Chris Meyers, Esq. | Last updated November 17, 2022
Securing small business financing is one of the first things a new business owner needs to consider. How will you finance the start-up phase? When are you likely to be eligible for loans? Will you have to sign a personal guarantee? What will make your business loan application appeal to lenders?
This article provides tips for getting a small business loan for a startup business.
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Put together all of the information needed for your application, beginning with your business plan. A well-developed business plan will help you understand how much money you need and the types of small business loans that you want to secure in the future.
Your business plan should identify start-up costs, an operating budget, and a break-even analysis. With this information in hand, you can decide the financing your business needs and when.
You may need 6 -24 months of business experience and a cash flow analysis before you can apply for some types of business loans. That may mean personal borrowing to kick start your business until you've got a track record and financial statements to show your business is viable.
In the months when a business is too new to qualify for traditional business loans, many business owners turn to:
A personal loan, personal credit card, and business credit card are all unsecured loans. They require no collateral. A line of credit against a home mortgage is secured by the home or real estate. All of these funding sources will require a good personal credit rating.
Before you apply, take a look at your bank statements, credit report, and credit history. Will the bank or credit card company see someone whose personal finances are in order?
If your credit score is 630 or below, you have bad credit. If you do secure a credit card, it's likely to have a very high-interest rate. Even if you repay interest only, your new business could end up in trouble and your personal credit rating could suffer even more.
You may need to take some time to improve your personal credit score before you start your business. Or you may need to expand your loan options. Ask friends and family for personal loans. Apply for a microloan through a community development financial institution. Although they don't provide a lot of money, some microloan funds are open to new businesses and those with bad credit.
There are many types of business loans. Some are for specific purposes, some for specific industries, and some for certain types of business owners or geographic areas. Before you look for a loan or business line of credit, write down the details:
Go back to the financial information you gathered for your business plan. Knowing the loan amount you are looking for, what kind of terms are most desirable? What would be acceptable?
There are a lot of business loan options out there. Only some of those loans will be right for your business.
The U.S. Small Business Administration is often the lender of choice for small businesses. They offer:
Business banks typically offer small-business bank loans with the lowest interest rates and most competitive terms. Many small-business lenders require at least a year in business to qualify for financing and they want to see a credit score in the 700s and strong revenue.
Community Development Financial Institutions (CDFIs) can take the form of a bank, a credit union, a small business loan fund, or a venture capital provider. Their goal is to expand economic opportunity in low-income communities. They bring together public and private sector investors to offer low-interest loan programs.
Credit unions can be easier for small businesses to get a loan through, especially if the business owner is a member and has a bank account at that credit union.
Online lenders offer personal business loans based on the business owner's personal credit history. For borrowers with no business history or a low credit score, an online lender could be the answer. They tend to have more flexible eligibility requirements, a simpler application process, and faster approvals but they charge a higher interest rate.
Microloans: The SBA offers microloans, as do nonprofit organizations that focus on underserved communities. Microloans can be available for $5,000 up to $50,000. They may offer discounted interest rates for certain types of borrowers (veterans, people of color, immigrants). They may allow borrowers with poor credit to apply.
Lines of Credit: The SBA offers lines of credit that are a flexible form of short-term financing. A line of credit provides a reservoir of money that you can draw on as needed. You pay interest only on the amount you borrow. There are five available SBA lines of credit:
The SBA isn't the only agency to offer lines of credit; commercial lenders and online lenders do as well.
Personal and business credit cards can provide cash advances when needed, though usually at a higher interest rate than a loan or line of credit.
While you are at it, look for business grants, too. City economic development departments and neighborhood business associations often offer grants to spur small business development in certain areas.
Consider putting together a spreadsheet with this information:
Source |
Max $ |
Purposes |
Geo |
Bus Type |
Qualification |
Benefit |
SBA Loan 7(A) |
$5 mil |
Working capital, expansion, equipment |
Any |
Any |
2 years in business |
|
PeopleFund |
$25,000 |
Working capital, equipment |
Texas |
Any |
Good credit |
Discounted interest for vets, open to brand new businesses |
Lake Street Business Assn |
$25,000 |
Startup costs, supplies |
Fort Worth |
Any, owned by POC |
0-2 years in business, operating in green business district |
Funds high-risk businesses in select area |
If you talk with other small business owners they may tell you they've received loans from the U.S. Small Business Administration, or this bank, or that program. There are a lot of business financing options out there. Only some of those will be right for your business.
Now that you have a spreadsheet of loan options, prioritize them so you focus on the ones most likely to fit your business needs and qualifications.
You've applied for small business loans for which you should have qualified, but you were turned down. What could be standing in your way of getting a business loan?
FindLaw's Start a Business section offers a lot more information about how to finance your startup small business. See Startup Financing for ideas on getting money from family and friends, financing basics, crowdfunding, venture capital, and more.
Contact a qualified business attorney to help you navigate the process of starting a business.
We have a DIY option you can use to save time and stress.We help you:
Prefer to work with a lawyer?Find one right now.