Learn how to apply for a startup loan to get your business plan going.
You can get funding for a startup in different ways, and picking the right kind of loan to get your business going can be a daunting process. This guide gives you insight into your options, helping you to pick the best one for your requirements.
Can I get a business loan as a startup?
Getting a business loan as a startup can be difficult if your business hasn’t generated much revenue yet. Most lenders have minimum monthly revenue requirements as well as business age requirements. If you find that you don’t qualify for loans from business lenders, you could consider a personal loan for business use or an equity investor to get the funding you need.
How does a startup loan work?
While the product details will differ, startup loans have some common features and eligibility criteria that must be met upon application.
For instance, most providers of startup loans require applicants to have good creditworthiness. The application may require you to submit a detailed business plan.
Depending on the kind of credit you seek, you may also have to provide collateral. While applying for a startup loan does not take much time, it can take up to a month or more for the lender to process your application and disburse approved funds.
Features to consider when comparing startup loans
- Interest rate. Even a seemingly small difference in percentage can have a big effect on how much you end up paying as interest, especially if you borrow a large sum over a considerable period of time. The government-backed SBA 7(A) loan for startups offers a very competitive interest rate. However, qualifying for one is not easy.
- Eligibility criteria. Not all providers of business loans for startups have the same eligibility requirements. For example, to qualify for an SBA 7(A) loan you would have to provide 10% as down payment, you’ll have to personally guarantee the loan if you have more than 20% ownership and you’ll have to provide some kind of collateral to secure the loan.
- Turnaround time. Startup loans typically take longer to process than consumer loans, with some lenders taking up to a month or even more. If you need money in a hurry, you may need to broaden your options and consider other forms of credit, such as a private personal loan.
- Collateral. Many startup loans require you to provide some form of collateral. This can be through equity in your home or in the equipment or vehicles you own as part of your business. You can even get a business loan to purchase new equipment where the equipment itself acts as collateral.
How to estimate the cost of starting a new business
You won’t know how much you need to borrow until you calculate how much it’s going to cost to start your business and figure out how much you’ve already got covered. Here’s how to do it in four steps.
Step one: Calculate startup expenses
These are one-time costs for things that you will not own long-term that come with starting a new business before the official launch. Expenses are tax-deductible and include::
- Legal fees. Licensing, trademarking and the cost of setting up your business legal structure all fall under this umbrella.
- Insurance. For real estate, inventory, equipment, vehicles or anything else that you need to cover before launch day.
- Rent. Include first month’s rent plus the security deposit when tallying this cost.
- Brand design. How much did you pay that graphic designer to come up with a logo for your new business? Did you have anyone design your website?
- Payroll expenses. Did anyone do work for your business before opening? That’s a startup expense. Common startup payroll expenses include graphic design. Don’t forget to include consultant fees.
- Website domain fees. Getting a domain that makes sense for your business isn’t always cheap but it could be vital to attracting customers
- Office supplies and computers. These sound like assets, but you can deduct around $100,000 for office equipment if you’re a startup.
- Training. Take any classes or workshops on how to start a business? That counts.
Step two: Add startup assets
Assets are things that you will have for a long time, like chairs, equipment and even intellectual property. These are not tax-deductible and include:
- Inventory. Do you already have some inventory you don’t have to spend money n
- Office furniture. Chairs, desks, inspirational signs count as assets.
- Signs. Awnings and in-store signs alike count as an asset.
- Improvements. Renting an office you plan to fix up? Those costs might seem like expenses but are counted as a business assets.
- Equipment. Need any machinery for your business besides computers?
- Land. Add how much you paid for your land when you bought it, not its current value.
Step three: Estimate recurring costs
What’s the bare minimum you’re going to need to keep your business afloat each month? You might need help paying for these in the first few months, including:
- Rent. How much do you pay in rent for your office, storefront or any other real estate.
- Utilities. Electricity, water, internet and any other monthly bills involved with keeping your business spaces and running.
- Payroll. The combined monthly salaries of all employees, plus estimated salaries for any freelancers.
- Inventory. How much money does it cost to purchase, process, store, distribute (or do anything else to) your inventory?
- Marketing. Include all advertising expenses with the exception of staff.
Step four: Add all three totals together.
This is the approximate cost of get your startup off the ground. You probably won’t need a loan to cover all of these expenses. Subtract anything you’ve already got covered — like office supplies you brought from home — to calculate how much financing you need.
Benefits and drawbacks of startup loans
- Hold on to equity. When you get the right kind of startup loan you don’t have to give up equity in your business. After you repay the loan completely, you retain complete ownership of your company.
- Establish business credit. By getting a business loan and repaying it in a timely manner you build a positive credit history for your business, which will improve your ability to get future credit at more advantageous rates.
- Traditional loans available. As long as you have good creditworthiness you will have various traditional business loan options to choose from. Traditional loans can be appealing because they tend to offer competitive interest rates.
- Can take a long time to process. The time that startup loans take to process can vary from lender to lender, from two weeks to two months. Generally, business loans take more time to process when compared to personal consumer loans. Learn more about the business loan underwriting process.
- Need good credit. You will generally require good credit to apply for a startup loan. The main exception is if you’re securing the loan using suitable collateral.
Things to avoid when looking into startup loans
Steer clear of startup loans until you have a well-thought-out business plan in place. Even the best ideas require careful implementation. If you, at any point, feel that you may have trouble repaying the loan on time, seriously reconsider taking it in the first place.
Avoid loans with very high interest rates as this will increase the cost of the loan significantly.
Make sure you go through the loan contract carefully before signing it and ensure you understand all associated fees and charges.
Financing a startup without a loan
There’s no way around it: Convincing lenders to believe in a new business is one of the largest hurdles to getting off the ground. I’
- Use your savings. Cash in your 401(k), IRA or use other less formal savings to fund your new venture. Spending your savings shouldn’t be taken lightly. Don’t risk your financial stability for a project you are unsure of.
- Friends or family. Avoid paying high interest by asking the people around you for an informal loan or investment in your new business.The drawback: You risk hurting your relationships if your business fails.
- Credit cards. True, these often have higher APRs than your typical business loan, but charging smaller expenses to a credit card could make a huge difference in your business’s performance.
- Crowdfunding. Set up an account on a crowdfunding platform to finance your small business with small donations from friends, family and fans.
- Grants. Free money is hard to get — not to mention time-consuming — but they can give your business a chance to get on its feet before going into debt.