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.
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.
Frequently asked questions about startup loans
Can I turn to crowdfunding to get money for a startup?
Yes, you can. There have been instances of startups successfully raising funds through crowdfunding campaigns. However, the success of your efforts will depend on the how many people view your idea as viable.
What is the maximum amount I can borrow through a startup loan?
This depends on multiple factors such as the lender you choose, the deposit you provide, your business plan and your creditworthiness. Through an SBA 7(A) loan, you can borrow up to $5 million.
What is the loan term of business loans for startups?
The loan term of startup loans typically varies from two to seven years.
Can I get a business loan with poor credit?
You may be able to still get a line of credit or a loan with poor credit. If you do secure one, it will most likely be at a higher rate, so it’s important to plan for the loan and make sure you can afford timely repayments.