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A 5-Step Guide To Getting A Startup Business Loan

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A 5-Step Guide To Getting A Startup Business Loan

(CTN News) – Startup businesses have a harder time getting business loans than established businesses, but it’s still possible. The best way for new business owners to improve their approval odds is to choose the right type of financing, understand their credit scores, and identify the most competitive lending options.

You can get a startup business loan by following these steps:

1. Determine what kind of loan you need

Banks and credit unions are among the most popular sources of financing for small businesses. The good news is that several financing options are available to startups. There are several types of startup business loans, including:

1. Online term loans: Online and traditional lenders generally offer a term loan, which involves a bank extending a lump sum of cash, repaid over a set period at a set interest rate. Various small business loans are available, with annual percentage rates (APRs) ranging from 9% to 12% and maximum loan limits ranging from $250,000 to $500,000. However, startup owners may not qualify for the highest loan amounts and most competitive interest rates.

2. Business lines of credit: In a business line of credit, a lender extends funds up to a certain amount, and the business owner can access the funds as needed. A monthly interest charge is only applied to the portion of the credit line accessed during that month. Furthermore, the borrower can access funds repeatedly during the draw period after making payments.

3. SBA 7(a) loans: The 7(a) loan programme is administered by the Small Business Administration (SBA) and provides business loans of up to $5 million to eligible applicants. Interest rates range from 2.25% to 4.75% plus a base rate, and funds can be used to cover working capital, equipment purchases, and business expansion expenses.

4. SBA Microloans: The Small Business Administration offers microloans up to $50,000 to eligible business owners. Typically, small businesses owned by minorities and women and located in disadvantaged areas are eligible for loans. Lenders may offer repayment terms of up to six years at interest rates ranging from 8% to 13%.

5. Asset-based financing: Startup owners can borrow against valuable assets like inventory, machinery, equipment, accounts receivable, and real estate with asset-based financing. Due to their lower risk, these loans usually have more attractive terms than others. Secured financing, however, means that collateral can be repossessed if the borrower defaults.

2. Make sure your business and personal credit scores are up to date

Lenders’ assessment of an applicant’s credit score serves as a risk assessment tool. A higher credit score increases the likelihood that an applicant will make payments promptly; consequently, approval probabilities increase. Generally, credit scores for businesses become available between six months and one year into their existence; therefore, it is possible that startups, which are new businesses, do not yet possess one.

However, loans are frequently personally guaranteed, which means the borrower undertakes to repay the debt with personal funds if the business fails to do so. As a result, lenders also consider the personal credit score of the applicant or business owner. Before submitting a loan application, assess your chances of approval and adequately prepare by procuring copies of your business credit reports and verifying your credit score.

3. Preparation and gathering of required documents

Each lender has its specific document requirements for business loans. But, to evaluate and confirm the legitimacy of a company and its applicants, most lenders rely on a few key papers. Financial documents such as bank statements, accounts receivable, credit card sales, and outstanding bills from the last four months are typically required by lenders, and tax returns spanning at least two years are also common requests.

Another way for a startup founder to increase their chances of acceptance is to write a detailed business plan. Lenders may see this as proof that the company can handle its debts in the future based on their projected income and expenses. A lender may also ask to see your banking details for direct payment and copies of any relevant business licences or registrations.

4. Identify and compare lenders

You might be able to get a startup loan from more than one lender, depending on your individual and company circumstances. When evaluating lenders, keep the following in mind to find the best startup company loans:

  • Annual percentage rates: For startup business loans, APRs start around 9%, but they can be higher, and for highly qualified applicants, they can even be lower. To find out the APR for each lender, visit its website or contact a customer support representative.
  • Fees and other costs: To cover the expenses of processing paperwork and confirming application information, business lenders typically impose origination fees that vary between three and five per cent of the loan amount. There are prepayment penalties for borrowers who choose to pay off their loans ahead of schedule; for those who want to pay late, there are late fees. To stay competitive, some lenders remove these fees, which might raise the total cost of borrowing.
  • Lender reputation: Read evaluations written by current and former borrowers to get a feel for a lender’s reputation, even if they seem solid on paper. Also, talk to other people in your business network to find out what they think about the bank. You should consider going with a different lender if you encounter any warning signs, such as bad experiences with customer service, throughout your investigation.

5. Submit Your Application

After deciding on a lender, it’s important to study their application process and gather all the necessary paperwork. Check with your potential lender to see if you can apply over the phone, online, or in person; the application and underwriting processes differ widely. A lender representative may contact you after you apply to ask for proof of collateral or more financial documents.

Strategies for Obtaining a Startup Business Loan Despite Poor Credit

To secure a company loan, even with bad credit, you must first show that you have a history of successful financial management. However, the credit histories of both the owner and the company are still typically considered by lenders.

Here are a few things you can do to boost your chances:

  • Improve your credit. Check your credit report for inaccuracies. Pay down your credit card debt and focus on other ways to increase your credit score quickly.
  • Look for SBA lenders. Some SBA partner lenders offer certain SBA loans to businesses that haven’t yet launched, such as microloans.
  • Seek out nonprofit assistance. Volunteer-run programmes like a local Small Business Development Center or SCORE offer one-on-one assistance for new entrepreneurs and may be able to give you more specific, individualised advice.
  • Take advantage of special programs. If you’re part of an underrepresented group, such as a minority or rural resident, you may be eligible for special startup business loan programmes.
  • Apply through a CDFI. These financial institutions focus on underserved communities and may be better aligned to help with your business and personal lending needs.

Pros and Cons of Startup Business Loans

As you’re considering taking on debt for your new business, consider these points.

Pros

  • Maintain ownership of your company
  • Predictable monthly payments with fixed-rate loans
  • Spread the cost of starting a business over several years
  • Improve your credit score if you make on-time payments

Cons

  • It may be difficult to qualify for
  • Loan costs from fees and interest may be very high
  • May need to provide loan collateral
  • High loan payments can put your business at risk of failure
  • You may need to repay the loan from your funds if the business fails

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