For many budding entrepreneurs, a small business loan may seem like the best option for getting your endeavor off the ground. However, most banks and lenders require criteria that a newly launched business won’t be able to meet.
What are those requirements, and what are your alternatives if you can’t meet them? Here’s what you need to know.
Requirements for Traditional Business Loans
When you apply for a traditional business loan, a lender will look at your personal and business’ credit profile and financial information. Additionally, lenders are likely to require a meaningful paper history of your business revenue, income and expenses.
If you’re just launching your business the problem becomes immediately clear, since you’re unlikely to have a business credit profile OR an extensive history of revenue and expenses. For that reason, new entrepreneurs usually need to find funds through alternative means, and most will rely heavily on your personal credit profile, personal income, and may require personal guarantees.
Checking Your Personal Credit History
Since you’re just starting your company, you don’t have a business credit profile (although you should start to establish one, which you can learn how to do here). But that doesn’t mean you’re out of luck.
The first step is to check your personal credit scores. Like bank loans, alternative business loans generally have credit requirements as well, so knowing your scores and what’s on your report will give you a better idea of what financing options you’re likely to qualify for. (You can check your personal credit score and summary report with a free Nav account.)
On your report, lenders are going to be looking to see that you demonstrate a consistent history of responsible credit usage and on-time payments for both revolving credit (credit cards) and installment loan (business loans, mortgages, auto loans, etc.) accounts. Underwriters place a high value on a good mixture of account types, since they want to see that you can responsibly handle both short-term credit and long-term loan repayments.
Funding Options for Startups
If you have strong personal credit, you may be able to qualify for the Small Business Administration Microloan Program. The SBA partners with nonprofit lenders and Community Development Financial Institutions (CDFIs) who have experience working with new business owners. Offering up to $50,000, this may be an option that could meet your needs even without an established business credit history.
The SBA isn’t the only provider in town when it comes to microloans. Accion provides up to $10,000 to new businesses and you don’t need stellar credit to qualify. Kiva is another option, offering loans up to $10,000 at 0% APR with no credit requirements. Kiva does, however, require you to prove to Kiva’s community of philanthropic investors that your business is worth their money.
A business credit card can be another great funding source to kickstart your venture. A good tip would be to choose one with a 0% intro APR offer so you can make purchases and carry a balance without paying interest for a few months while you get your business going. Make sure you’re making the minimum payments on time, however, so you can build strong business credit, and once the intro offer ends consider the APR you’re going to pay if you continue to carry a balance.
If you have a good relationship with your personal bank, it’s always worth meeting with a loan officer to see if they’re willing to work with you for business funding. In particular, some banks are happy to offer personal lines of credit which you can use to fund your business, or equipment financing where the equipment can be used as collateral. Be careful using a personal line of credit to fund your venture—new businesses are risky, and when you commingle personal and business finances you’re putting your personal credit at risk.
Finally, you can always turn to personal sources of funding. Common sources include personal savings or borrowing against home equity. Strictly personal loans can be used for business endeavors, but again, any payment lapses or negative reporting from creditors will impact your personal credit score directly.
Whichever financing option you choose, ensuring your credit history is positive and accurate will improve your chances of getting the funding you want. Nav can help — we can show you the likelihood you’ll qualify for different credit cards and financing options based on your business data and credit scores, both personal and business. Sign in to Nav to see your best options now.
This article was originally written on March 6, 2017 and updated on October 3, 2023.