Starting a new business is an exciting time, but getting the funding to get your startup off the ground can be stressful. Learning how to get a loan to start a business can help you understand what commercial lenders are looking for, what you can qualify for and some alternative approaches you can take.
Before we dig into the details, here’s a summary of how to get a loan to start a business.
How to Get a Loan to Start a Business
- Establish your business identity
- Learn how lenders assess you
- Request vendor credit
- Apply for a business credit card
- Use personal business loans
- Get an equipment loan
- Explore other options
1. Establish your business identity
Create a business entity
Sole proprietorships make up the vast majority of businesses in the U.S., but it can be more difficult to get a business loan than if you were to create a separate entity.
As you consider how to structure your business, there are several options, the most common of which include a partnership, limited liability partnership (LLP), limited liability company (LLC), S corporation and C corporation.
Each of these entities has benefits and drawbacks when it comes to taxes, liability and other features. So it’s important to take your time to research each one to ensure you choose the right one for you. It may also be worth consulting with tax and legal professionals to get some advice for your situation.
Get an employer identification number
An employer identification number (EIN) acts like a Social Security number but for business entities. While it’s not required for every business to have an EIN, having one can help you separate your business and personal finances and give you a better chance of qualifying for a business loan and checking account.
You can get an EIN for free by requesting one on the IRS website. The process is quick and painless.
Get a separate phone number and address
Depending on the nature of your business, it may also make sense to get a separate phone number and address. If your business is home-based, consider getting a P.O. box or using a mail forwarding service.
2. Learn how lenders assess you
Commercial lenders consist of banks, credit unions, nonprofit organizations, online lenders and other financial institutions.
Depending on the type of loan you’re applying for and the lender, you may see different approval criteria. In general, though, here are some of the factors that lenders consider when you apply for a business loan.
Get free, unbiased financing recommendations based on your business needs from our team of Credit & Lending Experts. Schedule a call now.
Personal credit score
While you’re applying for a loan for your business and not to cover personal expenses, your personal credit score plays a big role in your application. There are two reasons for this: your business likely doesn’t have a credit history of its own, and the loan may require a personal guarantee.
Since a startup probably hasn’t had the chance to built business credit, lenders only have your personal credit history to see how risky of a borrower you may be. And many business loans require a personal guarantee, which means that you’ll be personally on the hook to pay back the debt if your business can’t.
Join Nav to view your personal credit score as well as your business credit score as you work on establishing that history.
Your credit score is a snapshot of your overall credit health, but it doesn’t tell the whole story. Lenders will also likely check one or more of your credit reports to see if there’s any information that could prove to be a red flag.
For example, negative credit report items like bankruptcy, foreclosure, collection accounts and late payments could signal irresponsible credit use and make it difficult to get approved.
In addition to assessing your past experience with paying off debt, lenders will also want to evaluate your financial ability to pay back the loan you’re applying for. This may include asking for a profit and loss statement, a balance sheet and a cash flow statement.
And if your business is brand new and doesn’t have any revenue, it may also include your personal income and expenses.
Time in business
Many business lenders require that you be in business for at least a year or two before they’ll even consider extended credit to your startup. So if you’ve only been at it for a few months or even a few days, your options are going to be limited.
That said, there are some business lenders who specialize in working with brand-new business owners and some alternatives that don’t look at how long you’ve been in business at all.
In any credit situation, the lender’s biggest priority is ensuring it gets repaid, and the industry your business is in could be one indicator of how likely you are to succeed. What’s more, lenders will want to see whether you already have experience in that same industry, or if it’s all new to you.
In general, if you’ve been in the industry for a long time, your chances of success with the new venture are higher than if it’s something you’ve never done before.
Not all business loans require collateral, but having it can improve your chances of getting approved.
That’s because collateral, typically in the form of a physical asset, vehicle or real estate, acts to secure the loan in case your business defaults. Instead of going after your personal assets for repayment, the lender seizes the collateral and sells it to satisfy the debt.
3. Request vendor credit
Instead of looking for a business loan directly from a lender, you may be able to set up a credit arrangement with one of your vendors.
Vendor credit gives you a set period to pay what you owe instead of requiring cash on delivery. Common terms include net-30, net-45 and net-60, which give you 30, 45 and 60 days from the invoice date, respectively, to pay. In some cases, you may even be able to qualify for a discount on the invoice if you pay immediately.
Vendor credit doesn’t work as a loan, giving you an injection of cash that you pay back over time. But it can give you the flexibility you need to manage your working capital and allow you to run your business more effectively.
Also, many vendors will report your payments to the commercial credit bureaus, allowing you to use the arrangement to establish a business credit history.
4. Apply for a business credit card
Business credit cards act as a revolving line of credit that you can use over and over again as funding for your business. They’re also perfect for new businesses because they don’t require any time in business, a minimum annual revenue or a business credit history.
Instead, business credit card issuers will look at your personal credit score and reports, and also require a personal guarantee.
As with consumer credit cards, your statement on a business card will close each month, giving you a grace period and a due date for payment. As long as you pay your monthly balance on time and in full, you’ll avoid interest charges and can start building a business credit history.
In addition to giving you access to credit, many business credit cards also offer other features, including sign-up bonuses, rewards on everyday spending, introductory 0% APR promotions and more. So if you’re considering going this route, take your time comparing options to ensure you find the best fit for your business.
5. Use personal business loans
As the name suggests, a personal loan isn’t credit that you apply for in the name of your business. But with so few options available for startups, it could be worth considering.
Many personal lenders allow borrowers to use loan funds for business expenses. If your credit is in good shape, you can also expect relatively low interest rates, potentially even in the single digits.
Personal loans are typically unsecured, which means you don’t have to put up collateral to get approved. One big drawback of using a personal loan, however, is that it won’t help you establish a business credit history.
6. Get an equipment loan
If you need to purchase equipment or a vehicle to run your business, you may be able to get equipment financing without much time in business. This is primarily because equipment loans typically require you to use the asset you’re purchasing with the loan funds to secure its repayment.
Equipment financing is not only worth considering because it’s possible to qualify for as a startup, but also because it typically comes with favorable terms, including low interest rates and flexible repayment options.
7. Other options
As you’re figuring out how to get a loan to start a business, you’ll notice that it’s not easy to get approved for more traditional business financing, including bank loans and lines of credit. But depending on your situation, there are some other options that may be worth pursuing.
The U.S. Small Business Administration (SBA) has a microloan program that can help new business owners get access to up to $50,000 in financing, which they can repay with terms ranging up to six years.
Instead of originating the loans directly, the SBA provides insurance to loans originated by approved lenders, effectively reducing the risk the lender takes on.
SBA microloans offer relatively cheap financing, with interest rates usually ranging from 8% and 13%. However, lenders determine the eligibility criteria, not the SBA. So it’s possible to get denied because you have no revenue or time in business.
Some non-profit organizations, such as Kiva, also provide financing to new business owners through microloans. If you go this route, the amount you can borrow is typically much lower than an SBA microloan, so it’s best only if you have small funding needs.
And instead of doing a traditional credit check, non-profits may choose other ways to determine your eligibility. With Kiva, for instance, you’ll need to prove yourself by first raising money within your community and circle of influence. If you’ve managed to meet the organization’s criteria, your loan request will be opened to the Kiva community of individual lenders.
If you have a great idea for a product or service, you may be able to turn to the public to get the money you need. Crowdfunding allows business owners to go straight to their potential customer base.
In exchange for small “investments,” future customers can gain early access to your product or service when it launches. Some crowdfunding campaigns may also offer special incentives, such as discounted pricing on bulk orders or limited-edition products.
Unlike a loan, crowdfunding allows you to get funding for what you need without requiring you to pay the money back. Instead, you’re working directly with people who want what you’re selling.
There are a few crowdfunding websites out there, including Kickstarter and Indiegogo, and some campaigns have been wildly successful, generating millions of dollars in funding. While those are major outliers, it’s possible to get the money you need if your product or service is good enough and you can present it in a powerful way.
Enlisting the help of investors is another way to get the funding you need without setting up a creditor-borrower relationship. There are several venture capital firms that specialize in working with and funding new business ventures.
The only problem is that venture capitalists are extremely selective about which businesses they’re willing to work with. A venture capital firm’s top priority is to maximize their return on investment, so it’s essential to create a powerful pitch that highlights your product or service, business plan and the likelihood of success.
Even then, though, there’s no guarantee that you’ll get the capital you need, and very few business owners get funding this way. Even if you do, you’d likely need to exchange equity and even a measure of control for capital, which could make it difficult to take your business in the direction you want.
Frequently asked questions
How to get a loan to start a business from the government?
The government doesn’t offer business loans directly, but you may be able to qualify for an SBA microloan, which is insured by the SBA, from an approved lender. You can find a list of lenders to compare on the SBA website.
How to get a loan to start a business with bad credit?
If you have bad personal credit, you may have a hard time getting approved for many of the business financing options we’ve explored. Instead, it may be better to look at alternative funding options, such as crowdfunding, venture capital and non-profit microloans.
Also, you may be able to qualify for a business credit card with bad credit, but you may need to put up a deposit equal to your credit limit.
How to get a grant to start a business?
Unlike loans, grants are extremely appealing because they’re essentially free money. There are plenty of organizations, both private and non-profit, that offer small business grants. But most of them are designed for established businesses, so your options may be limited.
Don’t take that as discouragement from looking, though. Depending on the type of business you’re starting, and who you are as a business owner, you may be able to qualify for specialized grants for startups.
Is it possible to get startup business loans with no collateral?
Yes, there are new business loan options out there that don’t require you to put up collateral to secure financing. But you’ll typically need to at least provide a personal guarantee on the debt to get approved.
The bottom line
As you explore how to get a loan to start a business, you’ll notice that there are a lot of business financing options that aren’t available to startups. While this can be discouraging, there are also plenty of options available to you as you try to get your business off the ground.
Take the time to research and compare the options you discover, and think about which ones would be the best fit for your needs. Also, consider the cost of each type of financing, so you don’t end up paying more than you’d like in interest.
Pro Tip: Take charge of your financial health today with a FREE Nav account. We'll protect and monitor your personal and business credit, so when it comes time to find financing you're prepared on all fronts.