Starting a new business is exciting, 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.
Where to Get a Business Loan
We’ll dive into your different options for financing shortly, but let’s open the conversation looking at where you can get a small business loan. You’ve got plenty of options.
Banks might be your first stop, particularly the bank you already have a business or personal relationship with. Banks tend to offer low-interest loans, though they may be harder to qualify for. They may also offer SBA loans.
Credit unions, too, offer business financing, so if you’re a member of a credit union, you might consider applying for a loan there. If not, you might want to join one.
Then you have dozens of online lenders that offer the gamut of business financing, from term loans to lines of credit to merchant cash advances. There is really an option for every business and every situation.
Things to Consider When Financing a New Business
As you explore your financing options, pay attention to the criteria to qualify for a loan with a given lender. You may not qualify for everything we discuss here. If you don’t know your business and personal credit scores, look them up so you can pinpoint the loan options you qualify for in terms of required credit scores.
It’s also smart to gather any documents you’ll need when you apply. That might include a detailed business plan, financial statements, and tax returns.
Another tip when applying for a loan to start a business is to calculate how much you can afford to borrow. It might sound great to borrow as much as you can, but will you be able to easily pay it back each month, given the repayment terms? You can always borrow some now and pay it back and then borrow more later.
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
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1. Establish Your Business Identity
In order to obtain financing for your business, you’ll need to create a separate identity for your business. This process can include several steps.
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 as a sole proprietor 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 sole proprietorship, 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.
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Get an Employer Identification Number
An employer identification number (EIN) acts like a Social Security number but for businesses. 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 from that of your home. If your business is home-based, consider getting a P.O. box or using a mail forwarding service.
These actions aren’t absolutely necessary, but they can show potential lenders that you’re serious about keeping your business and personal life separate.
Separate Your Business and Personal Finances
Another thing you’ll want to do to separate your business is to open a business bank account, and possibly a savings account as well. This will make it easy to manage your accounting and file taxes.
Compare the Best Business Checking Accounts
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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:
- Cash flow
- Time in business
Get Your Business Ready To Apply For A Loan
Make sure your business is lender-ready before you apply for a business loan. Our course will guide you step by step to establish your business, build your business credit, and become an expert on business lending so you can apply with confidence.
Personal and Business Credit Scores
Even though you’re applying for a loan for your business, your personal credit scores may play a big role in your business loan 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 build its business credit scores, 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.
However, if you do have good credit (personal or business), you’re more likely to qualify for favorable loan terms.
Sign up for a Nav account 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. Small business 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, lenders 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 extending 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 the loan 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.
Collateral reduces the amount of risk a lender takes on more than a personal guarantee, so secured business loans are typically easier to get than unsecured ones.
3. Determine How Much Funding You Need
Before you start applying for a loan, determine the loan amount you need. Calculate the expenses your business needs to cover with the loan, whether those are startup costs, the cost to hire more staff, or the expense of buying equipment for your company.
Small business owners sometimes make the mistake of borrowing more than they need, which can make it a challenge to pay back. It’s important to only borrow what you need; otherwise, you pay interest on money you didn’t need and run the risk of defaulting if you can’t afford to make your monthly payment.
4. 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.
Benefits of Vendor Credit
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.
Eligibility Requirements for Vendor Credit
Some vendors may have a requirement that you have an existing relationship with them. Some may also look at your credit to see how financially responsible you are. Check with your specific vendor to get the criteria you need to qualify.
5. Apply for a Business Credit Card
Business credit cards act as a business 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 typically don’t require any time in business, a minimum annual revenue, or a business credit history.
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 annual percentage rate 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.
Benefits of Credit Cards
Business credit cards let you establish business credit, and they’re an easy way to purchase what your business needs. If you have a card with rewards you can get paid for using yours.
Eligibility Requirements for Credit Cards
Business credit card issuers will look at your personal credit score and reports, and may also require a personal guarantee.
Business Credit Cards We Recommend
Here are a few of the business credit cards you may want to consider applying for:
6. 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.
Benefits of Personal Business Loans
Even if you don’t qualify for a business loan, you may qualify for a personal loan you can use for business purposes.
Eligibility Requirements for Personal Business Loans
Your personal credit scores and income will be considered with your application.
7. 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 as a startup, but also because it typically comes with favorable terms, including low interest rates and flexible repayment options.
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Benefits of Equipment Loans
Unlike other loans that require collateral, you won’t have to scramble to come up with an asset; the equipment you’re buying acts as the collateral, helping you secure lower rates.
Eligibility Requirements for Personal Business Loans
Lenders may look at your business or personal credit as well as revenues.
Equipment Loans We Recommend
If you’re buying equipment, consider these lenders:
8. 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 and lower interest rates.
Instead of originating the loans directly, the SBA provides insurance to loans originated by approved lenders (like SmartBiz), effectively reducing the risk the lender takes on.
SBA loan programs offer relatively cheap financing, with interest rates usually ranging from 5.5% to 8%. 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 its 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 do I get a loan to start a business from the government?
The government doesn’t offer small business loans directly, but you may be able to qualify for an SBA 7(a), 504, or 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 do I 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 do I 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 your own business, you’ll notice that there are a lot of business financing options that aren’t available to startup entrepreneurs. While this can be discouraging, there are also plenty of startup funding options available to you as you try to get your business off the ground and cover startup costs.
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.
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This article was originally written on July 5, 2019 and updated on February 3, 2023.
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