Startup business loans are business loans, but with a difference: It’s not the same as traditional business loans or personal loans. It's made for entrepreneurs who are just starting a company or looking to launch in the near future.
Small-business startup loans are available for companies less than six months old. Founders use this working capital for everything from hiring to equipment financing to office rent, and more. These loans often don’t require collateral like traditional business loans do.
Some founders opt for online crowdfunding platforms to help finance their startup business loan. Others tap friends and family or take out lines of credit. If you'd like to go for the startup loan route, here's what you need to know.
1. Know your business needs.
When applying for startup business loans, it’s important to have a loan amount in mind that aligns with your business needs. This is one of the many reasons why developing and managing a business plan is so valuable.
In your business plan, list expenses that justify to the lender (and yourself) why it’s so vital that you receive a specific loan amount or repayment terms. The plan should include financial info that details both business startup costs and long-term expenses associated with operating your company.
2. Research different startup business loan options.
There are many options for new business loans that you can consider for your startup:
SBA Loans
SBA loans are not direct startup loans from the Small Business Administration. The organization instead connects you with lending partners that match their lending guidelines. Their financing options often come with lower rates and down payment options as well as startup advice and business education.
Nonprofit Microloans
Microloan programs usually include short-term loans that range from as little as $500 to $50,000 with low borrowing rates. Many of these nonprofit lenders also provide new business owners financial literacy and business advisory services to help ensure their startup succeeds.
Funds and Grants
Small-business owners often prefer this startup funding method because it doesn't need to be paid back. However, business grants do come with certain stipulations you must follow because organizations want to ensure the funds go to good use.
Credit Unions and Banks
Financial institutions also offer startup business loans as part of their business loan portfolio. They usually offer competitive rates and funding options.
Credit Card Companies
These companies have entered the startup financing niche in addition to providing business credit cards. Startup loans have rates that vary by loan size and credit history. These short-term startup loans often need to be repaid in three years or less.
3. Qualify for your targeted startup small-business loan.
Once you know the size and type of startup business loan you need, the next step is to make sure you qualify.
Each type of loan may have unique qualifications, so spending time researching and preparing for these can help increase your chances of getting one. Many require you have some startup equity, so it’s important to evaluate if you need to try crowdfunding platforms or bootstrapping first.
Compile the documentation you need for the appropriate loan type. This documentation includes personal identification, such as a driver’s license or passport. You'll also need to share your business plan, your bank account information and any quotes if you plan on purchasing equipment with this type of business funding.
It’s also a good idea to check your existing business credit report or even your personal credit score. Whether you have good or bad credit influences whether you'll actually qualify for a loan. In fact, it's often a deciding factor in startup loan approval since there’s often no available collateral.
4. Compare lenders and loan terms before you apply.
Before applying, compare the various startup business loans. Factors include the amount range a lender offers, the interest rate and the length of the loan.
Each type of loan may have unique qualifications, so spending time researching and preparing for these can help increase your chances of getting one.
You’ll also need to consider qualifications set by each lender, including minimum credit score, down payment, monthly payment or startup equity amount.
Also know that each type of startup loan has a different application, and some applications are easier than others.
5. Apply for your startup small-business loan.
There are basic steps to the startup small-business loan application process, such as collecting documentation and filling out an application. However, there are differences as well. Nonprofit microloans often have complex applications. This means you'll have to supply detailed documentation and wait a number of weeks for a decision. Grants can also involve an intensive application process that includes an interview with you and any of your co-founders.
On the opposite end of the business startup loan spectrum are business credit cards. They typically only involve a simple application form, a social security number or federal tax identification number, and personal identification. Decisions often come quickly.
6. Track your key performance indicators as you use your loan.
Getting money is only the first step. From there, you need to know how to spend it effectively.
Define your key performance indicators (KPIs) before you receive your funds. These are the metrics you need to know that define business success, like the revenue required to pay the loan back and what you'll need to self-fund going forward.
From there, monitor how you use your funds for business expenses in a way that helps create performance gains. The data can then be used to inform your next loan or how you can increase revenue and cash flow to keep funding your new business.
Photo: Getty Images
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