Man fillig in small business loan application form for his start-up.
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Looking for a small business loan to start or scale your startup?

Starting and growing a business comes with several costs (apart from some of these expensive mistakes that you might want to avoid)! You’ll need quick and flexible options to access capital to hire staff, rent an office space, buy new equipment, or simply to cover your monthly expenses. 

For most businesses, the first option is to get a business loan. 

But, how do you get a business loan?

And, is the process as easy as it sounds? 

In this article, we’ve put together all the steps you need to take to apply for a business loan for your startup. 

Let’s get you started with the process. 

If your business is brand new (0-6 months)

You may want to get a business loan as soon as you decide to start your venture. 

But, in reality, does it work that way?

Newer businesses will find it tough to qualify for a business loan until they’ve been in business for at least six months. 

So, what can you do to fund your business until then?

You have a few options:

1. Fund your business with your own savings

If this is your plan for a financial cushion, start by assessing your personal savings.

It’s a good idea not to use your entire savings. But, set aside enough for a year’s living expenses. And, create a separate savings account to contribute to your business.

2. Ask family members for a loan

After you’ve used your own money to fund your business, you could ask family members or friends if they’d like to give you a loan

The best part? You don’t have to worry about pre-qualifications like being in business for a certain amount of time, or having a good credit score. And, if you’re lucky, they might even lend you the money without a payback date, and without interest. 

On the other hand, asking a family member for a loan might get messy. Problems could arise when you mix money and family. So, make sure you discuss with them in detail before you get one. This will save you from uncomfortable situations, especially if you aren’t able to pay them back right away. 

3. Get private investors interested

Suppose your business idea has started to gain some traction in the market. Now’s the time to hunt for private investors. 

Tap your network and discuss your business idea with potential investors. 

You’ll need to know how to pitch to a private investor. This will be very different from pitching to family or friends. These investors will likely be more wary about where to invest their money. They might even want an equity stake in your company. 

Come up with a solid pitch to prove that your business is worth investing in. Figure out in advance what negotiations you are willing to make on the investor’s stakes in your business. If you have a business partner, ensure that you’re both on the same page. 

Once you’ve established your business (6 months+)

Once you’ve been in business for 6 months, you’ll likely be looking to take your business to the next level. 

Let’s say you’ve invested a good chunk of your own money or asked for loans from family or investors. You now need more funds to grow your business. 

Now’s the time to apply for a small business loan

How do you get started?

You’ll want to take things step by step and make sure you do everything correctly to get the funding you need. 

1. Determine how much money you need

Start by analyzing your business goals, both short term, and long term. You might need funds to open another storefront, hire more staff, or to buy new machinery. Now, decide the amount of funds required to accomplish these goals. 

You don’t want to ask for too little money that keeps you from achieving your goals. Neither do you want to ask for too much and get no for an answer! 

2. Research the type of loan that is best for your business needs

Unfortunately, there isn’t a “one size fits all” business loan. 

Weigh your options and consider which type of loan works best for you and your business

And, don’t worry if you get denied for one type of loan. There’ll be some other option that may work for you. 

Here are the different types of loans you can consider: 

  • Term Loan: A term loan is a basic loan with fixed interest rates, repayment schedules, and a maturity date. This option is ideal if you want to open a new storefront or make any major capital investment. If you need an immediate cash flow boost, a business expansion loan might not be right for you. 
  • SBA loan: The Small Business Administration (SBA) helps small businesses, but does not provide loans itself. They partner with lenders and banks to ensure you can get loans to fund your projects. 
  • Merchant Cash Advance: In this type of loan, a bank or lender gives you the money you need upfront, and you pay back an agreed-upon percentage of your sales back to the lender. A Merchant Cash Advance is a great alternative if your SBA loan gets denied. 
  • Line of Credit: A business line of credit is a flexible option for short-term requirements – similar to a credit card. Here, you’re allocated a specified amount of capital based on your cash flow, credit rating, etc. And, you repay only what you use, plus interest. You can use this line of credit to fund recurring expenses and to adjust for any seasonal changes in business.
  • Equipment Loan: An equipment loan is designed specifically for buying equipment. So if you need cameras to grow your photography business or a new espresso machine for your coffee shop, you can use this option. And, you can repay in fixed monthly payments. 

You’ll also find other types of business loans like commercial business loans, microloans, invoice financing, and more. 

So, make sure you consult a financial advisor to discuss all options that might work for you. 

Now, assume you’ve figured out the type of loan you need. 

What next? 

3. Do your research on lenders

This is an important step – if you approach the wrong lender, you not only get rejected, but you also risk lowering your credit score. So, weigh all your options – from the big banks to smaller online lenders, peer-to-peer lending sites, and credit unions. 

Do you need a loan really quick? In that case, an online lender might be a better option. They usually have a faster turnaround time than traditional banks. Also, compare the repayment terms and interest rates to ensure you’re getting the right deal.

The next step is equally crucial.

4. Find out what you need to qualify

Now that you’ve zeroed down on the type of loan and lender, it’s important to gather what you will need to qualify for a loan. 

Credit history: This includes your personal or business credit score, your history of credit card repayments, loan repayments, and payments to suppliers. Now, there’s a difference between your personal credit score and your business credit score. If you haven’t been in business for long, some lenders will only look at your personal credit score when they evaluate your loan application. But, start building up your business credit early on by getting a business credit card, and using it judiciously. 

Age of your business: Most lenders require a business to be around for at least six months before they can qualify for a small business loan. It’s a bad idea to apply for a business loan or alternative funding prematurely – only to be denied. 

Financial statements: Lenders will scrutinize your business’ financial details, including revenue, accounts receivable and payable, and cash flow. E.g., you’ll need to have a steady monthly income to prove your financial standing and ability to repay. Some lenders, like Credibly, will require $15,000 in average monthly revenue to qualify for a loan.  

Business plan: Some banks expect to see your business plan, including revenue and cash flow forecasts. This will give lenders clarity on why you need the money and how you’re going to use it.

Collaterals: Find out if your lender needs a personal guarantee, general lien, or a collateral. The collateral could be property, machinery, invoices, or even inventory.

Apart from these, be prepared to submit your personal financial details, copies of past returns, and more if your lender asks for them.

So, if you’ve collected all the information you need and done your research – you’re all set to apply for the small business loan!

5. Apply for the small business loan

Get a checklist of documents you need to apply with, including recent bank statements, ID proofs, legal documents, and a completed pre-qualification form. Remember that the documentation required will vary depending on the lender.

Conclusion

Getting a small business loan can seem like a lengthy, complicated process. But, you’ll sail through smoothly if you follow these steps and get expert help from the right advisors.  

So, what are your startup business goals? Have you explored ways to fund your expansion plans? Share your thoughts in the comments section below.