It's well-known that you have to spend money to make money. For startups, that fact is a source of frustration. How do you spend money that you don't yet have? And yet, so much of what's needed to go from startup to success requires money, from office space to employees to prototyping, manufacture and marketing.
The picture is further complicated by the fact that credit markets are tighter than they've been in years, with banks becoming increasingly selective about the businesses to which they will lend. Absent business history and excellent credit -- two things that, by definition, startups often lack -- obtaining funding can be difficult.
Who Qualifies for a Startup Loan?
The criteria by which loan eligibility is determined varies from one institution to the next, but there are enough points in common among lenders that borrowers can research and determine the kinds of loans for which they might be eligible. These factors include time in business, the use of the loan, gross sales and net profit.
How To Apply for a Small Business Loan
As with qualification criteria, application processes can vary widely among lenders. However, there are a few things that will serve you in good stead regardless of your lender.
Take Stock of Your Finances: You'll need to have your personal and business tax returns in order, information on your outstanding financial obligations, banking records, information on your backers/guarantors, an inventory of equity, investments and assets, and a comprehensive P&L.
Update Your Resume: Your lender will be looking at the principals' backgrounds and experience to ensure that you (and your team) are qualified to run and grow the business.
Know Your Credit Score: Knowing your score can give you some idea as to the kind of loans available to you and the rates at which they might be offered.
Write Your Business Plan: Your lender wants to know that you're able and willing to repay your debts, and that you’ve planned your business's path to profitability over the long term.
Double and Triple-Check: Missing or incomplete information can lead to delays, additional questions, or an outright rejection of the loan request.
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Startup Loan Alternatives
Credit unions, small business credit lines, cash advances. Read more in our article on small business loans for businesses with bad credit. There are other options that are particularly popular for those in the process of launching a business:
Bootstrapping: Bootstrapping a startup means doing more with less -- especially with less money. Bootstrapped businesses are often funded by outlays of personal cash or credit cards, loans from family, home equity, and similar means. Given that the infusion of cash is generally a smaller one, bootstrapped startups tend to rely on "lean" principles to finance and operate.
Microloans: Microloans are, as the name suggests, smaller loans for businesses that don't require a large amount of cash or a revolving line of credit. The loans can range from as small as $500 to as much as $50,000, with some loans requiring no guarantor or collateral.
Crowdsourcing: For businesses with a solid business model or a proven track record of releasing quality products, crowdsourcing campaigns can be a good way to fund the prototyping, manufacture, and/or distribution of a product, providing some or all of the project's working capital. Competition is fierce, however, and some platforms (like Kickstarter) have an all-or-nothing approach to funding.
Grants: While we would caution against any of the sites promising grant information for a fee (and they are legion), grants can be a viable way to raise capital for a business. Be aware that the process can be more involved -- and take much longer -- than a loan, and while the money may not need to be repaid, its use is often restricted by the rules of the grant-making body that issues it.
Venture Capital and Angel Investors: This section is last on our list for good reason: while startups backed by angel investors and venture capital earn more than their share of good press, the fact remains that the odds of getting VC or angel funding is only marginally higher than hitting the lottery. Both categories of lenders are even more risk-averse than banks, and tend to back only those businesses that promise the best ROI because they already have a successful track record. In other words, if your business needs venture capital to succeed, that's a good indicator that you're not likely to receive it.
Startup Loan Providers
The SBA: While not a loan provider, the Small Business Administration is a loan guarantor that works with several major lenders, with funds for startups typically disbursed under the aegis of the 7(a) program. Their advantage is that they have a better understanding of the needs and challenges faced by startups, and having the SBA as a guarantor can make it easier to obtain a loan, line of credit, or working capital from a bank or credit union. Read more about the SBA.
Banks and Credit Unions: If your startup has been up and running for two years or longer, or if you have excellent personal credit, a loan from a bank or credit union is worth exploring. The rates and repayment terms offered on traditional small business loans from issuers such as Wells Fargo, Chase, Bank of America, or a local credit union are much better than those offered through non-traditional lenders. Credit unions have also been much more proactive in making business loans than banks have in recent years.
Nontraditional Lenders: Lenders like Fundera, Accion, or Kabbage, as well as peer-to-peer (P2P) lenders like Lending Club and Prosper will lend to businesses passed over by traditional lenders because of their credit history. If poor credit is keeping you from obtaining financing, read more about getting a small business loan with bad credit. A network of government-run and nonprofit state and regional lenders also provide loans to businesses starting out in certain sectors and geographical areas (see our article on small business loans from the government).
It's difficult to fund a new business or startup. Finding funding will require persistence and resourcefulness, but it's not impossible. While we are of the opinion that bank loans should be among the first sources explored, we are also cognizant of the difficulties attendant to getting a small business loan if your business is just starting out. If you've tried and failed to get a bank loan for your startup, the range of alternatives that currently exist are perhaps broader than they've ever been.