How to Qualify for a Small Business Startup Loan

Do you want to start a small business? If this is the case, you’ll want to see it succeed. One of the ways to get your startup off the ground and running is through a small business startup loan.

Financing a business is essential, but for many businesses, getting money is hard. Data shows that 47% of startup failures in 2022 were due to a lack of financing.

You don’t want to face this issue, so you’ll need to learn how to qualify for a small business startup loan. Read on to learn everything you must know to get the capital you need.

Write a Business Plan

The first step to securing a small business startup loan is to have a business plan. Focus on drafting a high-quality, professional business plan. It should represent your business objectives and goals.

It’ll also need to include a well-written and informative executive summary. It should outline what your business sells or what service it provides. It should also cover market analysis, marketing strategy, and financial projections.

Potential lenders may skim through it, so they need to have a good sense of your business right off the bat. Make good points to show them why they should give capital to your new business.

Choose the Right Type of Loan for Your Startup

Knowing what type of loan you need is critical as applying for the wrong one can lead to failure. As you may know, there are different types of loans, so it’s a good idea to learn more about each of them.

You can opt to seek a term loan. Term loans are ideal for a small business that doesn’t have sound financial statements. Consider a bank loan for this if you already have an established relationship with a local bank.

You can repay a term loan over a specified period with a set interest rate. Most lenders ask that you make fixed payments each month. Common lenders include banks and credit unions.

Business lines of credit can give flexible access to cash. Think of this type of loan as a credit card as you can decide what amount of money you want to withdraw and when you want to do it.

If approved, you’ll receive a spending limit. Interest only accrues on the money taken out. After making a payment each month, you can continue to take out funds as needed.

A small business administration (SBA) loan is an ideal option for new businesses. The SBA, which issues this type of loan, has less stringent eligibility requirements compared to other lenders. The SBA does factor in a business credit score and annual revenue.

Commercial real estate loans are great for purchasing commercial property. Apply for this type of loan if you need to buy an office building or warehouse. Banks and online lenders offer it.

If you need to buy equipment, you can apply for equipment financing. You can access the funds as a lump sum. Use the funds to buy commercial trucks or machinery.

For a small amount of money, you can apply for a microloan. Go through the SBA or nonprofits to look for one. Microloans are ideal for their repayment terms.

Check Your Eligibility

Before you start visualizing how you’ll spend the funds, you must check your eligibility. Eligibility criteria vary by lender. Most of them do look at the following aspects.

Your personal and business credit scores will be looked at. The higher the scores, the better chance you have of getting approved for a loan. If you have a low personal credit score, you might want to increase it before you try to apply for a loan.

Bank lenders tend to focus on the number of years a business has been in operation. If you have yet to open your business, you may want to work with an online lender who caters to startups.

To qualify for funding, you should also meet the minimum revenue criteria. This refers to your business’ annual revenue.

Vet the Different Types of Lenders

If you meet the criteria, you may get offers from various lenders. This is the best type of news that you can receive. You’ll need to take the time to research and compare each lender.

Focus on important aspects like APR, interest rates, and fees. When it comes to APR, most business loan APR start around 9%. For startups, this percentage may be higher.

Look for low fees as you don’t want to be up your neck in them. Most lenders charge a fee for handling the paperwork and verifying applicant information.

Gather Required Documents and Submit Your Applications

Prepare all the documents you need to send to each lender. Documents you may need to submit include tax returns, bank statements, and invoices. Ensure that you have them in order as you don’t want to make any errors that can delay the process.

When in doubt, you should consult the lender. You may also want to consider hiring a business contract attorney to help you look over all those important documents. As a matter of fact, this type of attorney will come in handy when it’s time to address your contract needs.

Use This Guide to Help You Qualify for a Small Business Startup Loan

If your goal is to start your own business, you’ll need to prioritize getting funds. Your business can succeed if you’re able to get a small business startup loan. Use this guide to help you determine how to complete the process, so you can get the capital you need.

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