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How a Startup Loan Can Kickstart Your Small Business

Written by Banks Editorial Team

Updated April 16, 2024​

3 min. read​

small business loans startup

Some of the most prominent companies made their way into the business game with a small business startup loan. If your startup can offer a unique product or service, it may have the potential to become a million-dollar corporation. However, your startup may not be successful unless you can secure funding.

Some startup owners are often new to the business world, so they may not know what business loans they need to get started. The best solution for an up-and-coming startup is to get a small business startup loan.

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What is a Startup Business Loan?

The financial needs of a new business are often too much for just the company owner to handle. They need money to fund the purchase of materials, real estate, furniture for brick-and-mortar locations, and any necessary equipment. If the small startup business already has a few employees, it also needs money to compensate them for their work.

You can’t run a small startup business without addressing these working capital expenses first. Some startup owners turn to investors to help their small businesses, but this can actually do more harm than good. Investors often require the startup to give up some equity, and they may even try to act as the boss of your company.

Depending on your situation, a better solution may be to seek out a startup small business loan. With this loan, your startup will have access to the working capital it needs to operate daily. Some startup owners may also use their loans to open business credit cards or lines of credit. This type of loan can also provide you with the necessary funds for business expansion.

Startup business loans are usually between $500-$750,000, with flexible repayment terms of up to 25 years. Once approved, owners generally receive funds in two weeks, though it can also take up to a month. Interest rates are highly negotiable, ranging from 0% to 17%.

How Does a Startup Business Loan Work?

First, determine how much you want to borrow, which will ultimately depend on your startup’s needs. Do you need long-term funding or a short-term loan? While it may be appealing to choose a loan with a smaller term, your loan’s interest rates will be higher. However, since lenders generally impose more eligibility requirements for long-term loans, a short-term loan may be your only option.

To take out any loan, you usually need a good credit score. However, as long as you’re running a successful business, you can still get a startup business loan with poor credit. If a lender can look at your business records and see impressive growth, you’ll probably be approved based on those figures.

Lenders will also evaluate the age of your startup when determining your loan approval. If your startup is less than a year old, it may be considered too high-risk for the lender. A lender may also reject your loan application if you have failed to pay off other outstanding loans.

If you run into this problem, you might also be able to get a startup business loan based on collateral. Lenders will see your startup as less of a risk and may even give you lower interest rates. However, this is riskier for the borrower if they default on their loan.

Fortunately, many loan providers don’t require any collateral. You can take out a microloan from the SBA or go through an alternative lender. You may also be able to secure startup funding through crowdfunding or loans from wealthy family members.

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How do You Qualify for a Startup Business Loan?

While individual requirements will differ based on the lender, most institutions will expect you and your business to meet these standards:

  • A minimum of 6 months in business.
  • A minimum credit score of 680.
  • Healthy cash flow and income for your business.

If you don’t meet the first two requirements, some lenders will be willing to approve your loan based on cash flow. You can use this opportunity to open a business credit card so that you can gradually rebuild your credit score. This will make it easier to get approved for more business loans in the future.

It would also help if you were prepared to explain a few things about your business to a potential lender. A detailed, up-to-date startup business plan will assure lenders that you’re a reliable business owner. Explain precisely how you are going to use the funds and how they will benefit your startup. Be honest about any other outstanding debts and outline your plans to repay other lenders.

However, depending on your business, it may be impossible to secure a small business loan from lenders like the SBA. The SBA won’t give out loans to certain industries, like gambling or real estate investing. Additionally, you aren’t eligible to receive funds from any other lender if you have an SBA loan.

How do You Apply for a Startup Business Loan?

Before you take the leap and apply, take a good look at your company’s finances. With this loan, could your business potentially make enough money to cover the monthly repayments? If you’re not sure, you may want to look into other financing options. Defaulting on your loan depletes your credit score, making it more challenging to get another loan.

When you’re ready to apply for your startup business loan, make sure you have a few documents ready. The more information about your startup you can give, the faster you’ll be approved. You might need:

  • Relevant financial documents (such as invoices, bank statements, and credit card sales).
  • Your startup’s license and registration.
  • Driver’s license.
  • A voided business check.
  • Business plan and growth forecast.
  • A detailed account of your startup’s business history.
  • A copy of your personal and business credit report.
  • Some recent personal and business tax returns

Most startup business loan applications can be completed quickly online or over the phone. Approval wait times can vary significantly between lenders. If you need immediate cash flow, it’s better to work with a an alternative lender. Most applications are approved within 24 hours, with funds available on the same day.

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