Every new business venture is different, but there’s one thing they all have in common—they all require capital to get started. That’s why so many entrepreneurs look into how to get a loan to start a business.
Lenders can help new businesses secure the financing that they need to take care of all sorts of startup costs—including building a space and buying equipment, stocking inventory, hiring staff, and more.
However, the process involved with getting this financing isn’t quite as simple as walking into a bank and walking out with a loan. Here, we’ll cover how to get a business loan to start a new business—explaining steps to follow, important information for your search, and alternative options for capital.
Steps to Get a Loan to Start a Business
How to Get a Loan to Start a Business
The good news—there aren’t too many steps actually involved in learning how to get a loan to start a business. That said, there are nuances within each of those steps that are important to understand as you’re searching for your first startup business loan.
Here’s what you need to know.
1. Legally establish your new business.
Even if you don’t have the capital to fully launch your company, you still need to establish your business legally.
In fact, you’ll need to take these official steps in order to obtain the financing you need to continue to launch your business. This means you’ll need to:
Choose a business name.
Even if you’re not actually ready to launch, you will need a name for your business. You’ll use this name not only to distinguish yourself to your customers, but also on legal documents that will get your business going.
Although it’s important to choose a business name carefully, you’ll be happy to know that you’re not stuck with your name forever—you can file what’s called a “DBA” (doing business as) in which you operate under a different name even if your legal documents still say the name you originally picked.
Establish your business as a legal entity.
Your next step is to establish yourself as a business officially within your state. This is called choosing a business entity, and during this process, you’ll officially declare the structure of your business, as well as how you’re going to pay taxes on your earnings.
Examples of business entities include sole proprietorships, LLCs and LLPs, S-corps, and C-corps. It’s also important to note that each state has a different process for establishing a business entity. For instance, if you’re going to start a business in California, the process you’ll go through is different than if you’re looking to start a business in Florida.
Get an EIN.
Getting an EIN, or an “employer identification number,” is an important next step. This is sort of like your business’s social security number and you’ll use it on many important documents—both at the beginning of your business—as well as down the line.
You can quickly get an EIN online through the IRS.
Open a small business bank account.
Although opening a small business bank account isn’t technically a requirement to start your business, you might as well do so when you’re getting up and running.
Obviously, you’ll need one to get a loan to start a business, but it’s also important to help you separate your personal and business finances—an essential part of correctly and intelligently establishing your new business.
2. Figure out how much capital you need.
Another step to complete before you apply for a loan is to understand how much money you need and what you plan to use it for.
When you’re applying for a loan to start your new business, you’ll need to request a specific amount of money.
This number should be a precise figure that you derive from the following factors:
- What you’re planning to spend the money on
- The costs associated with these expenses
- How much your business can realistically afford to pay back with interest rates factored in
Business loans also have different structures—for instance, some offer lump sums, others are draw-as-you-need, and others specifically finance certain fixed assets. On top of knowing how much money you need, you should also know how you need to be able to access and deploy your capital.
3. Understand lender requirements.
Next, it’s crucial to understand how business loans work.
To explain, lenders have certain requirements that they need borrowers to fulfill in order to qualify. And, some of these requirements can be tricky for new business owners to meet.
Here are the most important things that lenders evaluate when granting capital to business owners.
Personal Credit Score
Your credit score is the most comprehensive indicator of your past responsibility with debt—how much credit you have available and how much you’re currently using, whether you’ve paid past loans and bills in full and on time, how long you’ve had credit in your name, and more.
Your business will build up a business credit score, too, as you begin to do business, but lenders will take into account your personal credit history as they’re deciding whether or not to give you a loan on behalf of your business.
Not only will your credit score determine whether or not you get a loan, but it can also dictate how much money you can borrow, the structure of your loan, and the terms under which you can borrow (including your business loan interest rate).
Time in Business
The amount of time you’ve been in business is important, too. It helps lenders evaluate the viability of your business, which, in turn, helps them determine whether or not you have a strong enough business to lend to.
Although there are some loans that specifically cater to startups, many lenders require a year or two (in some cases, six months) of business history before they’ll even consider extending you a loan.
Revenue and Cash Flow
Similarly, in order to properly assess whether or not you’ll be able to repay a business loan, lenders will consider how much revenue your business generates annually, as well as how much cash you have in the bank already.
Some lenders require certain revenue numbers before they’ll consider a candidate for a loan, which can prove tricky for entrepreneurs looking for a business loan to start a business.
Along with your cash assets, lenders will look at the type of assets your business has to put up as collateral. This could be physical equipment or property, or sellable inventory, for instance.
As a startup, you may not have strong assets to back your loan. Often, you’ll be asked to sign a personal guarantee, which means your personal assets will secure the loan in case of default.
Some industries are riskier than others—some have higher failure rates and are more susceptible to economic fluctuations (such as restaurants). Lenders are generally more interested in providing loans to businesses in more stable industries.
That’s not to say that you can’t get a business loan if you’re, say, looking into how to start a food truck, but if you’re approved, you may have a higher interest rate than someone in, for example, raw materials that are constantly in demand.
4. Research your best loan and lender options.
As you read through the above list, you’re probably realizing that, as a new small business, you won’t have things such as revenue, collateral, business history, and business credit for lenders to evaluate.
This can make it especially challenging to find a loan to start a business, especially from traditional lenders (and even some alternative lenders, who generally have slightly less stringent requirements).
There are, however, some lenders that are more likely to loan capital to new enterprises, and some types of loans that are better suited for startups. Here’s what to know as you’re researching your options for how to get a business loan to start a small business:
Types of Loans for New Businesses
The long and short of it is that new businesses are unlikely to be able to secure traditional business loans, such as term loans. There are, of course, exceptions—for instance, maybe you’ve run a successful business in the past and have some track record for lenders to look at—but it’s wise to look into alternatives to traditional loans just in case.
Some forms of startup funding that you may be able to secure include:
- Equipment financing: In which a lender finances a piece of equipment directly, and the equipment itself secures the loan
- Inventory financing: Which is similar to equipment financing, and in which the inventory financed provides collateral for the loan
- Business line of credit: In which a lender approves a credit line you can draw from, similar to a business credit card, but in much higher amounts
- SBA microloans: Up to $50,000 for less-established businesses, financed through the U.S. Small Business Administration
- Business credit cards: Which are often available to new businesses to fund smaller expenses, and which can help build credit for business loans down the line
Once you have a sense of the type of business loan you’d like to pursue to start your business, you can begin looking into lenders. You’ll find that not every lender will finance newer businesses, but some will have less time in business requirements than others.
Additionally, if you’re able to offer up valuable collateral, or choose a loan like an equipment loan that is self-securing, you might have a better chance of securing a loan as a new business.
That said, you’ll find that some lenders specialize in offering loans to new businesses, but many of these lenders charge very high interest rates to compensate for the risk, which could be difficult for your business to afford.
In other words, carefully understand what debt your business can take on—and at what cost—before proceeding.
5. Gather your business loan application materials.
Each business lender and type of business loan will have different application requirements. You’ll work with your specific lender to find out exactly what kind of information you’ll have to supply for your application.
However, there are several documents and pieces of information you can gather in advance, which can help speed along the business loan process.
You’ll want to have the following ready:
- Personal identification
- Two years of personal tax returns
- Business identification, including your EIN, ownership paperwork, and business license
- Information on your business bank account, including your last three months of bank statements if you have them
- Any other financial documentation that you may have on your business
- Business plan
6. Familiarize yourself with alternative routes for startup capital.
It’s possible that you might not get approved for a loan to start a business right away. Because that’s the case, you’ll want to familiarize yourself with a few alternative routes for startup capital.
Popular options include:
- Personal loans for business: In which you take a loan out against your personal credit and finances and use the capital to build your business
- Equity financing: In which you give away a percentage of ownership of your company in exchange for capital to build your business
- Crowdfunding: Which is a popular route for many consumer-product companies to help finance inventory and production
What to Do If You’re Rejected for a Loan to Start a Business
If you’re rejected for a business loan to start your business, it’s certainly not the case that you’ll never be able to secure capital. You may just be a little too early and may have to start generating some revenue and accruing some time in business—even if it’s just from bootstrapping your operations.
In the meantime, you might want to start by opening a business credit card. This can give you access to some capital to grease the wheels, and, most importantly, it’ll help you establish that business credit that’s essential for lenders to see when they’re evaluating your business loan application.
On the other hand, if you’re not in a position where you can wait to build up your business without capital, you can also reevaluate your collateral, redo your business plan, or look into different loan types that may be better suited for you as a business in the early days.
Talk to your lender and see what they’re looking for in an applicant that you haven’t been able to provide yet, so you’re better primed to make the right decisions.
The Bottom Line
As you begin the process to get a loan to start your business, make sure that you keep your expectations realistic and are open to alternatives to traditional business loans, too.
At the end of the day, securing a business loan as a startup isn’t the easiest process, so do your research about different types of loans and lenders, and you might be able to find a way to secure at least some of the capital you need to get going while you build up your time in business, credit, and revenue.
Sally Lauckner is the editor-in-chief of JustBusiness and the editorial director at Fundera.
Sally joined Fundera in 2018 and has almost 15 years of experience in print and online journalism. Previously she was the senior editor at SmartAsset—a Y Combinator-backed fintech startup that provides personal finance advice. There, she edited articles and data reports on topics including taxes, mortgages, banking, credit cards, investing, insurance, and retirement planning. She has also held various editorial roles at AOL.com, Huffington Post, and Glamour magazine. Her work has also appeared in Marie Claire, Teen Vogue, Cosmopolitan, and ColoradoBiz magazines, as well as Yelp, SmallBizClub, and BizCrat.