How to Get a Business Loan for Your Startup

If you’re like many founders, your startup will likely need a cash injection to fund expansion or a large purchase sometime down the line. When these situations arise, you should know how to get a business loan for your startup to unlock extra capital.

But for many startup founders, a trip to the bank to ask about loans is usually disheartening. In 2020, 43 percent of small businesses applied for loans of which 20 percent were denied due to credit issues. 

What gives? Aren’t struggling small businesses the target demographic for loans?

Lenders want to give loans to people who need them, but they aren’t running charities. To get the right loans with the right terms for your business, you need to research your options and prepare accordingly. 

Below, you’ll learn how to ensure you get the best possible business loan for your startup and the different types of loans available.

Create a Business Plan

Before you apply for a business loan, plan exactly how you’ll use the money to grow your business and make a profit. Lenders, especially those with the best terms, want to know how you’ll spend the money (and, more importantly, how you plan to repay them). 

If you make a compelling case for the money and repayment plan, many lenders will become more reasonable to your proposal. For example, maybe you want $5,000 for an ecommerce warehouse contract that will add X amount of profit each year and can repay in two years. 

Your business plan should include at a minimum:

• An executive summary – Make it easy for lenders to get the gist of your plan at glance. If they like the summary, they’ll read the full plan.
• A company description
• Market analysis of competitors and your place in the market
• How you plan to spend your loan
• How much income you expect to make with your loan

Check Your Credit Score

Credit scores are figures used by lenders in major nations to assess your creditworthiness or ability to repay a loan. They are usually calculated based on your past financial habits like:

• Payment history on credit accounts
• The amount of credit you use compared to the total credit available to you
• The length of your credit history
• Negative financial events such as a bankruptcy

In the US, most lenders use your Fair Isaacs Corporation (FICO) score. FICO says that about 90 percent of all major lending decisions in the US factor in a FICO score.

FICO scores consider five categories from your credit reports and weigh them as follows:

• Payment history: 35 percent
• Amounts owed: 30 percent
• Length of your credit history: 15 percent
• New credit accounts: 10 percent
• Mix of credit used: 10 percent

What’s the Lowest Credit Score You Need to Get a Loan?

You can split FICO credit scores into roughly these categories:

• 720-850 – Great credit. Almost all lenders will give you a loan.
• 690-719 – Good credit. Many lenders will give you a loan
• 630-689 – Fair credit. Some lenders would give you a loan.
• 300-629 – Bad credit. Lenders will rarely lend to you without collateral (an asset of yours you’re willing to relinquish if you fail to repay your loan).

But just because you’ve never had debt doesn’t mean you’ll start with a high credit score. You need a history of repaying debts (credit card payments, for example) to make your score enticing for lenders.

Where to Find Your Credit/FICO Score

Some of the ways you can find your FICO score include:

• Free online credit score checkers
• Personal bank accounts – These sometimes offer a FICO estimate as a complimentary feature.
• Credit card and auto loan companies – These businesses often provide complimentary credit scores to their customers every month.
• Purchase your FICO score – As of January 2023, FICO has three plans listed on its website.
  • Free plan – FICO will give you a free credit score from a single data source (Equifax). This will likely give you a picture of your current credit score but doesn’t pull all of the data lenders will use.
  • $29.95/month plan – Pulls data from all three major credit reporting agencies in the US and updates every three months
  • $39.95/month plan – Pulls data from all three major credit reporting agencies in the US and updates you every month

Now here are some of the places you should go for loans.

Pick a Good Startup Lender

Today there are a staggering number of lenders both online and offline with a wide range of loans you can take for your startup based on:

• How much interest you’re willing to pay
• How quickly you need your money
• How good/bad your credit score is
• The timeline in which you want to make repayments

Below are some of the top loan and alternative financing options available to startups today.

Commercial Loans (AKA Business Loans)

The term “business loan” is often a catch-all for any loan that ends up funding a business. But in the lending industry, a business loan usually refers to a commercial loan. These are loans sourced through official channels like banks or other state-affiliated lenders to help support or grow your business.

Many commercial loans are difficult for startups to obtain as they require above-average credit scores, multiple years of profitable operations, or collateral like invoices or building deeds.

However, there are two types of commercial loans most startups in the US should consider: SBA 7(a) Loans and SBA Microloans.

The Small Business Association (SBA) is an American organization that helps small businesses get loans and regulates lenders giving loans to small businesses. Their 7(a) loan and Microloan programs are specifically designed for small businesses struggling to raise capital.

SBA 7(a) loans have no minimum amounts and let businesses raise up to $5 million at a time. You can use them for:

• Short and long-term working capital 
• Refinancing current business debt 
• Purchasing furniture, fixtures, and supplies

SBA Microloans allow you to raise up to $50,000 solely to help expand your business. Microloans cannot be used to buy real estate or refinance business debt and are designed to help startups.

How to Apply for an SBA Loan

SBA loans are provided through third-party lenders rather than through the SBA itself. Therefore to begin you’ll need to find an SBA-backed lender and apply through them.

To apply for an SBA loan, your business must:

• Be registered in the US
• Have invested your own funds
• Be for-profit
• Have tried to source funding from other lenders – You may even have to prove you have tried yourself through actions like asset sales.
• Have good credit (with some exceptions)

As SBA loans are quite generous, these lenders like to have lots of information about their borrowers. When applying for a loan, you’ll need to submit extra documents like:

• The amount of money you wish to borrow
• A business plan
• Financial data for your company
• Personal financial statements
• Your credit history
• A personal resume
• Your loan application history
• Your business license

Pros of SBA Loans

• Low rates – SBA loans current market rates are nine to twelve percent. Your rate may vary based on your lender if you take out a variable-rate loan.
• Guaranty in case of default – The SBA guarantees 85 percent of your loan if it’s less than $150,000 and 75 percent if it’s more than $150,000. It limits guarantees to $3.75 million (75 percent of a $5 million loan).
• Free advice – Because the SBA guarantees part of your loan, they have a vested interest in your success. You can ask them for advice on how best to use your loan.

Cons of SBA Loans

• Hard to get – SBA loans have strict requirements and many businesses have trouble qualifying.
• SBA loans often come with fees – Usually, these are guaranty and service fees on top of monthly payments (however, there are no guaranty fees for loans under $350,000).
• Prepayment penalties – If you pay your loans back early for many SBA 7(a) loans you will incur a percentage fee on the amount paid.

SBA 7(a) Terms and Rates

It’s important to remember that SBA loans (both 7(a) and Microloans) are not made directly through the SBA but rather through affiliated lenders. Therefore payment terms vary depending on who you borrow from.

The maximum 7(a) repayment term is 25 years for real estate purchases. For equipment purchases, inventory loans, and working capital, the maximum repayment term is ten years. SBA 7(a) can work as a revolving line of credit for up to ten years.

Generally, SBA 7(a) rates are pegged to the US Prime Lending Rate set by the US federal reserve. You can choose to take out a variable loan where your loan rate will change based on the current prime rate or lock in a rate at the current prime rate for the duration of your repayment. As of writing this article, that rate is currently 7.5 percent.

As we mentioned earlier, SBA 7(a) rates tend to fluctuate between nine and twelve percent.

SBA Microloan Terms and Rates

Microloan terms and rates also vary depending on which third-party lender you use. Their repayment terms can extend up to seven years. The average rate for microloans in 2020 was 6.5 percent.

For more information about SBA loans and their terms make sure to have a look at the SBA website.

We’ve also written an article on using SBA 7(a) loans at Acquire.com.

Personal Loans

A personal loan is money borrowed from a bank, credit union, or online lender based on your personal credit history (rather than your business’s).

Most personal loans are unsecured, which means they don’t require collateral and you pay them back in fixed monthly payments – typically over one to seven years. However, failure to repay will still affect your credit score and your ability to obtain future loans.

How to Apply For a Personal Loan

Like SBAs, personal loans follow a formal procedure as you source them from traditional lenders like banks and credit unions.

Normally, you’ll need to submit: 

• An application
• Proof of income (bank statements or pay stubs)
• Employment status – If you’re currently unemployed (at least on paper), you’ll need to show them a clear repayment plan.

You can also get prequalified for personal loans, which means you can check your rates with multiple lenders without affecting your credit score before applying.

Pros of Personal Loans

• Flexible terms – You can usually pay over one to seven years.
• Payment grace periods – You don’t have to start repayments immediately and usually can pay your entire loan early without any fees.
• Many have fixed annual percentage rates (APRs) instead of fluctuating rates based on the current Prime Rate.
• Flexible approval options – If you don’t have a great credit score, many lenders will use other options to guarantee your loan like a co-signer or they’ll check your employment or education histories.

Cons of Personal Loans

• Some personal loans charge origination fees (usually a percentage of the loan amount).
• You need excellent credit for the best rates and terms.
• Different lenders may limit how you spend the money – No matter what, you cannot use personal loans for education, down payments on houses or cars, or investments.
• Traditional lenders may not understand your business model – Because personal loans are sourced from traditional lenders, they may not understand the profitability of many common startup models like dropshipping or early-stage SaaS.
• Lenders will expect you to either offer collateral or a personal guarantee. 

Personal Loan Rates and Terms

Personal loan terms are often two to five years, and interest rates vary based on credit score (usually from about six percent to 36 percent). They have a wide range of payment terms with grace periods usually lasting a couple of months for interest-free payments.

Business Lines of Credit/Credit Cards

For many small businesses with middling credit scores, lines of credit like credit cards are some of the best ways to unlock extra funds quickly. They are especially useful when you’re unsure of how to use the money.

A business line of credit is a flexible loan for a business where you only pay interest on the amount of money borrowed. As you repay the amount borrowed, you replenish the funds available. These funds can typically be accessed using a business checking account, credit card, or mobile app.

There are two types of business lines of credit:

1. Unsecured lines of credit are those you’re most familiar with using. Your limits are generally decided by how much income you make with your credit score factored in.
2. Secured lines of credit use collateral you own as a guarantee for your loan. If you do not repay the loan, the lender can take your collateral to help satisfy your debt. Some lenders will use assets like invoices as collateral for a debt.

How to Apply for Business Credit Cards and Lines of Credit

Once you’ve created a registered business, you’ll usually be able to apply for a credit card almost immediately (provided your credit is good enough). Some banks will also want to see recurring payments into your account over time before they’ll offer a line of credit.

Besides bank accounts, you can access lines of credit on some online payment applications for businesses like Paypal Business.

Pros of Lines of Credit

• Relatively easy to obtain
• Include grace periods for repayment without interest or fees
• Can be used for a wide range of purposes
• Let you access small amounts of capital quickly
• Can access extra features like rewards and insurance for purchases like flights

Cons of Lines of Credit

• High interest rates (as of 2022, most credit cards averaged roughly 19 percent APR).
• Some credit cards and lines of credit have annual fees.
• Relatively low spending limits, especially if you have a low credit score and revenue.

Loan Terms for Credit Cards and Lines of Credit

As you may know, most lines of credit only last for a month before you’ll need to start repayments. Credit cards tend to start charging interest roughly two weeks after each monthly billing cycle. They frequently add extra fees on top of your interest if you fail to make a payment. 

It’s important to also remember that credit card interest often compounds daily. That makes their actual end-of-year APY if you’ve missed payments incredibly high.

Online Revenue-Based Financing

In the new age of online lending and recurring payments, a new breed of financiers has emerged in the form of revenue-based financing (RBF). RBF offers fast cash to businesses based on future recurring revenue rather than credit scores or employment history.

When you raise capital from RBF you pay a percentage of your ongoing gross revenues until you’ve covered your loan plus interest. For example, you might agree to take 10 percent off of your monthly recurring revenue (MRR) until you’ve paid a $5,000 loan plus $500 of interest.

Some prominent RBF lenders set their maximum loan amounts up to a third of a company’s annual recurring revenue (ARR) or four to seven times its monthly recurring revenue (MRR).

If you’re interested in using a loan to buy a business, certain RBF lenders like Boopos will even finance your purchase based on your target startup’s revenue.

How to Apply For Revenue-Based Financing

Revenue-based financing businesses usually need little in the way of an application. They simply need proof that your business belongs to you and that you make enough revenue to pay them back. Companies such as Boopos pull your revenue data from sources like Stripe.

Pros of Revenue-Based Financing

• A streamlined application process – Many RBF lenders boast loans within 24 hours.
• Affordable payments – As payments always remain a percentage of revenue, you’ll always be able to repay even without revenue (six percent of zero is still zero).
• Collaboration – RBF companies lie somewhere between debt and equity. Many financiers consider themselves investors in your business and will give you advice.
• Flexible payment schedules – RBF businesses will finance your business because they see you have the revenue to provide them a return. If you have revenue they like, many will be flexible on payment schedules and revenue percentages they take.

Cons of Revenue-Based Financing

• Usually require substantial recurring revenue over a couple of years for consideration (with some exceptions).
• Difficult for low-margin businesses – If your startup is a low-margin dropshipping ecommerce company, for example, that percentage of your revenue set aside for payments might eliminate all of your profits.

Revenue-Based Financing Terms and Rates

Usually, repayment for RBF is based on a small percentage of your revenue, somewhere between one to eight percent. Your terms are usually capped at five years though some RBFs are more flexible.

A Loan Can’t Solve All Problems

No matter what option you choose, most debt financing comes with risks. If you apply for a loan, ensure you can repay it plus interest in the terms stipulated. Failure to pay your debts can mean consequences for you and your business including:

• Asset seizures
• Legal action
• Bankruptcy
• Destruction of your credit score

If you’re taking out a loan just to stay afloat and are unsure how you’ll make a profit, you may be better off selling your startup for cash rather than risking debt. Chances are you have a great business, but you need to pass on the baton to someone with more resources. If you run a tech startup, you may be surprised at how much money you can make selling a startup with even a trickle of revenue. 

Today there are also dozens of platforms where you can sell online startups in different stages of profitability to millions of buyers around the world quickly. At Acquire.com, we help founders sell their startups quickly, securely, and legally to buyers anywhere with zero fees. We see founders on Acquire.com regularly sell their startups for multiples of up to five times their annual revenue.

All you need to do is sign up, list your startup, tell buyers about why you want to sell, verify your ID, and we’ll help you close a sale in weeks, not months.
Check out our seller info page for more information. And best of luck, whichever path you choose.

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