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Published on February 13, 2021

How to Get a Loan to Start a Business: Small Business Loans

With all of the documents to gather and options to consider, getting funding to get your startup up and running can be stressful. Although it can be challenging, a small business loan can  be necessary to succeed in your business. Our list of suggestions can help you learn how to get a business loan for a new business.

How to Get a Loan to Start a Small Business: 8 Major Steps

1. Create the Business Entity

Separating the business’s identity from your own is essential to getting a loan to start a business. Though most companies are sole proprietorships, this can make it harder to get a loan. Solopreneurs or independent contractors may not be seen as a real business by a loan provider.

Other business entity options include a limited liability company (LLC), limited liability partnership (LLP), or an S corporation or C corporation. Taking the extra step to become an LLC, for example, can make it easier to write off business expenses and get approved for a loan. It’s best to speak with a tax consultant or accountant before deciding on a business entity.

Getting a separate business phone number and address also helps to establish the business. If the business is run out of the home, you can use a P.O box. Although getting a separate address and phone number can add to upfront costs, it can pay off since it makes your business look legitimate.

Businesses also need an employer identification number, which is like an SSN for the company. The EIN can be easily obtained through the IRS website.

 

2. Know The Reason And Amount Of The Business Loan

Business owners are much more likely to get a loan if they have specific expenses in mind for it. For example, if you have a podcast, you may need a loan for recording equipment, a marketing budget and other specifics.

Be sure to review what your startup costs are before applying for the loan. Some typical startup costs include technology purchases, equipment, permits and licenses and office supplies. After reviewing all of the reasons for needing the loan, work out the exact amount you’ll need.

 

3. Review Your Credit History And Score

Banks and online lenders use your personal credit history and score to determine loan eligibility since the business most likely won’t have its own credit report. The loan also probably requires a personal guarantee, which means you’ll be held responsible for the debt repayment.

To view your credit report for free, go to AnnualCreditReport.com. You should look for errors in the personal information, public records, credit accounts and inquiries sections. If there are any discrepancies, it’s recommended that you contact the credit reporting agency that made the report. If they don’t fix it, you may need to consult with a lawyer.

 

4. Decide Type Of Loan You Need

Here are the main types of small business loans:

  • Equipment financing. Best for purchasing business equipment like vehicles or technology. The repayment is the expected life of the equipment and the equipment is used as collateral.
  • Business line of credit. This loan can pay for a wide variety of startup costs. The repayment terms are six months to 5 years.
  • Business credit card. Best used for low-cost startup expenses and needs to be repaid monthly.
  • Credit line builder. Ideal for high-cost startup expenses and builds business credit. It needs to be repaid monthly as well.

Keep in mind that for equipment financing and business line of credit loans, the business needs to have existing annual revenue of over $50,000. So, if the company is brand new, a business credit card or credit line builder might be easier to get.

 

5. Compare Small-Business Lenders

The three types of small-business lenders are online lenders, banks and non-profit lenders.

Online lenders are best for businesses that lack time in business and collateral. One benefit of working with online lenders is that the approval time is usually shorter.

The Small Business Association (SBA) can offer low APR  loans through banks. If a business has good credit, available collateral and doesn’t need the loan right away, it can be a great option.

Non-profit micro-lenders are best for businesses that are too small to get a regular loan. These short term loans are usually for less than $50,000 and require a lengthy process for approval. You’ll need a business plan, detailed explanation of expenses and financial statements.

 

6. Check Your Qualifications

Most lenders require a credit score of above 680 at least. You’ll also need to have one year in business for loans from online lenders and two years for loans from banks. Online lenders also require an annual revenue of $50,000-$250,000.

Be sure that your income is large enough to afford the repayments— your earnings should be no less than 1.25 times your expenses, including the monthly loan repayment amount.

 

7. Gather Required Documents

The application process will be much easier if you have these documents on hand:

  • Tax returns from business and personal accounts
  • Bank statements from personal and business accounts
  • Business financial statements
  • Legal documents of business (articles of incorporation, franchise agreement, commercial lease, etc.)
  • Business plan
  • A plan for what you’ll use the loan for

 

8. Apply For A Business Loan

You’ve made it! It’s finally time to apply for your business loan. After deciding on a type of loan and lender, look at 2-3 options based on loan terms and APR. The APR includes the total loan fees and interest rate. Since it determines how expensive the loan is over the year, the APR should be the main deciding factor.

Choose the loan with the lowest APR, as long as you can afford the monthly repayments and submit the documents. Remember that your credit may be pulled from the inquiry, so only apply to your best option.

 

Explore Other Options

If your loan application is rejected, don’t give up! You can try raising money through your network and community. You can also try crowdfunding, which is asking the public to help fund your small business. Venture capitalists, or investors, can also be a way to inject capital into your business.

 

Conclusion

Getting a small business loan can be pivotal in a company’s growth and success. Though you’ll need to make your business official with an entity and business identity, this helps formalize the business. Choosing the loan and lender might seem complicated, but it comes down to the best choice for your business. Don’t forget to consider your credit score, annual revenue and income to decide on realistic loan options.

 

Need Help With the Business Loan?

Still not sure how to get a bank loan to start a business? We are launching a modern virtual bank to help Black and Latinx business owners get small business and startup loans.  Join the waiting list to join our community.

 

Small Business Loan FAQs

 

Is it hard to get a loan to start a business?

Getting a loan to start a business isn’t easy. There’s a lot that companies need to prove to lenders to be eligible for a loan. The business needs to seem established and separate from your personal accounts. It’s also better if it’s an older business, at least 1 to 2 years old. Finally, it’s easier to get a loan if you have a baseline revenue of around $50,000 per year.

What kind of credit score do you need for a business loan?

According to financial experts, the minimum credit score to get most loans should be around 680. For equipment financing or a business line of credit, you may be able to qualify with a credit score of at least 630. The higher your credit score, the more favorable the loan terms and APR will be.

What’s the average business loan amount?

In 2018, the average business loan amount was $663,000. Usually, national banks tend to lend out higher loan amounts than small national or regional banks. Online lenders will usually lend smaller loans from around $5,000 to $200,000. SBA loans have an average in the middle of about $107,000.

Can an unemployed person get a business loan?

Yes, it’s possible but difficult for an unemployed person to get a business loan. They’ll need a solid credit score and history and another income source, such as investments or other passive income.