BusinessStarting a Business

How To Get A Loan To Start A Business

When you’re an entrepreneur, one of the biggest challenges of getting your business going will be getting the funding it requires.  For banks or organizations to partner with you, they’re going to want to be convinced that your new venture is going to be a success and that you won’t default on the loan. So, how do you get a loan to start a business? Let’s find out more!

How To Get A Loan For Your Business

How To Get A Loan To Start A Business

There are many aspects and steps to take into account when you’re looking at getting a loan to start a business. You’ll need to look at money, your credit score, borrowing options, and more to be fully prepared to request a loan. We’ll talk about how you can get a loan to start a business and the options you have to secure the financing you need throughout this guide.

How Much Money Do You Need?

Before asking anyone for any funding, the first thing you need to do is figure out exactly how much money you’re going to require.  

Specifically, what will the loan money be used to pay for?

  • An office or workspace
  • Work vehicle
  • Equipment and tools
  • Employee wages
  • Etc.  

This should be done as you put together your return on investment (ROI) calculation and tally up all of your initial and ongoing expenses.

getting a small business loan

What Can You Afford?

On the other side of the equation, you’ll need to be realistic about what you can afford to pay to the lender once you’ve secured the loan.  To get a ballpark idea, use a free business loan calculator like this one from Bankrate to figure out your monthly payment. You can also use a personal finance tool or money management app to better organize your current finances to see how much you’re able to afford to spend.

How’s Your Credit Score?

Almost certainly if your business is new the loan officer is going to look at your personal credit history and financial assets as a way of determining if you qualify or not.

To prepare for this, go to any of the major credit reporting agencies and download a free copy of your credit report.  Make sure it is free of any errors and that there are no delinquencies.  Check your score as well to make sure that it is as high as possible (with the best score being 850).

Credit Score For Getting A Loan

Prepare Your Business Plan

Getting a sizeable loan from any lender is going to take some convincing.  The best way to do this is to put together your business plan and make sure that it reflects positively on your new business venture.

A good business plan should have a:

  • Executive summary (a brief overview of your business idea)
  • Company description
  • Market analysis
  • Product or service description
  • Marketing strategy
  • Financial projections / required funding

If you need help writing a business plan, then check out these tips from Entrepreneur.

Plan A Presentation

Since you will likely be meeting with potential lenders in person, you’ll want to prepare a presentation fo your business plan in addition to just the loan application.  Put together a visual slideshow and be prepared to speak openly and knowledgeably to any of the questions that the loan officer might have.

Your Borrowing Options

Now that you’ve thought through your funding request and have your materials prepared, its time to apply for a loan. 

getting a start-up business loan

Here are a few of the major options for borrowing you could consider:

Banks / SBA Loans

Probably the first place most people would think of when they need a loan of any kind would be the bank.  After all, that’s what they do!

Unfortunately, for most start-up businesses, a conventional loan is not going to be an option since your business has no cash flow and thus no means of paying the loan back.  Therefore, what you may do instead is apply for a loan with the bank that is backed by the Small Business Administration (SBA) from the U.S. government.  That way, it will be less risky for the bank and will increase your likelihood of getting approved.

You can look for lenders who offer SBA loans through Lender Match on the SBA’s website.  According to the site Value Penguin, the average SBA 7(a) loan was $417,316 while the average SBA microloan was approximately $13,000.

Angel Investors

Sometimes you might find individuals who are willing to support your business by lending you the money directly.  These people are called angel investors and they can be found through various services such as the Angel Investment Network.  Just keep in mind that they are often looking for a handsome return on their investment and will generally ask for an APR that is higher than that of a bank / SBA loan.

Nonprofits

Nonprofits (also known as microlenders) are another funding alternative to banks.  Usually if your business serves a particular social niche or is minority-owned, a nonprofit may wish to support you.  However, keep in mind that the loans are typically relatively small and often carry higher APRs than what a bank would offer.

Crowdfunding

Crowdfunding sites have become a very popular way for many new ventures to get off the ground.  When you create a post on a crowdfunding site, contributors will donate to your effort with no real expectations in return (except for maybe a gift or sample product from your company).  

Crowdfunding can be a particularly useful financing strategy because it means you retain full control of your business and are not locked into a loan contract.  However, don’t forget that you always should be ethical with the money that’s donated and use it for the business purpose you intended.  

Check out sites like GoFundMe or Kickstarter to get started.

P2P

Peer to peer (P2P) sites are another modern-day alternative to bank loans.  Instead of borrowing from an institution, you’re borrowing from actual people who have money to invest.  Though they may only invest a few dollars at a time, over time you can gain enough investors to collectively raise all the capital you’re looking for.  However, again, be prepared to pay a higher APR if your credit history isn’t fantastic.

Try a site like Lending Club.

Friends and Family

Do you have any friends or family members with extra money that they’d like to invest?  If so, you could offer them the opportunity to buy a stake in your new business.  Just be sure to get everything in writing and stay on top of any payments they are owed.  Remember, these are the people you care about and don’t want to cause them any financial distress.  

Borrow from Your 401k

If you’re struggling with any of the loan options above, you do always have the option to raid your 401k retirement plan and borrow against it.  You can take out as much as 50% of the vested balance or $50,000 (whichever is less).  The loan must then be paid back within five years at a reasonable rate of interest.

Though this is a viable option, I’d strongly recommend leaving it as a last resort since anytime you raid your retirement accounts it can seriously jeopardize your future financial well-being. Remember, investing for retirement is important, so only do this if you must.

Conclusions: How To Get A Loan To Start A Business

Getting a loan to start your business is a complex process, to say the least. There are many aspects and considerations to think about when deciding on a loan. Use the guide above to see exactly what you need to know before getting your loan so you’re ready and prepared. Go out there, get the money you need, and start your business!

Kevin

Kevin is an ambitious entrepreneur that is obsessed with all things related to finance. From a young age, Kevin has always been involved with side hustles ranging from online selling to freelance work. Over the years, Kevin graduated from side hustles and started launching multiple online and offline businesses. Kevin is a serial entrepreneur who loves starting new businesses and exploring all things related to business and finance. He is constantly looking for new ways to save money, invest money, and create income streams.

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