Given that there are 28 million small businesses around the country, the growing number of startups are driving lenders to rethink what it means to be a business. With so many businesses starting and thriving, startup loans are a popular way to begin on the right foot. Without the right startup funding, even the best idea is bound to suffer.
Here are four steps to get your business off the ground and secure startup funds.
1. Set Your Budget
To get your first startup loan, you need to avoid making the most common mistake that consumers make. So many people apply for a loan that’s bigger than what they need that they, later on, struggle to pay it back. This loan needs to first be able to cover the costs of what it takes to start your business and then needs to be able to be paid back by your products and services.
If you already work in the industry you’re starting your business in, it shouldn’t be hard for you to calculate your costs. Either way, start by adding up equipment costs, staffing costs, rent, raw materials, and marketing for your first six months. This is how much you should take out if you want to survive while you get the word out.
Then, have a plan for how you’re going to pay the loan back. This is a key component to help lenders determine whether they’ll loan money to you. If you don’t have any clear way that you’re going to pay back your loan, there’s no good reason for lenders to go out on a limb for you.
Be realistic about your sales goals because you’re ultimately going to be beholden to whatever you sign with your lender.
2. Plan For Alternatives
If your company is still in its first year, it’s going to be challenging to get your first loan. Getting a startup loan is possible but make sure you have backup plans for how to keep the business running when funds get low. Rather than trying to put everything on your loan, you should have some tricks up your sleeve.
Have some other lines of credit, even if they’re as basic as business credit cards. Have some friends and colleagues that you can borrow from and even consider setting up crowdfunding.
Avoid personal loans as your finances should all be registered as part of your business.
3. Search For The Best Lender
Startup loans are now available from a variety of lenders. You can get them from banks, nonprofit lenders, and even online lenders. They’ll give you everything from standard term loans to lines of credit that can contract and expand as needed.
Low APR is going to be hard to get for a startup, however, it’s possible that if you keep your credit healthy, you could qualify. If you find a lender who is willing to loan you money but at a higher APR than another lender, ask if they can offer you terms that match what the others offer.
You might be surprised at how low you can haggle your APR by just asking. However, if you’re saddled with bad credit, contact Bonsai Finance for help.
Make sure that you ask around to several different lenders before you settle on one. There are a variety of lenders who might seem like they offer great deals but, once you start digging into the fine print, aren’t as ideal as they seem.
Go with a traditional bank when you’re looking for a term loan or a line of credit. They’re harder to get approved for and you’ll need a higher credit rating. If you’re willing to put your home down as collateral, you have a higher chance of qualifying at a good rate.
If you have a small company, maybe with only you as an employee, go with microlenders. They’re the ideal solution when you’re seeking $35,000 or less. They’re perfect for any kind of startup, from tech to retail.
4. Prepare Your Documents
First, check out your credit score with one of the many free credit reporting agencies. You need to have a good credit score if you want to get the best rate and you can change your credit score more easily than your business’s financial situation.
Then, you need to start applying for loans that suit your needs. Don’t apply for every loan possible just because you want to see if you qualify. Each inquiry into your credit will knock your credit score back a little bit.
If you’re going to apply for multiple loans, apply for them all within a short time frame. This ensures that you can avoid seeing that impact on your credit score between applications.
You’ll need to have any personal tax returns or business tax returns that you’ve filed in the last couple of years. Include any bank statements showing your finances or your business finances.
Expect that you might also need to show legal documents regarding your business. This includes but isn’t limited to articles of incorporation proving that you’ve got a legally documented business and any franchise agreements that you’ve signed up to this date.
If you have a commercial lease already, this looks good if you can share it with your lender.
Startup Loans Rely on Your Sales Pitch
When you’re applying for startup loans, your lender is going to rely heavily on how well you can pitch your ideas. If you can’t sell your idea to them and how it’s going to make money, you might have to go back to the drawing board. Once you find a way to ensure you can pay the money back, funding should be no issue.
If you want to ensure that you thrive like others before you, check out our guide to building the ideal company culture at your startup.