As an entrepreneur, the decision to get a startup business loan is a big one. Financing your business through a loan is a major decision that requires you to consider a variety of things. These include interest rates, approval rates, payment terms, and more. But don’t let all this overwhelm you, we are here to help! Here is what you need to know to figure out if you should get a startup business loan.
Before approaching a lender, there are several questions you should answer for yourself so that you are as prepared as possible.
When it comes to taking out a startup business loan, one of the first things you are going to want to do is spend some time calculating how much money you are going to need.
Many entrepreneurs involved in startup companies make mistakes when it comes to figuring out their early expenses. This happens for several reasons. Namely:
How are you planning on using your startup business loan? This is an important consideration because there are specific types of loans (like equipment loans) that are geared toward certain kinds of expenses. You also want to think about if you are going to spend your loan on more than one thing. For example, you may have to make some repairs to your startup’s brick-and-mortar location while at the same time paying for some digital advertising—certain types of startup business loans that allow for this kind of flexibility, while others do not. Make sure you choose the right one.
Do you have good credit or bad credit? If you have bad credit, is it below 525? If you have good credit, is it above 700? These are important considerations because with a startup company in many cases, you are not going to have the cash flow early on to successfully apply for many loans without some kind of personal credit.
Also, the better your credit, the more desirable types of financing you can get. If you have bad credit, you may be forced to accept higher interest rates and or shorter payment terms. Better credit scores and personal finances can lead to more agreeable interest rates and longer payback terms.
How soon after applying for your startup business loan you need the money is an important consideration that many entrepreneurs fail to consider until it is too later. Many simply think that all types of small business financing take only hours or a day. But this is not the case. If you go through a traditional commercial bank and apply for a term loan, it could take many days or even over a week for you to receive your funding—not to mention long and tedious application processes.
The difference between getting your money in a timely fashion versus having to wait days or weeks for your funding can mean the difference between surviving and failing for some startups. The key thing to do is determine what your deadline is for getting the money and then figure out what your options are from there.
Unfortunately, many startups do not have good cash flow because they are so new. That does not, however, mean that none of them do. If your startup company is already making sales and has solid cash flow, this is something that should be brought up to lending institutions as it may help your loan’s chances of getting approved.
Having a well-thought-out business plan shows bankers and lenders that you are professional and have considered your business thoroughly. When applying for a startup business loan, lenders want to see that the person they are lending to is trustworthy and reliable. Having a clear and concise business plan which includes details on how you plan to succeed is a good way to endear yourself to lender.
Certain types of startup business loans require collateral, while others do not. Whether you need to put up collateral is an important consideration for a small business owner. While you may believe in your business and be willing to work hard for it, you may not be willing to put up your house on its success. There is nothing wrong with that. Whether or not to put up collateral depends on the specific kind of loan you are applying for, as well as your decision as to if you should do it.
After you have answered all of the above questions for yourself, it is time to ask your potential lender some questions about your startup business loan.
Startup business loans usually have higher interest rates than those given to more established businesses. Why? Because startup companies are risky. Regardless of how confident you are in your idea, co-founders, or business model, as far as banks are concerned, giving you money represents a risk.
Many large commercial banks will not give traditional term loans to startup companies, which is why many startups have to resort to alternative finance methods. These alternative methods include things like Merchant Cash Advances, short-term loans, SBA loans, equipment financing, and business lines of credit.
Merchant Cash Advances can be a great option if your startup is already generating income, but if the company is brand new and is not generating income, your chances of approval are low. Other than that, your other options—including short term loans, equipment financing, and business lines of credit—will all likely come with higher interest rates than your standard term loan.
Higher interest rates for startup business loans, especially ones that are non-traditional, are to be expected. Still, as a small business owner or entrepreneur, you should research what to expect so that you do not accept interest rates that are too high.
Some entrepreneurs are so eager to get approved for their startup business loans that they fail to ask the most basic questions—like, for example, “when is my first payment due?” The last thing you want to do as a small business owner is to start missing payments. Doing so can harm your credit, which, in turn, can make things more difficult for you in the future.
When going for a startup business loan, remember to read all the fine print and understand all of the terms and details of your loan agreement before signing.
One question that many small business owners fail to ask when applying for a startup business loan is, “Does your institution lend to businesses in my industry?”
This is an important question to ask even before you go through with your application. Why? Because if you are working with a financial institution that never works with businesses in your industry, there is probably a reason for it. In other words, their qualification process may sort at businesses like you for denial. This matters because many startup business loan application requires a “hard pull” on your credit, and checking your credit report too often within a short period of time can actually hurt your credit score and make it more difficult for you to get approved for other loans. The point is that you only want to apply for startup business loans when you feel you have a good chance of getting approved.
It is worth talking openly and honestly with bankers and lenders (as well as doing your research) when you are going for a loan. Do not assume that just because you think your startup business idea is unique and special that lenders are necessarily going to agree. Even if you do have a great idea and a great team, if your credit is below 525 and the particular loan you’re considering requires a credit score of 600 or greater, you probably shouldn’t bother applying.
One of the benefits of certain types of startup business loans is that they help your credit. This, however, is not always the case—which is why it is so important for startup business owners to talk to their lenders and make sure that when they make timely payments on their loan, it is reported to the proper credit agencies. Doing so ensures that your credit will improve you keep on top of your payments.
If your startup gets approved for financing, you want to make sure that you never miss or make late payments. Doing so can damage your credit, and while credit may not seem especially important during the early stages of your company, it is inevitable that most small business owners need some sort of financing over the course of their business. This may include financing for emergency expenses, financing for growth, or financing to help. Either way, as a startup owner, you want to do what it takes to ensure your credit stays in good standing and continues to improve. Doing so puts you in a better position to succeed well into the future.
Before moving forward with a lending institution, especially if you are seeking alternative financing, you want to check them out with the Better Business Bureau (BBB). The BBB is an organization dedicated to helping consumers when dealing with dishonest companies. Anytime you are dealing with things like loans or large amounts of money exchanging hands, there are always going to be those who seek to take advantage. If you are looking for a startup business loan and encounter anything that seems odd or too good to be true, you should stop and ask yourself if what your doing seems like something that could be a bad choice. The last thing you want as a new business owner is to get involved in a deal with a shady lending institution that is going to bleed your company dry by charging you insanely high monthly payments or, for that matter, by offering you very high-interest rates. The way you avoid these types of situations if by doing your research—both with the BBB and by research what kind of interest rates to expect with your loan.
Now that you know what questions to ask yourself and what to ask your lender, you should be able to figure out whether you should get a startup business loan. Good luck!