How to Apply for a Small Business Loan for Your Startup

When you have a great business idea, your next step is to figure out how to finance it. The good news is that there are multiple resources you can turn to to help get your business off the ground. Here's what you need to know about exploring your options and applying for the best loan for your business.

[Read: 5 Loans to Start a Business]

Types of startup business loans

There are a few different types of startup business loans you can explore as an entrepreneur:

Term loans

Term loans are often granted to an established small business with sound financial statements. These loans come in specific amounts and have either a fixed or floating interest rate throughout the specified repayment schedule. Term loans are usually used by businesses to purchase a new building, real estate or equipment and may require a larger down payment to lessen payment amounts.

Lines of credit

A line of credit gives businesses flexible access to cash for expenses. Like a credit card, you decide when you withdraw money and the amount, and you’ll also have a spending limit and only accrue interest on the amount withdrawn. The disadvantages associated with business lines of credit include the difficulty of getting approved if your business is less than three years old and the potential to worsen debt.

SBA loans

Small Business Administration (SBA) loans are granted based on a business’s years in business, credit score and annual revenue. With qualifications and requirements less stringent than a normal bank loan, these loans are a great option for small businesses to pursue.

Peer-to-peer lending

For entrepreneurs who don’t want to borrow money from a traditional bank or lender, peer-to-peer lending is a great alternative. With dozens of safe, reputable websites that connect qualified applicants with excited investors, peer-to-peer lending enables business owners to receive loans with rates and terms just like a bank loan, but cut out the financial institution middleman.

Equipment loans

Equipment loans are a type of financing used to purchase much-needed equipment and pay for it across a few years. This option enables small businesses to buy gear they couldn’t otherwise afford to pay for outright. Because the equipment itself serves as collateral for the loan, businesses usually don’t need to worry about their credit score too much.

Merchant cash advances

This financing option provides immediate cash taken from the future profits of a business. Small businesses may want to be wary of merchant cash advances, as they can end up heavily costing the borrower, but this option usually doesn’t rely too heavily on credit score and is quick to set up.

Personal loans

Depending on how new your startup is, you may be able to get a personal loan from a local or national bank that you have already banked with. This can be a great financing option since many term loans only deal with older businesses. Having a great credit history will also improve your chances of procuring a personal loan.

Loans from friends and family

If you have a network with enough resources to fund your startup, this financing option can be a great way to bypass formal applications and the slow funding process. Of course, when working with loved ones, you run the risk of damaging your personal relationships by pulling them into your business and finances. Consider using contracts or other signed agreements with clear specifications about interest and repayment plans to keep everything professional.

[Read: What Is a Short-Term Loan?]

How to apply for a business loan

Now that you understand the different types of business loans, here’s how to apply for one:

Determine your eligibility

Save yourself time by verifying your eligibility for a loan before applying. To qualify for any online lending, you’ll need to have been in business for at least six months.

Ensure you’re familiar with your two credit profiles so you know exactly what lenders and banks see when you apply for a loan. In addition to understanding your personal credit score, also know your business credit. You are most likely to receive a bank loan if your credit score is 690 and above. If you have lower credit, you should consider other lending options.

If you do not meet eligibility requirements, focus on building a strong history of credit and boosting your company’s financial health.

Write a business plan

Many lenders will want to view your business plan to understand the risks, discover how you’ll use the money, and what will drive your ability to pay it back. Writing a business plan is a great exercise in determining if “right now” is the best time to borrow.

Put effort into making a high-quality, professional business plan. Your executive summary should be especially well-written and informative so a lender can skim it and have a good sense of your business off the bat. It should be abundantly clear what you sell or what service you provide.

Additionally, include a market analysis to demonstrate you have done your research and have a thorough understanding of your industry and target demographic. If your business is still developing, the marketing section is a great opportunity for you to outline any plans for growth and future goals.

[Read more: How to Write a Startup Business Plan]

Choose the right type of loan for your startup

Based on the descriptions above of the types of startup business loans, you may already have a good idea of which option is best for your organization. Ensuring your business meets the qualifications like time in business, annual revenue, and credit score will expedite the application process and help it run smoothly.

Personal business loans can be easier to get approved for compared to traditional loans, so this loan option could be a great fit for startups and newer businesses. Traditional term loans offer very high borrowing amounts that you pay back over time with interest. You can also get loans specialized for a particular need or purchase.

Business lines of credit can supplement your cash flow and help cover day-to-day expenses. A business line of credit can be especially helpful for new businesses, as it can alleviate overwhelming startup costs.

Vet different lenders

Different lenders may be a better fit depending on your situation and specific needs. Microlenders offer short-term loans under $50,000 and can be a great option for startups. However, applications for a loan from a microlender are more time-consuming and often require thorough business plans.

Online lenders typically offer small business loans up to $500,000 with a broad average annual percentage range. You have a better chance of being approved by online lenders and can receive your funding more quickly, but online lenders have higher annual percentage rates (APRs) than traditional bank lenders.

The Small Business Administration (SBA) offers various programs and loans to support small businesses, and you can access them through traditional banks. Traditional lenders are less likely to approve you for a loan if you have bad credit, inconsistent revenue, or have been in business for less than two years.

Submit your application

Sometimes, submitting the application is the easiest part of the process, especially after all the due diligence of researching what’s best for your startup. Depending on the lender and loan, you may be able to apply over the phone, online, or in person.

Regardless of how you apply, you will need to incorporate all the necessary elements to expedite the application process and boost your chances of getting approved. Any application will require basic information about the owner and the business — name, address, etc. You will also need to include financial documents, like tax returns and profit and loss (P&L) statements.

If you aren’t sure what materials to prepare for your application, check with lenders or even your own accountant. When in doubt, follow the requirements for a government loan since they are typically the most extensive.

For more information on different types of small business loans, check out our guide.

This story was updated by Rachel Barton.

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