Getting a business loan is complex and even more complex when it is a start-up. Unlike emergency loans, the borrowing sum will be paid down for a specific period. Of course, a lender will carefully examine your repaying capacity before giving the nod.
The odds are stacked against the approval for a start-up loan. However, it does not mean that you cannot qualify for the loan. It will need in-depth research, so you choose the perfect deal. Here are the tips you should get a start-up loan:
- Evaluate what kind of loan you will need
“Before you apply for a loan to fund your start-up, you need to understand the basic features of each type of loan available on the market.” For instance, you can consider opting for online business loans specifically designed to help any kind of business needs. Online lenders provide these loans. These loans are more quickly processed than other loans. These loans are also called loans for new start-up businesses.
A business line of credit is the best alternative when you have to access a particular amount of money every month. You can partially or wholly use this amount whenever you need. The lender will accrue interest to your account. You are free to owe again the balance you have already paid off. It is revolving credit. The line of credit can be more expensive than start-up loans.
Business credit cards are aimed at funding small business needs. “Depending on the type of credit card you have, you will be liable to pay off the balance in full or partially.” For larger loans, you may need to rely on secured business loans. These loans will carry lower interest rates as they are secured.
- Check your credit score
“Do not forget that you must need a strong credit score to get approval for a start-up loan.” A few lenders might be willing to give the green light to your application, but interest rates will be very high. On most occasions, you will fail to get approval.
Remember that your lender will also check your business credit score. A business credit score will determine how loyal you have been to your creditors. However, a business credit score does not apply to a start-up company. These scores are available after six months of your operations. A lender will be interested in them if you have been operating your business for six months.
Make sure you check both personal and business credit reports to ensure that you do not fail to meet the criteria of your lender. “It is recommended that you maintain your credit score at the time of taking out a business loan.” To get approval easily:
- You should avoid owing money at the time of applying for a business loan.
- Keep your credit card balance low.
- Aim at the “fair” category credit score.
- Gather relevant documents
The next step is to require the relevant documents for your business loan. Some of these documents a lender will use to verify your identity and business existence. Since you are seeking a loan for a start-up, a lender might be sceptical about your repaying capacity, and therefore, they may ask for a business plan as well.
A lender would be interested to know how you will run your business. The idea behind asking for a business plan is to check how likely you will be able to repay the debt. You are not required to prepare a business plan at large. You just need to mention details like your target audience, marketing methods, and the scope of demand for your product or service.
A lender will review your business plan to get an idea of how likely your business will succeed. Stability is the most important factor that a lender wants to check before approving a loan. In the beginning years of your business, you will not be able to produce sufficient revenues.
A lender will make a decision of lending bearing this fact in mind.
- Compare interest rates and associated fees
Various lenders are out there that provide start-up loans, but you will need to research to grab the best deal. Interest rates vary by lender. It depends on the risk they perceive from your application. In case your credit rating is already bad, you will end up with even higher interest rates.
Annual percentage rates are always higher than interest rates as they involve fees and other charges. These rates indicate how much you will end up paying if you retain the loan for a full year. Visit each lender’s website to check the APR. If no details are given, you should contact their customer support teams and inquire about this information.
In addition, you should check the fees. Late payment, early repayment, and missed payment fees are not involved in APRs. Inquire about these fees as well. Processing and monthly fees can also increase the total interest you will pay every month. While some lenders charge upfront fees, others do not. Research fees so you choose the most affordable deal.
Do not forget to measure the reputation of lenders. Do some Google research to know what other borrowers have to give feedback about them. You should try to choose another lender if you see any red flags. Do not believe the testimonials on their websites. You should check reviews sites and social media sites to know the reality.
- Submit your application
Once you decide on the lender, you will apply for a start-up loan. You can submit the application form. You can do it online if you have chosen an online lender, or you can visit a branch if you have picked a bank.
The final comment
Getting a start-up loan can be a bit challenging, but the tips mentioned earlier will make it easier. You are highly likely to get approval if your credit profile has the strength to show.
Emma Anderson is a highly accomplished Editor-in-Chief at 24cashfinances, renowned for her exceptional expertise in the finance industry. Holding degrees in Finance and Marketing, Emma has developed a deep understanding of the financial landscape, particularly when it comes to loans and personal finance.
Emma’s professional journey began as a financial analyst, where she gained hands-on experience in evaluating market trends and analysing investment opportunities. Emma’s enthusiasm for writing and her goal to educate and give individuals a voice motivated her to move into financial journalism. Her work has been published in popular magazines and she has produced thought-provoking pieces on various financial topics.