When you apply for most kinds of business loans, the lender will want to know a lot about your business. How long has it been operating? How successful is it? And how much debt is it currently carrying?
But with a startup, these answers aren’t yet available. You have to establish a business history in order to share a history lesson with a potential lender. So it’s important for entrepreneurs to know how to get a loan to start a business, as it’s a different process than they may have experienced in the past.
First off, there are plenty of options for startups. Some of the most popular include:
Business credit cards: These cards are the most accessible forms of financing available, with easy applications and quick funding.
Line of credit: Rather than a lump sum, this revolving form of financing provides access to money whenever you need it.
Short term loans: While similar to the all-purpose term loans used in the business world, these loans are designed to provide money in as little as 24 hours.
Equipment financing: If you’re in an equipment-heavy industry, these loans can help you get your operation up and running.
SBA loans: The SBA offers multiple loan products, but the 7(a) loan is best suited for those who lack a solid business history.
As you consider your options, identify how much money you’ll need to borrow to start your business. This step is crucial because the amounts vary dramatically between different types of loans. According to the experts from the Small Business Administration (SBA), the median small business loan is $140,000, with loans rarely exceeding $250,000.
When you’ve selected a few of the best options for your needs, you’ll need to dig into the details of the loans to find the clear winner. While some lenders have clear-cut disclosures and details, others can be confusing.
The Innovative Lending Platform Association partnered with some of the industry’s leading lending platforms to create a tool for situations like this. It’s called SMART Box™ (Straightforward Metrics Around Rate and Total cost), and it helps you understand the pricing metrics and language of various loans.
Once you’ve settled upon your chosen loan, take the time to assemble all of the documentation required for the application. The exact requirements vary, but you can plan on needing most of the following:
Personal background information like education history, previous addresses, names you’ve used, and criminal record
A business plan including profit and loss, proof of cash flow, and balance sheets from your business
Personal and business tax returns from the past 3 years
Signed personal financial statements
Projected financial statements
Personal and business bank statements
The value of possible collateral
Business licenses and registrations
Any commercial leases, articles of incorporation, franchise agreements, or copies of contracts
By taking the time to review your loan options, analyze the disclosures, and prepare your application, you’ll give yourself a huge leg up in the funding game. Starting your own business is one of the most fulfilling things you’ll ever do, and with the right small business loan, the process becomes substantially easier.