How to Get a Startup Business Loan: A Step-by-Step Guide

Applying for a startup business loan may seem like a daunting task, but it's easier than you might think. This guide will teach you everything you need to know to help you get a startup business loan.

March 4, 2022 · Niek van Riel

Starting a business can be a gratifying experience, but it can also be challenging, especially when it comes to securing funding. Usually, when you hear about funding, raising money from investors and VCs are often discussed. But there's also the less sexy third option... Startup business loans. Less sexy, yes, but that doesn't mean they're not a feasible way to secure sought-after funding for your startup.

If you're looking to find out how to use a loan to help get your startup off the ground or take the next step on your journey, you've come to the right place. This guide will walk you through the process of securing a startup business loan from start to finish.

What is a Startup Business Loan?

A startup business loan is a loan that is typically given to startups and small businesses that don't want to dilute their cap table (by bringing in investors) or are in a situation where they can't get an investor on board just yet. These loans can be a great way to help your business get off the ground and can be pretty valuable in financing your operations. Startup business loans can be obtained from private lenders (banks, credit unions, etc.) or government grants and loans.

What are the Advantages and Disadvantages of Getting a Startup Business Loan?

There are a number of pros and cons to getting a startup business loan. Make sure you take time to consider the needs of your startup and whether a loan is the right funding solution for you.

Advantages:

  • You don't have to give up any control or dilute your business's cap table like you would when receiving funding from investors.
  • Raising money from Angel investors or VCs can be a lengthy procedure with plenty of due diligence. A bank loan can often be a smoother and less complicated process.
  • If things go well, you can build trust with lenders by establishing a good credit history for your startup - so you can secure more loans in the future if needed.

Disadvantages:

  • You need to pay the money back. When you have debt in the company, the paybacks will affect your cash flow negatively and cut into potential profits. The larger the loan, the larger the debt. Comparatively, when raising money from investors, you sell a stake in your company, but this money is not debt.
  • You also need to pay interest. The bank is not a charity and makes money on the interest you pay on top of the loan. You need to make sure that you obtain a loan where the interest rates are reasonable.
  • Due to the volatility of startups, startup bank loans will have stricter conditions attached and hold you accountable if the company can't make payments or go bankrupt. If the company can't pay, you might have to make the payments personally.

Types of Startup Business Loans

There are several different types of startup business loans available, but the most common are business loans from private lenders (banks and credit unions), followed by government grants and loans. Each has its own benefits and drawbacks.

Business Loans From Private Lenders

A private lender business loan comes in many different shapes and sizes dependent on how much you need, for how long, its purpose, and your credit history.

Long-term loans

These loans are great for nurturing growth over time as they are repaid over many years. These can be tricky to secure as a startup due to loan length and the startup's uncertainty. You will need to have an excellent business case to secure a long-term loan.

Short-term loans

These are usually repaid in less than a year, and monthly repayments are high. A solid cash flow is necessary before having access to short-term loans.

Equipment/inventory financing

As the name suggests, these are used to buy equipment needed for the day-to-day operation of your startup. These loans are relatively easy to secure as the equipment is considered assets that the bank can recover if repayments are not met.

Business credit cards

Like personal credit cards, this is a line of credit that is renewed on a monthly basis. You can use business credit cards to make purchases on anything related to the startup. They are usually approved quickly as no collateral is required, but be careful not to miss repayments as interest rates can get very high.

Personal loans

These are an excellent option for startups as you rely on your personal credit history rather than an unproven startup's track record, and therefore easier to secure. Be mindful that you are personally liable, and repeated missed repayments can affect your future borrowing power, both in business and privately.

Government Grants and Loans

Government grants and loans are a great option to secure startup funding. This type of government funding is usually awarded as part of a larger investment deal. The terms and conditions of the grant or loan are usually more restrictive and/or industry-specific. The reason governments award money to startups is to stimulate the economy by investing in new companies to create more jobs and drive innovation.

Government grants are cash handouts with terms and conditions attached, while government loans are repayable, usually with favorable interest rates. Your government needs to see a rock-solid plan of action before they hand you any money. If you have a great innovative business case, this is the perfect opportunity to get funded.

What are Lenders Looking for When Approving a Loan?

Lenders are more likely to be interested in a company if they demonstrate a consistent revenue history and strong cash flow. They will also look at a company's expenses and other financial information to understand its overall health. Some of the questions lenders consider are:

  • Can the company keep its costs under control?
  • Is the company's product priced appropriately for its target market?
  • What is the risk appetite of the company's founders?
  • Can the company afford to repay its loan and still grow?

The bank will look at your ability to repay a loan, whether or not the project is a good decision for the company, and whether it will contribute to profitable growth in the future. Your business plan for the project you want to fund must be clear and concise for the bank to consider going forward with a loan.

Steps to Getting a Startup Business Loan

Securing a startup business loan can be a relatively simple process by following the proper steps and instructions. It's not rocket science, but it does need to be done correctly. After all, your startup's future may depend on how you proceed with the application.

Step 1: Figure Out How Much Money You Need to Loan

The first step in securing a business loan is figuring out how much money you need. This involves estimating your startup costs and calculating how much money you'll need to cover those costs. Be sure to include everything, from the cost of your inventory to your marketing budget.

Step 2: Check Your Credit Score

A credit score is a number lenders use to determine your ability to repay a loan. Every country will have its own system of calculating credit scores, but generally speaking, your credit score will be based on your credit history, including your current and past loan payments, credit utilization (the percentage of your available credit that you're using), and new credit applications. In some countries, like the US, you can check your credit score online for free. A simple Google search will help you here.

Step 3: Research Startup Business Loans

Sourcing a startup business loan can be a daunting task. There are many factors to consider, and you may not easily find the right lender or loan terms that fit your particular situation. Generally speaking, alternative lenders are more open than banks to first-time business owners and entrepreneurs looking to get off the ground.

Make sure you research the terms and interest rates that come with each option. If you are unsure about all the fine print that comes with a loan, it's a good idea to have an expert look it over for you so you don't get caught out.

In terms of knowing where to look for an appropriate startup business loan, you can start with a simple Google search or by visiting online forums related to startup businesses. You can also contact local banks and credit unions and ask if they offer loans to startup businesses. If you're going for a government grant, you can usually find all their options on their website.

Step 4: Gather Your Business Documents

It's time to gather all your business documents. This includes your business plan, financial statements, expense sheets, financial projections, and any other relevant information specific to the loan you are applying for. Make sure to include copies of all of these documents with your application so that the lender can fully understand your business and decide if they are making a smart decision by lending you money. If you need help to develop these, you can use the Cuttles app.

Step 5: Apply for a Startup Business Loan

If the loan you're applying for requires you to have a meeting with the lenders, make sure to prepare yourself and be personable and approachable. It's easy to consider banks and lenders as a faceless process-driven machine (especially after the mountain of paperwork you've just prepared and completed). But there is still a human being at the end of the process which considers your application. Go prepared with a positive mindset when you have the meeting, similar to pitching to investors. How you act and come across in that meeting can determine whether you get the loan or not.

Step 6: Wait for a Decision / Get Approved

Once you have completed all of the steps, it's time to wait for a decision, hopefully, it's an approval! Make sure you keep up with any updates or changes to your case, as these could impact when or if a decision is made. You may be asked to provide more documentation or have additional meetings before the loan is approved.

Depending on the size of the loan and the country you're in, the time it takes to approve varies. For smaller loans, approval can be within a few days, and for larger loans, approval can take upwards of 3 months. Make sure you are aware of these wait times when you apply.

Step 7: Receive Your Startup Business Loan Funds

Congratulations on securing a startup loan! Now it's time to receive your funds. Here's what you should do:

  • Verify that your loan application was submitted correctly and that you received exactly what you asked for.
  • Review your loan agreement. Make sure all the terms and conditions are acceptable to you.
  • Deposit the loan proceeds into your company bank account.
  • Pay any outstanding debts, taxes, and fees.
  • Keep your loan records organized and up-to-date. This will help you track your progress and stay in good standing with your lender.

Wrapping Up

Applying for a startup business loan can, in many instances, be the right move for your startup business. Raising capital for a business venture is always complicated, and the importance of considering all available options is recommended. We hope that this article gave you some insights and clarity on how to proceed with getting money for your startup.