How to get approved for a startup business loan

The main points

Startups with an annual income of more than $100,000 have a much higher chance of being approved for a loan.

Providing collateral can increase your chances of getting a startup business loan.

If applicants are experiencing problems obtaining a loan accepted, they should look into alternate financing options.

Starting a new business can be challenging. In addition to the time and effort required to start a new business, you will also need significant financial resources. For new business owners, learning how to get approved for business loans can be like learning a new language.

A startup business loan can help finance or grow your business dreams. These loans are intended to help with the startup expenditures of a new firm. But getting approved for small business financing can be more difficult if your business doesn't have an extensive credit history or track record of generating revenue.

According to the Federal Reserve's 2023 Small Business Report on Employer Companies, only 32 percent of businesses with annual income of less than $100,000 in 2022 were fully approved for funding. It was less than 50 percent in 2019.

It is possible to obtain a business loan, but you will need to follow certain steps to help your chances of approval. Here's what you need to know before applying for a startup business loan.

Check your credit score

Your credit score is one of the primary factors that lenders use to decide whether or not you qualify for financing.

Lenders can consider both personal and business credit. Your personal credit is tied to your Social Security number. You can check your credit report by visiting one of the three main personal credit bureaus: Equifax, Experian, or TransUnion, but you may have to pay up. For free credit reports, visit annualcreditreport.com.

These reports may not show you your credit score, but many credit card and financial institutions offer free credit scores to their customers.

Your company credit relates to your Employer Identification Number (EIN). Dun and Bradstreet, Experian, and Equifax are the three main commercial credit bureaus. But unlike a personal credit bureau, you will have to pay to see your full report and score.

In general, not all business loans require an industry-wide standard or a minimum credit score. But the better your score, the more likely you are to qualify for competitive interest rates and terms. This is because a high score makes lenders feel confident that you are not a risk.

If you are a business owner with bad credit, there is hope. Many lenders are willing to work with you to find financing. Online lenders, including financial technology companies, tend to have more relaxed eligibility terms than traditional lenders. It's possible to find loans for bad credit startups, but getting the money is likely to be more expensive, and you may need to take additional steps to qualify for financing, such as providing assets as collateral.

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Some businesses must have a TIN, including corporations and limited liability companies (LLCs). But independent contractors, independents, or sole proprietorships usually don't require it.

Increase your annual income

Increasing your startup's income is another approach to expand your financing options. Revenue is the income your business generates, and a steady stream of annual income gives lenders confidence when lending.

Lenders typically ask for income of $250,000 or more, with the best rates and terms. You will have no problem finding lenders with smaller requirements, but these loans usually have higher rates and additional fees or charges.

Taking the time to grow your business' annual revenue can help lenders feel better about making loans.

Increase your time in Business

It is not unusual for traditional lenders to require a minimum of two years in business to qualify for a loan. If you are a startup in need of cash, the need can be frustrating. In such cases, you can get financing from alternative lenders.

Many online lenders work with business owners who have been in business for a year or less. And depending on the lender, certain types of start-up business loans qualify for startups. This can include equipment loans and other types of secured financing.

Choose the right type of loan

It is also important to understand the types of startup loans available and their credit or revenue requirements while searching for the best option for a new business. Startups can access various forms of lending, including:

SBA Loans: SBA loans are government-backed loans that can be used for a range of company needs, such as long-term fixed assets and operational capital.

Online Business Loans: Online business loans or alternative loans are often faster to finance because they have a faster underwriting process. They are good for emergency financing but can have high interest rates.

Microloans: Microloans provide small sums of money for immediate expenses or the purchase of goods. It may be easier for them to get approval at first.

Business lines of credit: Lines of credit work like a credit card, offering a revolving line of credit that can be paid off and used again. It is ideal for startups that need ongoing funding.

Equipment Financing: These loans are reserved for the purchase of major equipment and the equipment is usually used as collateral for the loan.

Invoice Factoring: When you opt in to invoice factoring, the lender will purchase all or part of the value of your outstanding invoices. This allows you to access cash more quickly than waiting for clients to pay.

Crowdfunding: Individuals donate to a company, usually in exchange for some reward, such as free trade, product, or stock. Although it is a good way for startups to fund their business, financing and meeting goals takes time.

Each of these early stage loans has advantages and disadvantages. Some have fixed loan amounts, longer funding times, or require more work than simply applying and waiting for approval. Make sure you know which type is best for you before applying.

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Startups can also qualify for public and private grants. This type of financing is available at the local, regional and national levels, does not require repayment and can help disadvantaged communities access funds. Grants available in your field may include:

• Scholarships for black women

• Grants for minority business owners

• Grants to veterans

• Grants for women

• Grants to previously imprisoned persons

Find the right lender

While traditional banks may be the first choice, they may not be the greatest alternative for small business loans. Traditional banks usually require at least two years in business to provide a loan.

Banks may also have credit score and income requirements. Shop around and explore some of the other available lending options. Online lenders, for example, may offer more flexible eligibility requirements.

David Canet, managing director of ConnectOne Bank's SBA division, suggests looking for lenders with programs designed to accommodate small businesses. These are the lenders you should seek for, whether it's the SBA or other startup finance options.

Provide collateral

Offering a guarantee is another way to help the lender feel more comfortable making the loan. In reality, some lenders will require collateral if your business has a Limited Credit Profile or a Bad Credit Score.

"In the event of a small business going bankrupt," Kent says, "the lender has another way to pay it off." So collateral will definitely boost your small business start-up loan demand.

Even in cases where the lender does not require collateral as a condition of obtaining a loan, it may be a good idea to provide one. Doing so may help you get a better interest rate or better loan terms.

The collateral can be any asset that you will hand over if you fail to keep up with the loan payments. Examples of collateral include real estate, business equipment, inventory, and even your business bills.

Find a cosigner

Getting a cosigner is another way to improve your odds of getting approved for a startup business loan. A cosigner is a person who is willing to guarantee that a loan will be repaid if the borrower is unable to do so or defaults. The key is to find a cosigner with good credit or a high and solid income.

In addition to increasing your odds of getting approved, getting a cosigner can also help you get a better interest rate. But before proceeding, make sure the cosigner understands the risks they're signing up for. When someone agrees to be a cosigner, they are legally liable to pay the debt if you fail to do so. Also, if you default on the loan, the cosigner's credit score will be negatively affected.

Bottom Line

While getting approved for a startup business loan can be difficult, it is possible. Taking the time to improve your credit score, increase your business revenue, and the length of time you've been in business can go a long way toward improving your odds of approval.

If you need a loan urgently, there are still options. Depending on the lender, bad credit business loans are open to startups. Getting help from a cosigner and providing guarantees to pay off the loan can also improve your chances of getting a loan and help reduce costs. And don't forget to take the time to research all of the startup loan options available to find the one that best suits your needs.