Can a startup apply for a small business loan? Are you sure? Usually when startup founders think about funding, we think about venture capital or accelerator programs. That’s because those funding sources offer potentially big payouts, oftentimes with no obligation to pay back the money if the startup fails.
But, there’s another source of funding that’s more traditional — and potentially riskier: the small business loan.
Small business loans are a more traditional way of getting financing, which means they may be easier for some startups to get than venture capital, which can be a long and arduous process.
They’re a great option for startups that already have some momentum and — even better — some income coming in. That’s because while venture capitalists are all about taking big risks for the potential of big rewards, traditional banking institutions are more careful with their funds.
And unlike taking angel investment or VC money, taking out a small business loan means retaining full ownership of your startup.
If you think that this may be a good financing option for your startup, here’s how to apply for a small business loan:
1. Be clear on why it’s needed — and how much you need.
First things first: You need to be extremely clear on why you need a small business loan, as well as how much you need. While VC’s might be willing to hand over money on a hope and dream, a bank is going to want to see a clear plan and explanation before loaning money.
It’s worth it to create a business plan and financial statements that clearly outline what will happen with the money you’re asking for. It also makes it easier to come in with a clear number when you go to apply for the business loan.
2. Get advice from experts.
When applying for a business loan for the first time, it doesn’t hurt to get some advice from business owners who have gone before. Personal connections are great, if you have them, but there are also organizations that offer advice specifically for small business owners and startup founders looking for help figuring out the business loan process.
One such group is the SCORE Association, which is a nonprofit, volunteer-run association of business mentors, primarily retired executives. You can search for a chapter in your area for in-person advice, or request a mentor via email or video. They also offer workshops (online and in person) and a digital library of small business resources, including templates.
Another great resource is the Small Business Development Association, which has offices throughout the United States, offers free business mentoring. Both organizations are part of the Small Business Administration, which is an independent agency of the federal government created to help small businesses grow and also advocate for their concerns.
3. Figure out the best lending fit.
While it may seem like a no-brainer to go right to a big bank, many small businesses and startups find more success with smaller or local institutions.
It’s worth it to consider local financial institutions, like credit unions — which often not only award business loans to smaller companies and startups, but may actually do so at a lower rate than a larger institution.
Most credit unions require people to be a member in order to get a loan, you should do their research before applying.
Recently, a new wave of online financial institutions that help people apply for business loans has also cropped it. It’s worth doing some research to see if this avenue is a good fit for your startup as well.
The Small Business Administration also offers long term, low-interest loans that are partially guaranteed by the government. They can be a great option for startups looking to apply for a business loan.
And, of course, national banks are always an option, too. It really depends on your startup, the size of your loan, and your own personal financial history.
4. Pick up a loan application.
Every institution is going to be slightly different about what they require, so be sure to pick up a loan application form early in the process in order to make sure you have everything. Many loan applications will have a checklist that can help you guide you as you prepare to apply for a business loan.
To give you an idea of what you might be able to expect, here are the sample forms offered by the Small Business Association.
5. Get personal and business credit history in line.
More mature companies will be assessed based on their business credit score, but less mature companies (fewer than three years old) and startups with no financial history will be assessed on the founders’ credit scores as well.
While there’s not much that you can do to improve a bad credit score immediately, it’s worth getting a copy of credit history to make sure that everything is accurate. If it’s not, you can submit a correction to the credit agency.
Generally, a score above 700 is considered good, with above 750 being considered very good. People with a score below 680 should prepare an explanation for their low credit and those below 650 will most likely be rejected and should reconsider applying for a business loan.
6. Make a business plan.
You should never, ever try to apply for a business loan without a business plan already in hand. Even early stage startups need to be able to show financial institutions that they have a roadmap they’ll be following.
It’s reassuring to the bank or credit union because it not only gives them an idea of what you’re going to do with their money, but also shows that you’ve thought seriously about the issue.
Make sure your business plan includes the following components:
- Executive Summary
- Company Description
- Problem, Solution & Market Size
- Product (How it Works)
- Revenue Model
- Operating Model
- Competitive Analysis
- Customer Definition
- Customer Acquisition
- Traction
- Management Team
- Funding
- Financials
For more information on business plans and how to make one, check out this article: What is a Business Plan: An Introductory Guide.
7. Get your pitch together.
After all that preparation, it’s important to make sure you’re prepared for the actual loan application. You’re going to need to prepare a two main things before the meeting itself: a pitch and a packet of information about your startup, including your executive summary.
First, the pitch. All startup founders should have a short, succinct, clear pitch prepared for seeking funding.
If you haven’t created a pitch deck yet, check out this article for more information on how to get there: Investor Deck: How to Present Your Business.
While it’s a good idea to have a pitch deck on hand and your pitch perfected, it’s also important to make sure that your pitches and decks are oriented toward the person or institution you’re pitching to.
That means that while a VC might want to hear about 10x return, a traditional financial institution like a bank may be more interested in hearing about how you’re going to get to profit quickly.
This is another area where you may want to consider consulting with a mentor or friend who has already done a pitch to the institution (or type of institution) that you’ll be pitching, in order to get a better handle on what your pitch should highlight.
The other important thing to bring when applying for a business loan is a packet of information about your startup. Start with an executive summary, and then make sure it includes any other information that will help encourage the loan officer to take a risk with you.
This is a good place to include your business plan — it can make up the majority of this packet. Be sure to also include a repayment plan, an asset and liability financial statement, your current income and your startup’s current profits and losses, and any collateral you’re willing to put up to secure the loan, if that’s something the financial institution is asking for.
8. Don’t give up.
If you’re rejected for one loan, don’t take it as a rejection across the board! While your startup may not be a good fit for some financial institutions, that doesn’t mean it’s not a good fit for others. Ask for feedback from the loan officers and then take it moving forward to the next institution.
And, of course, applying for a business loan is just one way that startup founders can raise money for their company. If you’re interested in exploring other financing options, be sure to check out these articles:
- Venture Capital & Series Seed Funding: A, B, C, D, E
- Crowdfunding
- Small Business Loans
- Small Business Grants
- Private Investors
- Angel Investors
- Stay tuned for future guides!
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