Unfortunately, business loans can be difficult for startups to procure.
That’s because while some funding sources in the startup ecosystem — like VCs and angel investors — are looking to take big risks, traditional financial institutions like banks generally aren’t.
You’re going to need to show that you have perfect personal (and probably business) credit and they might even require that you’re profitable or on track to become profitable. Generally, banks prefer businesses that have a proven track record when they’re handing out loans.
But that doesn’t mean business loans are impossible for startup founders! It’s just something to keep in mind when you’re considering a bank loan as a funding source.
If you’re trying to get a first time business loan, there’s some major prep work that needs to be done.
Regardless of the type of first time business loan you decide is the best fit for your startup, you’re going to need to present the following documents and information to your lending institution.
It’s a good idea to get all of this together before you approach the bank, so that you’re ready to go (and you’re sure you qualify) before you start the long process of applying and qualifying for a first time business loan.
Your bank is going to want to know a lot about you in order to decide whether or not they’re going to loan to you, so prepare a document with the following information:
Basically, you want to give them an overview of who you are — and show that you’re a reliable and good bet.
You’ll also need to show them your professional history, so prepare a resume.
Feel free to offer a one-page, high-level resume, as well as a more detailed one that may extend beyond the traditional one-page resume but gives a more complete picture of your professional background.
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:
For more information on business plans and how to make one, check out this article: What is a Business Plan: An Introductory Guide.
No bank is going to give you money without a description of what that loan will be used for. So figure out exactly the purpose of this loan — and be sure to take a look at the requirements for the type of loan you’re applying for — and get that down on paper.
While new startups can absolutely apply for a first time business loan, in general it’s easier for companies with a little history under their belt.
As a result, the minimum time in business is often two years, with companies with a longer business time more likely to be approved than younger companies.
Your lending institution is going to want a copy of your personal credit report in order to determine whether or not you are a good bet for lending. As the founder, your personal credit history gives a good idea of how well you’ll handle money and loans within your startup.
Most places use the FICO scoring system, which is as follows:
If your personal credit is below 650, be prepared to explain why. Also, if you find a mistake on your credit report, you have the right contest it with the credit bureau. Make sure any corrections are taken care of before you approach the bank for a SBA loan.
If your startup has a credit history, the bank will also want to see a business credit report. You can get one from D&B, Experian, or Equifax.
And while most people are familiar with the personal credit score ranking, the business one is different. It ranges from 0 to 1,000 and anything over 80 is in the good range, so don’t freak out of it’s a surprisingly low number!
Have three years of your personal tax returns, as well as three years of business tax returns (if you’ve been in business that long) prepared and ready for examination by the bank.
They want this information for the same reason they want your credit scores: It gives them a good idea of your financial and business acumen.
One note: Many small businesses and startups write off a large number of things on their taxes. However, this might hurt you in a SBA loan application, as it makes it look like your startup doesn’t have a profit. If that’s the case, be prepared to explain to the bank officer why you chose to take that approach with your taxes.
In addition to your personal and professional credit reports, there are some other financial documents that your bank is most likely going to want to see.
While each institution has their own specific requirements, you should have the following prepared:
Balance sheet: Your balance sheet shows the balance of what your business owes (liabilities) and what it has (assets). On the assets side, include your cash, inventory, accounts receivables, notes receivables, and your fixed assets, such as land or property. On the liabilities side, include any debts, such as accounts payable, notes payable, accrued expenses, and long-term debt.
Profit and loss statements: A profit and loss statement is a document that shows what money is coming in, a well as what money is going out — and from where it’s coming and going. Make a detailed list of your sources of revenue and expenses for the bank officer to examine.
Business debt schedule: A business debt schedule is exactly what it sounds like: A breakdown of all of your current business debt, as well a schedule for how you’re going to pay down that debt. It will help you and your bank officer determine whether or not it’s a good idea for your startup to take on more debt. It’s also useful for keeping track of your repayment schedule and your finances as your startup moves forward.
Collateral isn’t always required for loans, but it’s worth determining and documenting what collateral you’re willing to offer, in case they ask for it.
Startups in particular may be consider higher risk loans, so definitely don’t skip this step. Take a look at your assets and consider: What are you willing to give up if you default on your loan?
The answer will be particular to your assets and situation, but may include anything from real estate to equipment to the company itself.
Each loan is going to have different requirements for necessary legal documents, but here are a few you might be asked for:
For more information about business loans, don’t miss the following guides: First Time Business Loans
Don’t miss our guides to the full range of startup funding options: