How to get approved for a startup business loan
Key takeaways
Startups with annual revenue over $100,000 have a significantly higher chance of loan approval
Providing collateral may improve your chances of getting a startup business loan
Applicants should consider applying for alternative funding options if they are having difficulty with getting approved for a startup business loan
A startup business loan can help fund or grow your entrepreneurial dreams. But For new business owners, learning how to get approved for a startup business loan can feel like learning a new language. Getting approved for small business financing can be more challenging if your business doesn’t have an extensive credit history or substantial track record of generating revenue.
According to the Federal Reserve Banks’ 2023 Report on Employer Firms, only 32 percent of firms with less than $100,000 in annual revenue were fully approved for financing in 2022. This was down from 50 percent in 2019.
Getting a startup business loan is possible, but you’ll need to follow some steps to help your chances of approval.
1. Check your credit score
Your credit score is one of the primary factors lenders use to decide whether you’re approved for a business loan.
Lenders may look at both personal and business credit. Your personal credit is linked to your social security number. You can check your credit report by visiting one of the three major personal credit bureaus: Equifax, Experian or TransUnion, but you may have to pay. To get free credit reports, visit annualcreditreport.com.
These reports likely won’t show you your credit score, but many credit cards and financial institutions provide free credit scores to their customers.
Your business credit is linked to your Employer Identification Number (EIN). The three main business credit bureaus are Dun & Bradstreet, Experian and Equifax. But unlike personal credit bureaus, you’ll likely have to pay to see your full report and score.
In general, there is no industry-wide standard or minimum credit score requirement for all business loans. But the better your score, the more likely you will qualify for a competitive interest rate and terms. That’s because a higher score makes lenders feel confident that you don’t pose a risk.
There’s hope if you are a business owner with bad credit. Many lenders are willing to work with you to find financing. Online lenders, including fintech companies, tend to have relaxed eligibility requirements compared to traditional lenders. It’s possible to find loans for startup businesses with poor credit, but it will likely be more expensive to borrow money, and you may need to take extra steps to qualify for funding, such as providing assets for collateral.
If you have time to wait, growing your business credit could lead to more affordable financing.
Bankrate insight
Some businesses are required to have an EIN. This includes corporations and limited liability companies (LLCs). But independent contractors, freelancers or sole proprietorships are typically not required to have one.
2. Grow your annual revenue
Increasing your business revenue is another way to expand your borrowing options as a startup business. Revenue is the amount of income your business generates, and a steady stream of annual revenue gives lenders confidence when extending a loan.
For the best rates and terms from lenders, $250,000 or higher revenue is usually required. You’ll have no trouble finding lenders with smaller requirements, but these loans generally have higher rates and additional fees or charges.
Taking time to grow your business’s annual revenue can help lenders feel better about providing a loan.
Bankrate insight
Many lenders require businesses to deposit revenue in a business checking account. Your loan application could be denied if you’re still using a personal checking or savings account to hold on to your revenue.
3. Increase your time in business
Traditional lenders typically require at least two years in business to get approved for a business loan. If you’re a startup needing cash, this requirement can be frustrating. In such cases, you can seek funding from alternative lenders.
Many online lenders work with business owners who have been in business for one year or less. And depending on the lender, some types of startup business loans are eligible for startups. This may include equipment loans and other types of secured financing.
4. Create a business plan
Lenders want to see that you have a solid plan for growing your business over the next few years. Writing a business plan is especially important for startups since you don’t have the track record to show solid finances upfront.
Your business plan should outline your short-term and long-term goals and objectives and how you plan to achieve them. You’ll also want to include revenue goals since financial stability is what the lender is looking for.
To show how you plan to grow your business, you can include any seed, grant or venture capital funding you have secured. You may also want to outline your marketing plan or how you will get your product to market and in front of customers.
With a solid plan, lenders are often more likely to approve the loan and amount of funding you’re looking for.
5. Choose the right type of startup business loan
Understanding the types of startup loans available and their credit or revenue requirements is also important when searching for the best option for a new business. Various forms of lending are more accessible for startups, including:
Loan type | Purpose |
|---|---|
SBA loans are backed by the U.S. government and can be used for a variety of business expenses, including long-term fixed assets and operating capital. | |
Online or alternative business loans for startups are often faster to fund because they have swift underwriting processes. They are good for emergency funding but may have high interest rates. | |
Microloans offer small amounts of money to cover immediate expenses or equipment purchases. They may be easier to get approved for as a startup. | |
Lines of credit operate like a credit card, offering a revolving line of credit that can be paid down and reused. They are ideal for startups that need ongoing funding. | |
These loans are specific to major equipment purchases and typically use the equipment as collateral for the loan. | |
When you sign up for invoice factoring, a lender will purchase all or part of the value of your outstanding invoices. This gives you access to cash faster than waiting for customers to pay. | |
Individuals donate to a business, typically in exchange for some reward, such as free merch, a product or equity. While a good way for startups to fund their businesses, funding and meeting goals takes time. |
Each of these startup loans has advantages and disadvantages. Some have set loan amounts and longer funding times or require more work beyond just applying and waiting for approval. Make sure you know which type of startup loan is best for you before applying.
Bankrate insight
Startups may also qualify for public and private grants. Available at local, regional and national levels, this type of funding doesn’t need to be repaid and can help underserved communities gain access to money. Available grants in your industry may include:
6. Find the right startup lender
While traditional banks may be the first option that springs to mind, there may be better choices for a startup business loan. Traditional banks typically require at least two years in business to provide a loan.
Banks may also have steeper credit score and revenue requirements. Shop around and track down some of the other lending options available. Online lenders, for instance, may offer more flexible qualification requirements.
David Canet, Managing Director of the SBA Division at ConnectOne Bank, suggests finding lenders with programs designed to accommodate small businesses. “Whether it be SBA or other financial solutions that fit startups, those are the lenders you need to research.”
7. Gather documents
Lenders may require you to submit a lengthy list of documents, including business formation documents and financial statements. The lender reviews these documents to evaluate your creditworthiness and whether you can reasonably repay the loan amount you’ve requested.
Common documents that you may need when applying for a startup business loan:
Business formation papers
Employer Identification Number (EIN) or Social Security Number
Business bank statements going back several months
Business tax returns (if applicable)
Business plan
Personal tax return and bank statements
Business licenses
Profit and loss statements
8. Provide collateral
Offering collateral is another way to help a lender feel more comfortable about approving a startup business loan. In fact, some lenders require collateral if your company has a limited credit profile or a poor credit score.
“In the event that the small business becomes unable to pay,” says Canet, “the lender has a second means of having it repaid. So collateral is absolutely going to strengthen a small business startup loan request.”
Even in those cases where a lender doesn’t require collateral as a condition to obtain the loan, it can be a good idea to provide it. Doing so can help you obtain a better interest rate or loan terms.
Collateral can be any asset you will turn over if you fail to keep up with loan payments. Examples of collateral include real estate, business equipment, inventory and even your business’s invoices.
9. Find a cosigner
Having a cosigner is another way to improve the odds of getting approved for a startup business loan. A cosigner is someone willing to guarantee that the loan will be repaid if the borrower is unable to do so or falls behind on payments. The key is finding a cosigner with good credit or higher and solid income.
In addition to increasing your odds of getting approved, having a cosigner may also help you obtain a better interest rate. But before proceeding, be sure the cosigner understands the risks they are signing on for. When someone agrees to be a cosigner, they’re legally responsible for repaying the debt should you fail to do so. In addition, if you fall behind on the loan, the cosigner’s credit score will be negatively impacted.
Bottom line
While getting approved for a startup business loan can be challenging, it is possible. Taking the time to improve your credit score, increase your business’s revenue and the amount of time you’ve been in business can all go a long way toward improving approval odds.
If you need a loan right away, there are still options. Bad credit business loans are open to startups, depending on the lender. Enlisting the assistance of a cosigner and providing collateral to back the loan can also improve the chances of getting a loan and help ease the costs. And don’t forget to spend time investigating all of the startup loan options available to find the best choice for your needs.
Frequently asked questions about startup business loans
What credit score do you need for a startup business loan?
Every lender will set its own minimum requirements for credit score for a startup business loan. But generally, a personal credit score of 670 or higher is usually required for a bank business loan. A score of 600 or higher is typically needed for an online lender, though you can find lenders that will accept lower credit scores.
How big of a business loan can you get when you’re a startup?
Startup loan amounts tend to be smaller than loans offered to established businesses. The amount of funding available for a startup business loan varies based on the lender, your credit score, industry and business revenue. The type of loan you’re applying for also determines how much money you can get.
Are business startup loans hard to get?
Yes, business loans can be difficult to obtain if your business has been around for less than two years or its credit score is less than ideal. Some lenders may offer loans to startups or businesses that have been around for six months or less. But these loans may carry heavy interest rates and fees. Taking the time to improve your business’s credit score and establish a few years of operating history can help improve your business’s revenue stream.
