How to Get a Business Loan For Your Startup

A business loan for your startup can be incredibly useful if you require some capital to cover your expenses while you work to fulfill orders and contracts that are associated with a certain income at the tenure – even a blessing in disguise if the return of investment exceeds the borrowed amount by a high margin.

However, getting a startup loan can be difficult. For bolstering your odds of securing some funding for your newly launched company, consider taking the following measures.

1. Create a Solid Business Plan

A well-made business plan is critical for companies aiming for startup loans because the lending parties not only need an introduction of your business but also require an insight into your operations. Giving your startup’s business plan is the first step to making this happen. Your chances of receiving a loan will be high if or low based on how well-thought or badly worded your plan is. Make sure it mentions business projections and financial plan among other things to attract lending parties’ interest.

2. Look into ROBS (Rollover for Business Startups)

Rollover for Business Startups or ROBS helps startup owners tap into retirement funding before they’re older than 59.5 years of age, but there’s no tax or withdrawal penalty involved. It’s also not technically a ‘startup loan’ so there are no issues for borrowers being on the hook with more than a single lender. ROBs functions by rolling funds over from your current retirement bank account into a new one that’s associated with the entity of your business. The retirement account then buys shares in the company and the company can then use those funds for necessary expenses. It’ll also improve your credit rating, which should allow you to apply for better, high-interest loans.

3. Consider Home Equity Loans

You may not realize until now that you may have some equity in your personal home. This can be used to secure a loan for a startup, with 90 percent of the equity. These are typically low interest loans, and seem like a great opportunity if your only remaining option is to take a home loan out. That said, make sure you’re not carrying other loans with it; two loans can quickly take a toll on your company, and may also reduce your depth to income ratio further.

4. Opt for a Credit Line Builder

Having a good business credit is vital for most new companies as that leads to attractive financing opportunities down the road. One way to do this in your case is to look into credit line builders. These are a unique form of funding that involves a startup working with a financial institutions and applying to get approved for multiple business credit cards. The advantage here is that the applications are sent together, saving you time and hassle in the process. Plus, you get a higher limit once all of those applications are approved. However, the startup owner’s personal credit needs to high (700 or more in most instances) if they want to quality for a credit line builder.

5. Reduce Bad Debt

On, Eric Rosenberg says that if a startup is being run as an S-Corp, LLC or as a sole entity, the startup owner’s personal credit will be definitely impacting their company. If we were to rephrase that, the owner needs to ensure that their personal credit score is attractive by making timely payments and removing all debts from lenders who are priced high if they want to stand a chance for getting a business loan approved. However, even after approval, the company may still experience a high APR. The best thing to do is keep the finances in order, and work with low-rate, more flexible lenders like the Small Business Administration.

6. Borrow/Cash Out 401(k)

One of the most expensive routes you can take is borrow from a 401(k). That’s because the amount has to be paid back in full within five years. If you fail to make a full payment, you’ll see yourself getting cashed out and may even face a penalty on withdrawal. There could also be a full tax to pay on the amount. Additionally, you’ll be paying interest on the borrowed amount – meaning now you have two loans looming on your head. If you are 59.5 years of age or above, you can just take out something from your retirement funds. If you’re below that age, you’ll have to pay penalties and taxes (up to 20%) on the amount.

7. Work with Venture Capitalists

These are investors who inject enough capital in startups to help them grow. However, it’s not an easy task to connect with them, and the company should have a promising outlook if it wants them to invest money in it. You’ll have to present a compelling plan and hope you’re the right fit for them. Unlike traditional loans, however, you might have to part ways with some equity in your business. All agreements made with VCs should be read carefully; it helps you avoid any grey lines. You might have to give some decision making control to the investor, or something of a similar nature to secure a business loan.  

8. Other Loans

If the options above don’t apply to you, see if you could take out a personal loan. As a reminder, most financial institutes will be using the startup owner’s personal credit anyway. Make sure to sit down with a personal attorney to avoid a mixup between personal and business matters. If you want to prevent pledging collateral, look into unsecured personal loans, or take out a second mortgage (more risky) for tapping into home equity.

Bottom Line

Use these tips to improve your chances of getting a startup loan. And when you do, use it wisely so that credit rating paints a pretty picture. Good credit may also create more funding opportunities, like applying for the loans being run by the Small Business Administration, which are often associated with a low rate but a high return.