How to Win Startup Business Loans

Risky Business
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Borrowing money for a business is never easy. Even if you’ve got an established business generating profits, the process is long and complicated. If you’re borrowing for a startup, things get even more difficult.

Traditional Lenders

Most lenders are unwilling to lend to startup businesses. That doesn’t mean you can’t borrow, but it might not work out exactly as you imagined. If you’ve already been turned away by traditional banks and credit unions, there are still several avenues to explore.

SBA loans: before you completely give up on traditional lenders, ask about using loans guaranteed by the US Small Business Administration (SBA). These loans provide a guarantee to the bank, which means less risk for the bank. Qualifying and getting approved is a complex process – lenders usually require you to provide detailed information about your business and your personal finances. You should also plan to provide a personal guarantee pledging your home, investment accounts, or other assets as collateral for the loan (and putting your personal credit on the line). Still, this might be your best option.

Startup Options

Most startups need to get more creative. Traditionally, you’d rely on the three F’s to start your business: “friends, family, and fools.” Fortunately, today’s entrepreneurs have more options available that don’t just depend on your built-in connections or your ability to sell.

Unfortunately, your personal finances are probably the most important factor for getting approved. You’re trying to get funding for your business, but lenders can’t look at your business’ history because there is no (or very little) history to look at. What’s more, the vast majority of startups fail within the first few years.

As a result, your personal credit scores are important – although there are exceptions. If you’ll get funding from non-traditional lenders (such as people you know, venture capitalists, or crowdfunding), your credit is less important.

Online lenders are a good option for inexpensive loans and quick approval. Especially if you have good credit, non-bank lenders (including peer to peer lenders) should be at the top of your list. There might not be as much choice for loan terms, but money is available, and getting funded is relatively easy – so you can move on to more important things.

Credit cards have long been the tool of choice for entrepreneurs with limited options. Unfortunately, credit cards are notoriously expensive, and a large debt at a high interest rate can drag you down quickly. If you’re able to find attractive balance transfer offers (and you’re confident that you can pay everything off before the promotional period ends), credit cards might still work. Just remember that it’s hard to predict the future.

When using credit cards, it’s best to apply for them in the name of your business. Sure, they’ll only be approved based on your personal credit, but using business cards is a step towards building business credit. Plus, it looks more professional and helps you present an “established” image – showing banks, vendors, and others that you’re serious about your business.

Venture capitalists are investors who have money to help you grow your business. These individuals and organizations are hard to find, and you need to present a compelling case before they’ll hand over money. However, your business might be a great fit for an investor. With venture capitalists, you’ll often have to give something up in return for the money (not surprisingly). Read through all agreements carefully, and get a clear understanding of what you’re “paying.” You might have to give up a portion of ownership, some decision making control, or something else.

Crowdfunding is an option if you can get people excited about your product, service, or business. Individuals can provide money, typically without any review of your credit – so this is a good option if you have bad personal credit. In exchange, you’ll often provide products or service, although other options might also be available. For more details, read about the basics of crowdfunding from Zack Miller.

Other loans: if none of the options above are viable, you might be able to borrow personally. Again, most banks will use your personal credit anyway (just review your plans with a local attorney before mixing your business and personal affairs). Unsecured personal loans are a good option to avoid pledging collateral. Some entrepreneurs even tap their home equity using second mortgages – but this is risky. If your business fails and you’re unable to repay the loan, you could lose your home in foreclosure.​

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