As a Startup Can I Get a Small Business Loan?

Small Business Startup Loans

It can be incredibly difficult for entrepreneurs to secure small business startup loans. An unproven business model and an entrepreneur with little to no experience in their new role represent huge risks to lenders. In fact, some do not offer startup loans at all. However, funding can be incredibly important for businesses at every stage — especially those just getting started.

Tom Gazaway of LenCred said in an email interview with Small Business Trends, “As I see it nearly all businesses need funding. They may need it to start, they may need it to grow, perhaps to hire, or for a variety of needs that change and evolve over time. One thing that is certain is that this “need” is heightened or at a greater level in the startup phase. Then during the phase where the need is the greatest it’s also the hardest to find it.”

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Tips on Small Business Startup Loans

If you’re starting up a new venture and are looking for small business startup loans or opportunities for financing, here are some expert tips to keep in mind throughout the process.

Learn What Lenders Look At

In the most basic terms, lenders look for the level of risk involved with each financing opportunity. In other words, what’s the chance that your business will fold and you’ll be unable to pay them back? Since we all know that more than half of startups fail within the first year, this type of loan obviously comes with a lot of risk.

Beyond just the length of time you’ve been in business, lenders are also likely to consider your business model, any collateral or assets you might have, and your credit history. Most of these factors still seem to favor more established businesses. But you could potentially focus on other areas like your personal credit to make your application more appealing to lenders.

Gazaway says, “It is certainly much easier for an established business owner, with a proven model, collateral, bottom line net profits, and good personal and business credit to not only obtain funding but to obtain low-cost funding. Whereas a startup has few if any of those things. So to a lender the risk is exponentially higher.”

Look for SBA Loans

Since many private financial institutions don’t offer small business startup loans, the safest bet when you’re searching for lenders is to look at those approved by the SBA. SBA loan programs ensure that there is at least some money set aside for small businesses. However, a major chunk of this money still goes to more established businesses. And it can be difficult for new startups to get their fair share.

Gazaway explains, “The best kind of financing for most small business owners is an SBA loan. Approx. 75-80% of SBA loans go to established companies. But connect the dots on the math.  There’s 28 million small business owners in America and there’s less than 100,000 SBA 7(a) loans being issued per year. So if the percentage of people who need financing is high but the percentage of SBO’s who get SBA loans is quite low then there’s a fundamental disconnect or a large chasm that we need to understand and address.”

Consider Alternatives

Many startup founders end up turning to family, friends, or credit cards if they’re absolutely unable to get an SBA loan or financing from another type of lender. These can be fine options to start, especially if you’ve exhausted the other channels. However, Gazaway does note that it’s important for you to treat those personal relationships like actual investors. Keep them updated throughout the process and show them the respect you’d offer to an official investor. This can help you maintain those positive relationships and grow your business to a point where you may be able to get funding from more official channels in the future.

Create a Credit Plan

If you haven’t yet started a business or haven’t been unable to secure funding thus far, your credit could be a major roadblock. Lenders are likely to look at both your personal and business credit scores when determining whether or not to approve your application.

Gazaway says, “The best thing that startups can do to improve their chances of getting startup funding is to treat their credit as an asset.”

So if you know that funding can benefit your startup or small business, which should be the case for basically every entrepreneur, make building your credit a priority. Make every payment on time and keep balances low. Then slowly build your score by opening new accounts as needed and paying them off as quickly as possible.