Startup Business Loans vs. New Business Loans
Startup business loans and new business loans might sound like two completely different things and ultimately whether or not they are can be based on interpretation. When you fully understand what each term means, however, it may help you find the best way to search for new business funding.
The phrase “new business loan” refers to a business that has not yet started. There is a common misconception that if a business has not started yet it is not eligible for funding. This is absolutely not true!
At Seek Capital we specialize in getting new business loans for companies pre-revenue. Our pre-approval criteria is based on personal credit score. While revenue and other items can come into play, the bottom line is that if you have a FICO score of 680+ you will likely qualify for a new business loan.
A startup business loan can refer to a company that is still in the startup stage. This also includes pre-revenue companies like new business loans, but maybe the company has taken a few more steps, like filed and LLC or a corporation with the state. Maybe a company looking for a startup business loan is a little further in the startup process than someone seeking a new business loan.
Either way, if you have a FICO of 680+, there are real and substantial options to get the funding that you need to take your business to the next level.
How do I finance a Startup Business?
Believe it or not, there are plenty of ways to fund a startup business even before the company has any revenue or time in business. One obvious way to do so is to use personal and/or business credit cards.
The banks are only looking at your personal credit score in order to get approved. If you have a 680+ FICO score, you should be able to get some money in the form of an unsecured line of credit. You can also earn amazing credit card rewards for travel or cash back.
Other ways to finance a startup business include, but are not limited to, getting money from friends and family, running a crowdfunding campaign or using an equipment financing company.
Here are the 7 best ways to finance a startup business:
- SBA Loans
- Business Credit Cards
- Friends and Family
- Angel Investors
- 401k Rollovers
- Equipment Financing
Any good startup business funding plan will use a combination of these different funding methods. For example, if your primary method of funding is going to be friends and family, you should also use credit cards. Maybe your friends and family are going to give you cash to put in the bank to run the business, but how else are you going to get all the amazing free perks and benefits that come with the credit cards. You can get free flights, hotel upgrades and even 0% interest on large purchases for 20 months with some cards.
Do Banks Give Loans to a Startup?
It is very difficult to get a loan from a bank or any other type of traditional business loan for a new business.
The banks have very strict criteria for getting approved for a traditional loan. Foremost, the banks require time in business to usually be at least 6 months but usually 2 years or more. This means if you have not yet started your business, there is little to no chance that you will qualify for a traditional bank loan. This also means that even if you have started a business but it has been operating for less than 2 years, you are also very unlikely to get a traditional bank loan.
The most you are likely to get from a bank at a pre-revenue stage are credit cards. You can get approved for credit cards quickly as long as you have a 680+ FICO score. The documentation to get approved for credit cards is also very simple. You will just need business registration documents and an EIN number. As long as you have good credit you will be able to qualify for some business credit cards.
So the answer to the question above -- whether banks give start up business loans - is no. However, if you look more closely, you may actually be able to get some money out of the bank in the form of an unsecured line of credit. If you are going to carry a balance you are going to want a 0% interest credit card. With these types of cards, you only pay back the principal balance until the 0% period is over. Suppose you need to finance a $20,000 purchase and you get a 20 month 0% interest credit card. You will only need to pay $1,000 principal a month and nothing in interest as long as you make the payment of $1,000 per month for all 20 months.
The flexibility is also amazing though. You could also make the minimum payment on the credit card for 3 months in a row and then when you make some more money in the 4th month pay off a much larger portion of the balance. When all is said and done, if you do not want to pay any interest, in 20 months you would need to pay off the entire balance.
How do I qualify for a startup business loan?
The best way to qualify for a startup business loan is to have and to maintain good credit. With a FICO score of 680+, you should be able to qualify for between $5,000 and up to $100,000 based on just your personal credit.
Let’s break down how to qualify for each type of startup business loan.
When you are trying to raise start up business funding through friends and family, it does not take much more than trust to qualify. However, even though you are getting the money from friends or family, you will still usually want a well thought out business plan. You will also want an agreement so the terms under which you are required to pay back the money are very clear.
To qualify for an SBA startup loan it is much more difficult, but worth it if you can do it. The documentation alone is significant. You will need a business plan, financial projections, a profit and loss statement, a balance sheet, personal financial statement and business financial statements. The process usually takes more than 6 months also. However, if you have 20 to 30 percent to contribute, you can indeed get approved for an SBA startup loan if you have all of this documentation ready to go.
Business credit cards should be a big part of any startup business funding plan because qualifying is the easiest and you can get 0% interest for up to 20 months, depending on the credit card for which you apply. In order to qualify for business credit cards you will just need business registration documents, an EIN number and articles of incorporation. WIth these documents, the only other thing that you need to qualify for business credit cards is a FICO score of 680+. With a FICO of 680+ you can qualify for multiple 0% interest credit cards. This means you can make purchases for the business and just pay back the principal amount, without interest, over the 0% period of time. This is amazing and shouldn be at least a part, if not the entire, startup business financing plan.
In order to qualify for crowdfunding you will need a lot of documentation as well as sales material to get people to invest in your campaign. In particular you will need a business plan, an amazing video pitch deck and business registration documents. You do not need any time required in business to do a crowdfunding campaign. This means you can literally qualify for crowd fundraising to start a business without even operating for a single day yet. You just need to put together a strong marketing plan to get people to invest in your campaign. Social media marketing should be a strong focus of any successful crowdfunding campaign.
In order to qualify for a 401k rollover in order to use your money as a startup business loan you must first have money in a 401k or other qualifying savings account. If you do indeed have a well-funded 401k, then you qualify right off the bat but you just need to do everything by the book or you can get in big trouble. The documents you will need to qualify include a business plan, financial projections, a profit and loss statement, a balance sheet and personal financial statement. Again, the big thing here is that you indeed have money saved away in a 401k. As long s you have the money and follow all of the laws, you should be able to start your business with that money.
In order to qualify for equipment financing it is a little bit different than qualifying for, say, business credit cards. In terms of the documentation needed, you will need bank statements, financial projections, balance sheets, and an approved purchase order. The key is the approved purchase order. This allows the company providing the equipment financing to understand exactly where their money is going to be spent and what they will get back in the event that you default on the loan. In order to qualify for equipment financing you also have to be operating for more than 6 months. This options is not the best for brand new startups.
In order to qualify for angel investors, the documentation is a little easier but finding the prospects can be very difficult. In order to qualify once you find the right angel investor you will need a business plan, financial projections, a profit and loss statement and personal financial statements. As long as you have all of this documentation, there is no minimum time in business requirement.
What documentation do I need to get a startup business loan?
For most small business startup loans you will need the following documentation: EIN number, articles of incorporation, personal finances, business finances (if available), profit and loss statement, balance sheet, cash flow statement, tax returns and personal credit information. Which of these documents you are required depends on what type of loan you are looking to get. For example, for credit cards you only need your EIN and other personal information for the bank to run your credit score. For equipment financing, on the other hand, you would need to present a lot more documentation.
With respect to start up business funding through friends and family, the documentation is not that stringent because a lot of whether or not they will give you the funds has to do with general trust. An agreement is necessary, but this is the risk you are taking when you mix friends and family. Normally the documentation to get startup loans from friends and family include a business plan and a simple agreement. In the agreement it should clearly explain what the friends and family members will get in exchange for the money they are lending.
With respect to start up business funding through SBA loans, the documentation required is a little more intensive. For starters you will need to have a thorough business plan outlining exactly how the funds will be used. In addition, you will need to have financial projections in the plan as well as a profit and loss statement. You will also need a personal and business financial statements. They will want to see that your personal finances are in good shape before lending you money. If you can come up with all of this documentation, the next big thing is that you need to make owners contribution. That means if you are getting $1 million from the SBA, you will need to come up with around $200k yourself to match.
One of the main reasons why we recommend using business credit cards as part of any startup business funding plan is because the documentation to apply for the credit cards are not as stringent as other forms of startup financing. In order to get business credit cards you will need business registration documents, such as your articles of incorporation and an EIN number, which is also known as a federal tax id number. Besides for those documents, you don’t really need to show that the company has been operating or has any prior income. As long as your FICO score is a 680+, you should be able to qualify for most credit cards. The next big question you need to ask yourself, then, is what do you need most for your business. An extended 0% apr period or travel rewards points? The answer to that question will determine which credit card you ultimately choose.
The documentation for raising startup business financing through crowdfunding is super important. In order to raise money through crowdfunding you are going to need a business plan that explains everything you are doing. In addition, you are going to need financial projections for the company demonstrating how you plan to grow the company. The most important documentation, however, is going to be the sales materials. You are going to need a strong pitch deck and a sales video to get people to want to invest in your campaign.
The documentation required for a 401k rollover to startup a business is a little gruesome. First, you are going to need a business plan just like you need with most other startup business financing avenues. However, in addition to a business plan, you are going to need financial projections, a profit and loss statement and a balance sheet. Finally, you will need personal and business financial statements if the company has already been started. In addition to these documents, we strongly suggest that you consult with an accountant and a lawyer before moving money from a retirement account to start a business. There are very strict legal procedures and policies that must be followed.
Equipment financing is another great way to get the money you need to start the business of your dreams. But what documents do you need to get this type of funding? First, you are going to need bank statements. The lender is going to want to verify the cash flow is legit. Next you are going to want financial projections and a balance sheet. The most important document that you are going to need to show, however, is going to be an approved purchase order. The reason why equipment loans work is because if you default on the loan, the lender can just take the equipment from you. Therefore, it makes sense that the lender wants to see exactly what equipment you have been approved to purchase before lending you money against that specific piece of equipment. In other words the lender wants to know exactly what they are going to get in the event that the loan is not paid back.
Angel investors is the last viable way to attract startup business loans to launch a new company. Let’s look a the documentation needed if you are looking to signup angel investors. First you are going to need a business plan. The angels are going to want to see that everything is well thought out. This business plan should definitely include a financial model. You are also going to need financial projections in the business plan. The investors want to see that if everything scales perfectly, how much money could they make off of their investment. You are also going to need a balance sheet and profit and loss statement if the business has already been operating. Finally, you are going to need personal and business financial statements. After all, most of the time investors are investing in you and not the idea. They want to see that you are financially sound enough. If everything goes right and you are managing millions of dollars, can they trust you?
How much money do I have to put down to get a startup business loan?
The amount of money that you have to put down in order to get a startup business loan all depends on the type of loan you are getting, where it is coming from and the agreement that accompanies the money.
When you get a startup business loan through friends and family you do not have to put any money down. This is because you are lending money from your friends and your family. There are also not any specific payback terms. You can come up with any pay back terms you want. However, to keep things as clean as possible we would suggest making sure this is all settled in an agreement before you take the money.
When you get startup funding through SBA startup loans, you are required to put a lot of money down. The usual amount is 20-30% of the total loan. So, if you are taking $1 million from an SBA loan, you are going to have to put down $200,000 to $300,000. The logic behind putting down so much money for these loans in simple: skin in the game. People are not going to get government backed loans with attractive interest rates unless they are very serious about the business.
One of the best parts about getting startup financing through business credit cards is that you literally do not have to put anything down. Instead of putting money down you should just make the minimum credit card payment per month so that your credit score stays strong. You can use up to the full line of credit for which you have been approved, which is absolutely amazing. Suppose you are approved for $50,000 in credit cards. You can literally get all of that money without putting a single dollar down. If you get 0% interest credit cards, you will also never pay a dollar more than the amount which you are using so long as you pay back the money within the 0% interest period. Note that there are also not any origination fees with credit cards.
Crowdfunding also does not require putting any money down. However, in order to do a strong crowdfunding campaign you will need to do a lot of work upfront before the campaign can gain any attraction. For example, you will need very strong sales materials in the form of a sales video and a pitch deck. You might also have to put some money down to do crowdfunding in that you may invest money into Facebook or Google advertising in order to get people over to your campaign. There are also not any origination fees with crowdfunding.
What are my options for funding if I have time in business or revenue?
When you have time in business, revenue, or both, you may qualify for small business loans instead of startup business loans. Once your business is more established, your options may grow significantly to get funding.
For example, you may qualify for a business line of credit if you have been in business for over a year with average annual revenue over $180,000 and a credit score of 630+.
Another example involves getting invoice financing. Basically anyone with open accounts receivable can qualify for invoice financing, even though the stronger your business profile is, the more you can get at a better interest rate.
You may also want to consider short term loans in order to get money for your company. In order to qualify for these short term loans, you typically need to be in business for just about 3 months and have some revenue.