Startup Business Loans vs. New Business Loans
“Startup business loans” and “new business loans” are terms with somewhat loose definitions, depending on the lender. Understanding how the terms are difference can help you find the best way to search for loans for your business.
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 not true!
Seek Capital specializes in getting new business loans for companies pre-revenue. Seek Capital’s pre-approval is based on personal credit score. Revenue and other factors can come into play, but the bottom line is that if you have a FICO score of 680 or higher, you will likely qualify for a new business loan.
A “startup business loan” can refer to a loan for a company that is still in the startup stage. Startups can include pre-revenue companies like new businesses but also can include companies that have progressed to filing for an LLC or corporation. Startup businesses are a little further along in the launch and growth process than owners seeking new business loans.
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?
You can pursue several funding options for your startup business before the company has any revenue or time in business. One way to do so is to use personal or business credit cards.
The banks are only looking at your personal credit score in such cases. 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 getting equipment financing.
Here are the seven best ways to finance a startup business:
- SBA Loans
- Business Credit Cards
- Friends and Family
- Angel Investors
- 401k Rollovers
- Equipment Financing
- Paycheck Protection Program Loans (PPP Loans)
Any good startup business funding plan will use a combination of these different methods to launch their company. For example, if your primary method of funding is going to be friends and family, you could 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 you can leverage business credit cards to turn business expenses into rewards such as free flights and hotel upgrades, or you can make smart business purchases using a 0 percent interest card.
Do Banks Offer Loans for Startups?
It can be difficult to get a personal loan from a bank or a traditional business loan for a new business. Banks have strict criteria for getting approved for a traditional loan. For example, many banks require time in business to be at least six months to two years or more. This means if you have not yet started your business or if you have been operating for less than two years, you have little to no chance that you will qualify for a traditional bank loan.
The most you are likely to get from a bank at the pre-revenue stage is a credit card. You can get approved for credit cards quickly if you have a FICO score of 680 or more. The documentation to get approved for credit cards is minimal. You will just need business registration documents and an employer identification number (EIN). As long as you have good credit, you will be able to qualify for some business credit cards.
So, the answer to this question of whether banks offer startup business loans is “not really.” You may be able to get some money out of the bank in the form of an unsecured line of credit or credit cards, however. If you are going to carry a balance, you will want a 0 percent interest credit card. With these types of cards, you only pay back the principal balance until the 0% APR period is over. After that, interest will kick in on any remaining balance.
This kind of business credit card offers a lot of flexibility. By not having to spend money on interest, you can take advantage of the promotional 0 percent rate by making the minimum payment on the credit card for a few months in a row and then make a much larger payment when you have more income.
How Do I Qualify for a Startup Business Loan?
The best way to qualify for a startup business loan is to have and maintain good credit. With a FICO score of 680+, you should be able to qualify for between $5,000 and $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 startup business funding through friends and family, it does not take much more than trust to qualify. Even though you are getting the money from friends or family, however, you will still want a well-thought-out business plan. You will also want a clearly defined agreement so the terms under which you are required to pay back the money are very clear.
Qualifying for an SBA startup loan is much more difficult. 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 six months. If you have 20 percent to 30 percent to contribute, however, you can likely get approved for an SBA startup loan.
Business credit cards can be a helpful part of any startup business funding plan because qualifying is relatively easy, and you can get 0 percent interest and rewards on many cards. In order to qualify for business credit cards, you will need business registration documents, an EIN and articles of incorporation. WIth these documents on hand, 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 potentially qualify for multiple 0 percent interest credit cards. Equipped with these cards, you can make purchases for your business and just pay back the principal amount without interest before the 0 percent rate period ends.
In order to qualify for crowdfunding, you will need a lot of documentation as well as marketing materials to get people to invest in your business. In particular, you will need a business plan, a compelling pitch and business registration documents. You do not need any time in business to do a crowdfunding campaign. You just need to put together a strong marketing plan to get people to invest in your idea or company. Social media marketing should be a substantial part of any successful crowdfunding campaign.
To qualify for a 401k startup business loan, you must first have money in a 401k or other qualifying savings account. If you do have a well-funded 401k, then you just need to follow all loan or withdrawal application processes carefully. You will need a business plan, financial projections, a profit and loss statement, a balance sheet, and personal financial statement. As long as you have the money in your 401k and follow all of the laws, you should be able to access that money to start your business.
Equipment financing has different requirements than other startup business loan options. In terms of documentation, you will need bank statements, financial projections, balance sheets and an approved purchase order. The key is the approved purchase order. This document allows the equipment financing company to understand exactly how the money is going to be spent and it can include the terms outlining what will happen in the event you default on the loan. In order to qualify for equipment financing, you also have to have been operating for more than six months.
In addition to types of financing and business loans, startups can attract angel investors. These investors require documentation such as a business plan, financial projections, a profit and loss statement, and personal financial statements. If you have all of this documentation, there is no minimum time in business requirement. With this type of funding, you do not repay a loan but instead give the investors equity in your company.
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 financial statements
- Business financial statements, if available
- Profit and loss statements
- Balance sheets
- Cash flow statements
- Tax returns
- Personal credit information
Startup business financing companies and lenders require different documents depending on the type of loan you are applying for and the terms of the loan or funding type. For example, to get business credit cards, you only need your EIN and other personal information for the bank to assess your credit score and issue you a card. For equipment financing, on the other hand, you need to present a lot more documentation.
Loans through friends and family can have much more flexible requirements. An agreement is necessary, but you might only need a business plan for your friends or family to approve the loan. The agreement should clearly explain what the friends and family members will get in exchange for the money they are lending.
Much more documentation is required to get a startup SBA loan. 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. The lender will want to see that your personal finances are in good shape before approving the loan. You also will need to make an owner’s contribution, typically around 20 percent. That means if you are getting a loan for $1 million from the SBA, you will need to come up with around $200,000 yourself.
One of the main reasons why Seek Capital recommends 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. You don’t really need to show that the company has been operating or has any prior income yet. As long as your FICO score is above 680, you should be able to qualify for several types of business credit cards. The next big question you need to ask yourself then is what do you need most for your business? A 0% APR period or travel rewards points? The answer to that question will determine which credit card you choose.
To raise money for your startup through crowdfunding, you will need a business plan that explains everything you are doing. In addition, you will need to provide financial projections for the company demonstrating how you plan to grow the company. The most important documentation, however, is going to be the marketing materials. You are going to need a strong story in the form of a pitch or in a presentation video, for example, to get people to want to invest in your campaign.
If you want to invest your own money in your startup, you can consider a 401k business loan. First, you are going to need a business plan just like you need for most other startup business loan avenues. 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, Seek Capital strongly suggests that you consult an accountant, tax advisor, retirement advisor or a lawyer before taking money from your retirement account to start a business because retirement accounts are protected by strict legal procedures and terms.
Equipment financing is another great way to get the money you need to start the business of your dreams. To get this type of loan, you first need to supply bank statements. The lender is going to want to verify your cash flow. Next you are going to need financial projections and a balance sheet. The most important document that you will have to supply, however, is an approved purchase order. If you default on the loan, the lender can take ownership of the equipment.
Angel investors are another way to attract startup business funding. Angel investors will first want to see your business plan. This business plan should include a financial model. You are also going to need to provide financial projections to show the investors how much money they could make by investing in your startup. You are also going to need to show 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. They want to see that you are financially sound and capable of delivering a return on their investment.
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 depends on the type of loan you are applying for, where it is coming from and the loan terms.
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 a startup business loan through friends and family, for example, you might not have to put any money down. Payback terms are entirely up to you and your lender. To keep things as clear as possible — and to protect your relationship — Seek Capital’s experts suggest making sure that all terms are settled in a written agreement before you take any money.
When you get an SBA startup loan, you are required to put a relatively large amount of money down. Usually 20-30 percent of the total loan is required. 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 requiring a large down payment for these loans in simple: skin in the game. Your large down payment mitigates the lender’s risk. 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 do not have to put anything down. Instead of putting money down, you just make the minimum credit card payment every month so that your credit score stays strong. You can use up to the full line of credit for which you have been approved. For example, if you are approved for $50,000 in credit cards, you can access that money without putting any cash down. If you get 0 percent 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 percent interest period. Note that there are also no loan origination fees with credit cards.
Crowdfunding also does not require a down payment like a loan, but there might be some expenses or fees associated with running a successful campaign. To run a strong crowdfunding campaign, you will need to do a lot of work upfront to attract investors or donors. For example, you will need strong marketing and sales materials that tell your story and showcase your product or service. You might also have to invest some of your money into social media or online advertising in order to help people find out about your campaign.
What Are My Funding Options If I Have Time in Business or Revenue?
When you have time in business, revenue or both, you might qualify for a small business loans instead of a startup business loan. Once your business is more established, your loan options can increase significantly. For example, you might qualify for a business line of creditif 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. If you have open accounts receivable, you could qualify for invoice financing. The stronger your business profile is, the more money you can borrow at a better interest rate.
You might also want to consider short term loans to get capital for your company. In order to qualify for short-term loans, you typically need to be in business for about three months and have some revenue.