Startup Business Financing & Establishing Business Credit
You've come up with a great new business concept - now, all there's left to do is develop your unique service or product and bring it to market. You quickly realize, however, that you must jump through more hoops to secure startup funding than you initially thought.
Last year, the U.S. saw an unprecedented 5.5 million new business applications, marking the third consecutive year of heightened business growth. This peak in entrepreneurship coincides with the increasing accessibility of small business and startup loans. This welcome change yields a financial lifeline for small businesses seeking to develop and scale.
Despite this increased availability in business financing, many factors go into applying and qualifying for the ideal loan for your business. Here, we'll explore key considerations for getting started with business credit and securing your business startup loan.
What is a Business Startup Loan?
Business startup loans are any loans to initiate ongoing business operations and product or service development. This financing can be used for new equipment, inventory, employees, leasing, and marketing—all things that are imperative for business growth.
For new business startups, however, securing funding isn't as straightforward as going to the bank and asking for a loan. Your loan vendor, whether it's a small financial institution or a large bank, will require certain documents, creditworthiness, collateral, or time in business, among many other factors that could influence their decision to grant you a loan.
Establishing Business Credit to Qualify for a Startup Loan
Now that you've got an idea of what your startup costs and expenses look like, establishing business credit should be your next course of action when seeking out a loan. Business credit bureaus evaluate various factors to determine your creditworthiness, which often means looking at your credit history. And if your personal credit is in shaky standing, it's likely you'll have a difficult time getting approved for your startup loan.
Outstanding debts and collections, limited credit history, or bankruptcies pose a red flag to business credit agencies. However, it's not impossible to secure a startup loan for your business with a less-than-favorable credit history - it's just going to require some more work on your end.
Assuming your personal credit history is up to par, you can establish good business credit and secure a loan that has more competitive terms. The first step to applying for one requires registering for a Dun & Bradstreet number, otherwise known as a DUNS number. This is an identification number that represents each location of your business.
The Key Documents You Need to Establish Business Credit
Your credit history is in check; you've determined your eligibility, loan amount, and vendor and registered for your DUNS number. Now, you must verify your business's financial viability.
This is where the paperwork portion truly begins. There are several documents you need to have in order for vendors to determine your eligibility. Such documents include, but are not limited to:
Tax Documents: For your application, you'll need to gather three years' worth of business or personal tax returns.
Detailed Business Plan: Document a detailed business plan detailing financial projections and a breakdown of how you intend to use the loan.
Personal Bank Statements: The personal bank statements you'll need vary by vendor, requiring statements that range from three months' worth to three years.
Business Financial Statements: The business financial statements you'll need encompass several documents, such as a pro forma balance sheet, funding requests, credit reports, proof of business registration, collateral, and more.
Business Debt Schedule: Also known as a schedule of liability, these documents should include a list of all debts currently owned, the original amount of debt and its current balance, and your monthly payment schedule.
A Personal Guarantee: This refers to a key provision in your loan contract that states you agree to take personal responsibility for the loan should your business default on it.
Consider These Three Things Before Applying for a Startup Loan
What is Your Eligibility?
As we discussed earlier, your eligibility for a business startup loan will depend on several factors. For the most part, you'll need to prove the following:
● Your business is capable of producing revenue.
● You're capable of paying back the loan based on past credit history.
● Your business isn't a risky venture or operating in a risky industry.
● You have adequate collateral to back the loan.
● You do not owe a significant amount of outstanding debt.
How Much Funding Will You Need?
It's estimated that most business startup loans range between $9,000 - $20,000. Determining where your business expense needs will fall starts with identifying all startup expenses and breaking down your expense estimations item by item. Once you add up your expenses, you'll have a clearer picture of what your funding needs are.
What Startup Loan Will Work Best for Your Needs?
According to the FDIC, term loans and business lines of credit are the most common ways to raise small business capital. However, new entrepreneurs can take various routes to securing financing, such as:
Small Business Administration (SBA) Loans: These loans offer favorable payment terms, flexibility, lower down payments, and extended repayment options. They're also less risky because they come with a federal guarantee to the banks. Before going this route, however, bear in mind that there are various requirements you must meet before being approved.
Friends and Family: This one is self-explanatory. Securing funding from friends and family is the most viable option for those who don't have the best credit history or don't want to go through an arduous process of applying for a loan. You can offer them equity in your business, interest repayment, future profits share, or any terms you both find agreeable.
Crowdfunding: Crowdfunding involves raising money through a large platform of people who believe in your business vision. It's a wildly popular financing route amongst startups and those in the product development stage. Like funding through friends and family, there's no application process or repayment obligations, but there's no guarantee you'll receive your desired business financing.
Bootstrapping: Bootstrapping, or relying on your personal income and savings or the generosity of friends and family, is another means of obtaining financing. You may also consider limiting business expenses in the beginning phases in the interest of keeping startup costs and debt low.
Get Approved for Startup Funding for Your Business Today
American Biz Credit helps entrepreneurs realize their business vision through our robust funding solutions. Using our credit software, you can obtain competitive funding options, secure high-limit credit lines for your business, and access every business-funding available to increase the likelihood of you getting funding with favorable terms.
