The idea of starting a new business is exciting; being your own boss, helping others in your community, and making money are all great goals, but such high ambitions always come with a price. For most people, the financial cost of starting a new business is more than they can afford on their own. But that doesn’t mean you need to give up on your dreams; you just need some assistance.
Applying for a startup business loan is a great place to begin.
What are startup business loans?
Startup business loans are often thought of as commercial business loans that typically help brand-new enterprises with the money they need to open their doors. While this is true, did you know that businesses that have already started operating can also get startup business loans as well?
Many lenders define a “startup” as a business that has been operating for less than two years and is without a consistent stream of revenue. This definition lumps together many fledgling business ventures that do not have a track record and may scare away traditional business loans. While some lenders steer clear of new businesses, others cater to them.
How to get a startup business loan with no money or revenue
Here’s the rub: How do lenders ensure your business is a safe investment if they can’t see it already working?
Well, they want the people behind the business to be reasonable and responsible who have done their homework when it comes to both their business and business loans. Knowing your business is all on you, but this quick guide will help you when it comes to identifying common funding options and showing you ways to make your application more attractive to a loan officer.
Types of startup business loans to know
There is not a single type of business startup loan, but rather several varieties to choose from. The right type of loan and lender for your business will depend on your prior business experience, financial standing, and funding goal. You won’t be eligible for every business loan out there, but there is a good chance that at least one will meet your needs and qualifications.
SBA Startup Loans
The first stop for many small businesses is the Small Business Administration (SBA). While the SBA doesn’t directly give loans to borrowers, it does work with financial institutions and other lenders to guarantee a portion of the loans, allowing them to charge more reasonable rates.
The SBA has several loan programs available, including the ones listed below.
SBA 7(a) Loans
SBA 7(a) loans are the primary type of SBA-backed loans. Businesses can use this program to gain access to funds for long and short-term working capital, business expansion, purchasing equipment or real estate, refinancing debt, or leasehold improvements. While loans obtained through this program tend to offer better terms than if a business goes it alone, recent changes to SBA 7(a) loans have made qualifying for them more difficult, and extensive paperwork is part of the application process.
SBA 504 Loans
This program provides long-term, fixed-rate loans for established businesses that are interested in acquiring fixed assets, like real estate and major equipment, that will significantly enable the business to grow or address some types of debt. SBA 504 loans cannot be used for working capital or to purchase inventory. SBA 504 loans are only available through Certified Development Companies.
SBA Microloans
SBA Microloans can offer up to $50,000 dollars to small businesses that qualify. Eligible and approved businesses may use the money for a variety of purposes, such as working capital, supplies, furniture, and equipment. However, the loans can not be applied to paying off existing debt or purchasing real estate. Businesses need to apply for SBA microloans through a non-profit intermediary.
Startup business loans from online and nonprofit lenders
Today, you don’t have to go to a traditional financial institution for a business startup loan. There are a number of well-respected online and nonprofit lenders that can provide funding for businesses, and many of these alternative lenders are willing to work with newer businesses. But there is a trade-off. Most of these types of loans only cover smaller loan amounts, typically come with shorter repayment terms or a higher interest rate than with traditional banks, and have strict requirements.
You can find summaries of some of the more popular online lenders below.
Fundbox
Fundbox is for operating businesses because its loans require businesses to be at least three months old and have a verifiable revenue stream of at least $30,000. For businesses that qualify, they can expect fast funding within a day or two, but with loan rates that are higher than those of traditional financial institutions. Fundbox loans are short-term, with repayment terms typically between 12 and 24 weeks.
Accion Opportunity Fund
Accion Opportunity Fund is a national non-profit small business lender that not only works with the SBA but also offers loans of up to $250,000 directly to borrowers. Direct loans need to be paid off in between 12 and 60 months and typically cost more than a traditional lender. While open to all business owners, Accion Opportunity Fund often works with underrepresented entrepreneurs. In addition to funding, the organization also provides support services, including mentoring and access to business networks, to assist new business owners.
Lendio
Lendio is not a lender, but a website that allows business owners who are interested in a loan to fill out an application once and potentially receive loan offers from the dozens of lenders associated with the service. It is important to note that some of the lenders on Lendio work with the SBA. However, since there is a wide range of lenders on the website, terms and requirements can vary greatly, with some financial institutions offering good value, while others do not.
Startup business loans for women entrepreneurs
Historically, women have had a difficult time funding new businesses, but in today’s climate, all that has changed. Several lending opportunities are particularly well-suited for female entrepreneurs, and while every lender below does not only fund women, all of them are socially driven options that embrace woman-owned businesses. While the loans are typically small, and borrowers will still need to pay them back, they tend to have lower rates or more liberal repayment schedules.
Below, you can find information about three of the most popular female-friendly financial organizations:
Grameen America
Grameen America offers a group-based microloan model that targets underserved women, mostly in the Black and Latina communities. It offers small loans, but demands recipients attend training sessions and fall into specific income brackets to qualify for the loans.
Kiva US
Kiva US provides 0%, no-collateral loans through peer-to-peer lending. Kiva started as a way for people to fund businesses mostly in developing countries, but it has expanded to now allow US businesses to ask for funding. Despite no-interest loans, Kiva US is not for everyone since maximum loan amounts are low, and potential borrowers need to bring in their own investor before the campaign can go live on the site.
Ascendus
Women who are seeking small microloans along with advisory services may want to check out Ascendus, a non-profit lender. Ascendus offers several programs, with the most popular one offering loans between $500 and $50,000 loans. However, Ascendus loans can have higher interest rates than other options, and are not available everywhere in the US.
What startup lenders actually care about
Since lenders don’t have the history of the business to look at when they are making startup loans, how do they decide which businesses get them? Yes, current revenue is important, but lenders like to look at a variety of factors, including:
- Creditworthiness – The primary stakeholders’ credit history can play a big part in whether a loan application is accepted. How a loan applicant handles her personal finances is a good indication of how she will handle her business’s finances.
- Business readiness – Having a clear business plan, a solid product, a location, and a team in place shows the lender that you are responsible and invested in the project, and are not just a dreamer.
- Clear use of funds – Lenders like to know where the money they lend you is going. A strong business plan will help.
- Industry risk – Some industries are more stable than others. Lenders don’t like risk and prefer to lend to businesses in stable industries.
Preparing your business before applying for a startup loan
You’ll only get the loan if you can get the loan officer to believe in your business. You can improve your business’s credibility and approval odds by:
- Forming a legal business with the right business structure – Taking the time to create a proper business structure, whether that be opening an LLC, corporation or something else, shows you believe in your business.
- Filing for an EIN – Having an Employer Identification Number (EIN) shows the lender you know what you are doing.
- Opening a business bank account – A business bank account is a requirement for most loans.
- Organizing your financial and personal documents – The easier it is for the lender to look over your loan application, the more inclined she may be to approve it.
Proper preparation increases confidence for both you and your potential lender, but it doesn’t guarantee a loan approval.
Alternatives if startup business loans aren’t a fit
Startup loans are not the best option for every business. Whether you are disappointed by multiple refusals or don’t want to be saddled with high interest payments, there are other options, such as:
- Crowdfunding – Raise the money you need from your current customers or community members.
- Grants – Apply for government or private-sector small business grants.
- Bootstrapping – Use your savings to start the business and expand as you start to bring in profits.
- Friends and family funding – Ask the people you know for private investments.
Ultimately, the funding option you choose should be tied to the needs of your business.
Conclusion
Getting startup business loans with no revenue is possible, but there are no guarantees. The most important thing for you to do is to prepare the best you can and to have realistic expectations. This mindset will help you to avoid becoming discouraged and giving up on your entrepreneurial dream.