How to Get a Business Loan for a Startup

Securing a business loan poses a greater challenge for startups compared to established businesses. However, it's important to note that it's not an insurmountable task. As a new business owner, you can enhance your chances of loan approval by making informed decisions regarding the type of financing you pursue, understanding your credit scores, and exploring the most advantageous lending opportunities. Here's a comprehensive guide to obtaining a startup business loan.

Asset-based financing is a type of secured business financing that allows startup owners to borrow against valuable assets such as inventory, machinery, equipment, accounts receivable, and real estate. Since this type of financing carries less risk for lenders, the terms are often more competitive than other loan options. However, it's important to remember that in secured financing, the bank has the right to seize the collateral if the borrower defaults.

Determine the Appropriate Loan for Your Needs 

While many small business owners turn to traditional banks and credit unions for financing, there are various types of business loans that can assist startups in getting off the ground. Here are some common options to consider:

These loans, are typically offered by both online and traditional lenders. They involve receiving a lump sum of money from a bank, which is repaid over a fixed period at a predetermined interest rate. The best small business loans often have APRs starting around 9%, and loan limits generally range from $250,000 to $500,000. However, it's important to note that startup owners might not qualify for the highest loan amounts or the most competitive interest rates.

With a business line of credit, a lender extends funds up to a certain limit, and the business owner can access the financing as needed. Interest is only charged on the portion of the credit line utilized each month. Additionally, after making payments during the draw period, the borrower can repeatedly access the funds.

The U.S. Small Business Administration (SBA) offers the 7(a) loan program, which provides business loans up to $5 million to eligible applicants. These funds can be used for working capital, equipment purchases, business expansion, and more. Interest rates for SBA 7(a) loans range from 2.25% to 4.75% plus a base rate.

SBA Microloans are available to qualifying business owners, offering amounts up to $50,000. These loans are typically targeted at startups in disadvantaged areas, as well as those owned by minorities and women. Repayment terms can extend up to six years, with interest rates ranging from 8% to 13%, depending on the lender.

Assess Your Business and Personal Credit Scores 

When an applicant applies for a business loan, lenders rely on credit scores to evaluate the level of risk associated with the applicant. A higher credit score indicates a greater likelihood of making timely payments, thereby increasing the chances of loan approval. While business credit scores typically become available after six months to a year of operations, new startups may not have established credit scores, particularly if they are in their early stages.

Nevertheless, it's important to note that loans often require a personal guarantee, which means the borrower commits to repaying the debt using personal funds if the business fails to do so. Therefore, lenders also examine the personal credit score of the applicant or business owner.

To prepare for the loan application process and gauge your approval prospects, it's advisable to obtain copies of your business credit reports and check your personal credit score before initiating the loan application.

Collect and Organize Required Documentation 

The specific documents needed for a business loan may vary depending on the lender. However, certain documents are commonly requested to evaluate and verify an applicant's identity and the existence of the business. For instance, lenders often require at least two years of tax returns and financial records such as bank statements, accounts receivable, credit card sales, and outstanding invoices from the past four months, as a minimum requirement.

As a startup founder, you can enhance your chances of approval by preparing a comprehensive business plan. This demonstrates to lenders that your business is financially stable enough to repay its debts based on projected future revenue and expenses. Lenders may also ask for copies of business licenses and registrations relevant to your industry, as well as banking information for direct deposit purposes.

It is essential to assess a lender's reputation by reading online reviews from current and previous borrowers. Additionally, reach out to fellow members of your business community to gather insights about their experiences with the lender. If any red flags, such as negative customer support encounters, arise during your research, it is advisable to consider an alternative lender.

Explore and Compare Lenders 

When seeking a startup loan, you may be eligible for financing from multiple lenders. To determine the most suitable startup business loans for your requirements, consider the following factors when comparing lenders:

Generally, business loan APRs start around 9%. However, startup business loans may have higher rates, while the most qualified applicants may secure lower rates. Visit each lender's website or contact their customer support to inquire about the available APRs.

Lenders often impose origination fees, typically ranging from 3% to 5% of the total loan amount, to cover administrative expenses and application verification. Some lenders may also apply prepayment penalties for early loan repayment or charge late payment fees for missed due dates. These fees can impact the overall cost of borrowing, and certain lenders may waive them to remain competitive.

Submit Your Loan Application 

Once you have selected a lender, familiarize yourself with their application process and ensure that you have compiled the required documentation accurately. Application and underwriting procedures may vary among lenders, so determine whether you can apply online, via telephone, or if an in-person visit to a branch is necessary. Following the submission of your application, a representative from the lender may contact you to request additional documentation, such as proof of collateral or additional financial records.

Advantages and Disadvantages of Startup Business Loans

When contemplating the decision to acquire a startup business loan, it is important to consider the following factors:


Maintain Ownership of Your Company: By obtaining a business loan, you can retain full ownership and control over your company without diluting equity or seeking external investors.

Predictable Monthly Payments with Fixed-Rate Loans: Opting for a fixed-rate loan enables you to have consistent monthly payments, allowing for better financial planning and budgeting.

Spread the Cost of Starting a Business: Startup loans offer the advantage of spreading the initial costs of launching a business over an extended period, making it more manageable and reducing the immediate financial burden.

Opportunity to Improve Your Credit Score: Timely repayment of your startup loan can positively impact your credit score, establishing a strong credit history that can benefit your business in the long term.


Difficulty in Qualifying: Startups often face challenges in qualifying for loans due to limited business history, a lack of collateral, or perceived higher risk. Meeting the strict criteria and requirements set by lenders can be a hurdle.

High Loan Costs from Fees and Interest: Startup loans may come with substantial costs in the form of fees and interest rates. These expenses can significantly increase the overall amount repaid over the loan term.

Potential Requirement for Loan Collateral: Some lenders may demand collateral, such as personal or business assets, to secure the loan. This poses a risk as the lender can claim the collateral in the event of a loan default.

Risk of Business Failure from High Loan Payments: If the loan payments become too burdensome, they can strain your business's finances and jeopardize its sustainability. High monthly loan obligations may hinder cash flow and impede business growth.

Personal Liability if the Business Fails: In situations where the business is unable to repay the loan, personal guarantees may require you to use your personal funds to fulfill the debt obligations, putting your personal finances at risk.

Considering these pros and cons will help you make an informed decision about pursuing a startup business loan that aligns with your business goals and financial capabilities.

Small Business Grants: 

Research and apply for small business grants offered by government entities, nonprofit organizations, or private foundations. These grants provide financial assistance without the requirement of repayment, often supporting businesses in specific industries or demographics.

Remember, each financing option has its own requirements and considerations. Evaluate which alternative aligns best with your business goals, resources, and long-term vision. With perseverance and adaptability, you can find the funding necessary to propel your startup forward.

Exploring Options After Being Denied a Startup Business Loan 

In the event of a rejection for a startup business loan, there are several avenues you can pursue to secure funding for your new business. Begin by reaching out to the lender directly to understand the reasons behind the rejection. 

This valuable feedback can provide insights into areas for improvement in your credit profile, increasing your chances of future loan approvals. Simultaneously, focus on enhancing your business's financial stability until it becomes eligible for a startup business loan or alternative financing options.

If time constraints prevent you from improving your credit score or establishing your business before reapplying for a loan, it may be worthwhile to consider alternative forms of financing. There are various options available, such as:

Alternative Lenders: 

Explore non-traditional lenders who may have different eligibility criteria and be more inclined to finance startups. These lenders often consider factors beyond credit scores, such as revenue projections, business plans, or industry-specific metrics.


Utilize crowdfunding platforms to raise funds from a larger community of individuals who believe in your business idea. This method allows you to leverage social networks and generate capital through contributions from interested supporters.

Angel Investors or Venture Capitalists: 

Seek out angel investors or venture capitalists who are interested in investing in promising startups. These individuals or firms provide capital in exchange for equity or a share in the business's future profits.


Consider self-funding your business by utilizing personal savings, assets, or income generated from the business itself. This approach allows you to maintain complete control over your business without relying on external financing.

Securing a Startup Business Loan with Challenged Credit

When seeking a startup business loan with bad credit, it's crucial to demonstrate a track record of financial success, even if your credit history is less than ideal. Lenders typically assess both the owner's personal credit and the business's credit history. To enhance your chances of approval, consider the following strategies:

Improve Your Credit: Begin by carefully reviewing your personal credit report for any inaccuracies. Take proactive steps to pay down credit card debt and explore other means to boost your credit score swiftly. Consistently making timely payments and managing your finances responsibly can gradually improve your creditworthiness.

Explore SBA Lenders: Certain Small Business Administration (SBA) partner lenders offer specific loan programs, such as microloans, to businesses that have yet to launch. Investigate these lenders, as they may be more inclined to consider your application despite your credit challenges.

Seek Nonprofit Assistance: Take advantage of volunteer-run programs like local Small Business Development Centers or SCORE. These organizations provide valuable one-on-one guidance to new entrepreneurs and can offer tailored advice and support to help them navigate the loan application process effectively.

Utilize Special Programs: Research special startup business loan programs designed for underrepresented groups, such as minorities or residents of rural areas. These initiatives aim to provide financial assistance and support to entrepreneurs from diverse backgrounds.

Consider Community Development Financial Institutions (CDFIs): CDFIs are financial institutions focused on serving underserved communities. They may have a greater understanding of your unique business and personal lending needs and offer more flexible options to help you secure the necessary funding.

While obtaining a startup business loan with bad credit can be challenging, implementing these strategies and diligently researching available options will increase your likelihood of success. Remember to showcase your financial viability and demonstrate your commitment to the success of your business throughout the loan application process.

Business Grants and Competitions: 

Explore opportunities for business grants or competitions that offer financial support to startups. These grants, are often provided by government entities, nonprofit organizations, or private foundations and do not require repayment. Participating in business competitions can also provide exposure and potential funding opportunities from investors or venture capitalists.

Consider these alternatives to startup business loans, evaluate their terms, and choose the option that best aligns with your business needs, financial situation, and growth plans. Remember to thoroughly research each alternative and weigh the advantages and disadvantages before making a decision.

Exploring Alternatives to Startup Business Loans 

When traditional business loans pose challenges in qualifying for startup funding, there are alternative options available to consider. These alternatives can provide the necessary financing to support your new venture's growth and operational needs. Here are some popular alternatives to startup business loans:

Business Credit Cards: 

Business credit cards offer the flexibility of accessing funds on a revolving basis as per your business requirements. They can be used for various purposes, ranging from purchasing office supplies and furniture to larger investments like equipment. The application process for business credit cards is typically streamlined compared to business loans. 

Approval decisions are primarily based on the borrower's personal credit score, making it relatively easier to qualify for a business card. The APRs for business credit cards generally range from around 13% to 25%. Some cards may even offer introductory 0% APR periods, allowing business owners to make interest-free purchases for a certain period, typically up to two years.

Furthermore, cardholders are only charged interest on unpaid balances carried over to the next billing cycle, providing an opportunity to cover monthly operating costs while avoiding interest expenses.

Business Lines of Credit: 

A business line of credit offers ongoing access to funds, similar to a credit card, but with potentially lower interest rates. This type of financing allows business owners to draw funds as needed and only pay interest on the amount utilized. It provides flexibility and can be utilized to manage cash flow, unexpected expenses, or short-term financing needs. Business lines of credit, are typically secured by collateral, such as inventory or accounts receivable, but unsecured options are also available depending on the lender and your creditworthiness.

Peer-to-Peer Lending: 

Peer-to-peer lending platforms connect borrowers directly with individual lenders who are willing to invest in startups. These platforms facilitate loans with varying interest rates and terms. Peer-to-peer lending can be an alternative for startup owners who may not meet the strict requirements of traditional lenders. The approval process tends to be more flexible, and interest rates may vary based on the perceived risk associated with the borrower.

Personal Loan Options for Business Funding

When traditional business loans prove challenging to obtain, startup founders can consider personal loans as an alternative. Personal loans often have a less rigorous application process and more flexible qualification requirements compared to business loans. While loan amounts may be lower, qualified applicants may benefit from lower APRs, especially those with excellent credit scores, with rates as low as 3%.

Personal loans can be an excellent choice for startups that lack established revenue or financial projections. However, it's important to note that some personal loan lenders may restrict the use of funds for business purposes, and borrowers are personally liable for repaying the loan. Commingling personal and business loan funds can also create complexities in bookkeeping, taxes, and legal matters.

Personal Savings as a Funding Source

For some entrepreneurs, personal savings provide an alternative to borrowing to start or grow their businesses. Using personal funds eliminates the need to pay origination fees and interest, and it allows business owners to retain full equity ownership.

However, investing personal savings in a business venture carries inherent risks. If the business fails, the owner may lose their savings. Additionally, many startup founders may not have sufficient personal funds to fully finance their ventures without additional funding.

Borrowing from Friends and Family

Startup owners may consider borrowing money from friends or family members to kickstart their businesses. This approach bypasses traditional qualification requirements, but it comes with its own set of challenges. Before seeking a loan from someone close, it is crucial to assess the comfort level of entering into a financial relationship with them.

To mitigate potential conflicts, it's important to clearly communicate and document the terms of the loan, including the loan amount, interest rate, repayment terms, and any other relevant factors. Putting the loan agreement in writing helps ensure mutual understanding and reduces the likelihood of future disputes.

Crowdfunding as an Alternative

Crowdfunding provides an avenue for startup founders to raise funds without relying on traditional financial institutions, friends, or family. Platforms like Kickstarter or Indiegogo enable entrepreneurs to launch crowdfunding campaigns online.

Through these campaigns, individuals can donate funds that become available to the business at the end of the crowdfunding period. Crowdfunding does not involve meeting traditional qualification requirements, and donors do not receive equity in the business in return for their contributions.

Exploring personal loan options, utilizing personal savings, considering loans from friends or family, or exploring crowdfunding platforms are all viable alternatives to traditional business loans. Each option has its own advantages and considerations, so entrepreneurs should carefully evaluate which approach aligns best with their funding needs and long-term goals.

Please note that specific loan terms and eligibility criteria may vary depending on the lender and individual circumstances. It's advisable to research and consult with different lenders to explore the options available for startup financing.

Frequently Asked Questions (FAQs) about Startup Business Loans 

Are startup business loans hard to obtain? 

Securing a startup business loan can be more challenging compared to obtaining financing for an established business. Lenders typically assess the risk associated with lending to a new business by evaluating its financial stability and historical data. However, since startups lack such information, lenders rely on business plans, revenue projections, and other theoretical factors to make lending decisions. 

To improve their chances of approval, startups should develop a comprehensive business plan that showcases their ability to make timely debt payments. It's also beneficial to wait until the business can demonstrate established revenue before applying for a loan.

What are the qualifications for a business startup loan? 

Lenders typically consider both the personal and business credit scores of a business owner when evaluating eligibility for a startup loan. However, since many startups have not yet established a business credit score, lenders primarily rely on the applicant's personal credit score. 

Along with credit scores, lenders review various documents to assess the financial stability and repayment risk of the business. These documents often include tax returns, financial records, a detailed business plan, and any necessary licenses, registrations, or legal documentation.

Can I get a startup loan with bad credit? 

While it is possible to obtain a startup loan with bad credit, it is more challenging compared to borrowers with better credit profiles. To strengthen a loan application, prospective borrowers with bad credit can develop a comprehensive business plan that outlines how the company will generate revenue and presents a solid marketing strategy. 

Some financial institutions specialize in lending to borrowers with low credit scores, but it's important to note that these loans may come with higher interest rates and origination fees.