Financing Your Dream: How to Get a Loan to Start a Business

You’ve dreamt it, you’ve designed it, you’ve refined it, and now you’re ready to take the leap into starting a small business. It’s an exciting endeavor, and you’ve put in the work to make it happen. But the next question is, where do you get the money to start?

A lack of funds at kickoff can often cause people to put their business on pause, because you need capital to keep the ball rolling. Yet there’s a relatively simple solution for this—many small business owners get loans or lines of credit when first starting out to help them build a foundation, and you can too!

There are many options out there for entrepreneurs to get a loan to start a business, including traditional bank loans, lines of credit, and alternative options like crowdfunding and small business grants.

We’ll break down the types of loan options available to you, the loan application process, and what lenders are looking for when evaluating applications, including the importance of credit scores. A good personal credit score can open doors to competitive loan offers, while a strong business credit history can significantly enhance your loan application.

Let’s dive in and you’ll be financing your dream in no time.

What types of business loans are out there?

When you start researching how to get a loan to start a business, the traditional options will turn up first. You can usually secure a business loan from any bank, credit union, or other financial institution that offers them. They are also typically guaranteed by the U.S. Small Business Administration (SBA), which partners with lenders to help increase access to loans for small business owners and reduce lender risk.

Online lenders offer higher approval rates and quicker funding processes compared to traditional banks, though they often come with higher annual percentage rates (APRs).

SBA loans range from $500 to $5.5 million and can be used for almost any business purpose like fixed assets or operating capital. The benefits of going with SBA-guaranteed loans are competitive rates and terms, lower down payments, flexible requirements, and little-to-no collateral needed in some scenarios.

The most common SBA-backed small business loans:

7(a) loans: This is the SBA’s primary business loan program. 7(a) loans can be used for many things like working capital, acquiring or improving real estate, refinancing business debt, purchasing and installing equipment, and purchasing supplies and furniture. The maximum loan amount is $5 million.
504 loans: This loan program offers long-term, fixed rate financing for fixed assets that promote business growth and job creation. It can be used for the purchase, construction, or improvement of existing buildings or land, new or existing facilities, long-term machinery and equipment, streets and parking lots, and landscaping. A 504 business loan cannot be used for working capital, inventory, debt management, or investment. You can borrow up to $5.5 million.
Microloans: These loans help small businesses and some non-profit centers start up and expand. Microloans can be used for working capital, inventory, supplies, furniture, machinery, and other equipment when you need less than $50,000 for small improvements to your business. If you’re just starting your small business, this can be a great option.

Loans vs. lines of credit.

Applying for a line of credit is another way to secure funding for your small business, but it functions a little differently than a loan. Term loans like the ones mentioned above provide you with a one-time lump sum of cash in exchange for agreed-upon borrowing terms and a certain repayment schedule.

Business lines, on the other hand, more closely resemble credit cards. Your bank or financial institution gives you a set credit limit that can be used over and over once the balance has been repaid, better known as a revolving credit limit.

Just like you would with a credit card, you can spend up to your maximum credit limit at any time, and as soon as you pay off the balance, you have access to that credit once again. Business lines offer flexibility and the benefit of paying interest only on the amount withdrawn.

Unlike term loans, lines of credit have no restrictions on what you can use them for and you only have to pay interest on the credit you use. However, lines of credit also typically have higher interest rates, lower dollar amounts, and smaller minimum payments.

Alternative financing options for business loans.

What if you can’t get a traditional business loan? Perhaps that’s because you don’t have enough established credit, you have a lack of collateral, your debt is too high, or lenders see your business as risky for a number of other reasons.

But that’s no reason to give up! There are plenty of alternative financing options out there for small businesses like yours if you can’t get a bank loan. Just to name a few:

Crowdfunding: Small businesses can use crowdfunding to finance their venture by raising money from the community, typically on platforms like Kickstarter and Indiegogo. Many individuals contribute small amounts of money to fund your business idea, and it allows you to access capital without incurring debt as well as build a network of support. To make crowdfunding work, you have to invest the time and effort to create a compelling campaign.
Angel investors: The origin of many a startup company, these are private investors who use their own net worth to provide financing to small businesses in exchange for a piece of the pie, better known as ownership equity. You won’t have to repay the funds since your investor is getting ownership shares in exchange for money—and angel investors are often open to providing smaller amounts of money over a longer time period with a defined exit strategy. Just consider how much equity you’re willing to give away in exchange for funding.
Small business grants: Business grants are issued by federal, state, or local governments. The biggest bonus of a small business grant is there is no need to repay the funds and there are no interest rates, though with specific eligibility requirements, they can be hard to get. You can acquire a grant through the government, Small Business Administration, or the National Association for the Self-Employed. It may also be worthwhile to look into small business grants for minority groups like women, Black-owned businesses, and low-income entrepreneurs.
Personal loans: Personal loans can be easier to qualify for and offer lower APRs compared to business loans, making them a suitable option for startups without established revenue or financial projections. However, some personal loan lenders may not allow funds to be used for business purposes, and borrowers are personally liable for repaying personal loans. Carefully consider the application process, qualification requirements, and potential complications of using personal loans for business purposes.

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How to get a loan for business: application process and credit score requirements.

You’ve done your research, so it’s time to apply, apply, apply! For the loan application process, you’ll need to cross your t’s and dot your i’s by compiling everything you need. Whether you are applying for startup business loans or small business loans, make sure you understand their eligibility requirements

Start up business loans typically have more lenient eligibility requirements compared to traditional small business loans. Knowing how to get a business loan means knowing the necessary documents to gather, researching different lenders, and understanding the pros and cons of each loan option.

The documents you will need to bring to the table include:

Credit report: A strong credit history helps lenders evaluate how you have managed debt in the past and decide if you are a good candidate for a loan. Typically, a credit score of 700 or higher is considered a good spot to be in. If your credit score is low or you have poor credit history, you’ll want to work on building your credit before applying for a loan.
Bank statements: Your bank statements show lenders what your deposits, withdrawals, and balances look like and gives them a sense of your ability to pay back their loan. Bank statements also allow lenders to predict what your earning and spending will look like in the future, as well as identify if you have any outstanding debt.
Income statement: The income statement measures your business’s profitability over time. This gives lenders an idea of how sustainable your business is. There will often be a minimum criteria your business must meet to qualify for a loan, which could be based on revenue or sales volume.
Budget: Lenders want to know that you’ve got a solid, healthy budget. This shows them where your money is being spent and why. If you have a well-balanced budget, it shows that you can likely handle regular loan payments.
Income tax returns: Lenders will require your most recent tax returns to verify your income and assess your debt-to-income ratio. If your debt-to-income ratio is above 43%, lenders will likely consider you more high-risk.
Business plan: A solid business plan shows lenders what your business is all about. It should be organized, well-thought-out, and detailed. Business plans typically include a business description, mission statement, your products and services, market analysis, and a financial plan.

Obtaining a startup business loan can be challenging, especially if you have bad credit or are a new entrepreneur. If your loan application is denied, consider improving your credit score, seeking alternative funding options, or consulting with a financial advisor for further guidance.

So what’s on the line when you apply for a loan? Most lenders require some form of collateral as well. This guarantees to the lender that you also have something to lose should you fail to meet your loan terms and repayment.

Collateral can come in the form of real estate, vehicles, equipment, inventory, or your savings. The dollar equivalent that you offer in collateral will depend on your lender, your credit score, your borrowing amount, and the types of assets you own.

Lend yourself a hand with your small business loan.

Getting a business loan will help you immensely in getting your business off the ground and sets your small business up for growth and expansion. And when you get to the point where you’re ready to take your business to the next level, Homebase can help.

Homebase is the everything app that helps you when you’re using that loan to build out your team. We handle hiring and onboarding so that your team is ready to go when you are, and you can schedule and time track employees with ease to keep operations running. When payday arrives, our tools connect directly to our payroll system, so you can keep your finances clear for your next grant application.

You’ve built your business from the ground up and put in the work to get a business loan for maximum success potential, so don’t get tripped up on details. Homebase can help you make the day-to-day operations of managing your team a breeze so you can keep climbing higher. The sky’s the limit!