How to Qualify for a Business Startup Loan

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New businesses may find it difficult to qualify for traditional bank loans. But don't lose hope. You still have plenty of options.

March 31, 2018

5 min read

Opinions expressed by Entrepreneur contributors are their own.

Look at the top funding sources for startups launched in the United States. Some of the most common ways to get capital include personal savings, friends and family, venture capital and angel investors, according to data from Fundable, a crowdfunding platform.  

While these are tried-and-true options to grow your young business, not every entrepreneur can go one of those routes. That means they must access funding through more traditional means.

Related: How to Raise Your Credit Score by 100 Points in 5 Months

The problem is startups often lack the business history and credit to land favorable term loans through banks. If you find yourself in such a situation, don’t panic. There are specific small-business startup loans that may suit your needs and goals.

Here are some noteworthy startup loan products, and the requirements you must fulfill to qualify:

1. Equipment financing.

Equipment financing is a loan that enables you to purchase new equipment for your business by using the equipment itself as collateral.

There are many advantages to equipment financing, including:

• Interest fees and other financing costs can often be deducted from your taxes, according to Section 179 of the IRS Code. You can use the depreciation of the equipment as a tax deduction as well.
• You don’t have to wait to find extra money. This means you can get the latest equipment, from computers to industrial stoves to heavy machinery, and start using them to grow your business now, putting the revenue generated by the equipment toward paying off your loan.
• Since you use the equipment itself as collateral, lenders are more willing to provide financing to new businesses. There is less documentation needed in comparison to term loans.

Now, qualification for equipment financing generally requires a credit score over 600, $100,000 in annual revenue and 11 or more months in business. If you’re just starting out, you’ll likely need a higher credit score for approval from most lenders -- usually at least 680.

2. Business credit cards.

Like a personal credit card, a business credit card provides access to revolving credit. This is when the lender provides you with a maximum credit limit. With the credit card, you make purchases, which lowers that available credit limit. When you make a payment, the credit limit goes back up. This provides you continual access to capital.

Related: The Best Business Credit Card for Every Type of Spender

In addition to giving you steady access to funds, there are many other advantages of using a business credit card, such as:

• The ability to build business credit. Make your payments on time, and keep the balance as low as possible. Your business credit will improve, and you may be able to qualify for more favorable financing products over time.
• Separation of personal and business finances. This allows you to more effectively manage your company’s budget, as well as avoid confusion with Uncle Sam come tax season.
• More efficient handling of finances. Most business credit card companies offer customers powerful financial tools to track spending, taking out a lot of manual work involved in bookkeeping. You can even control how employees spend company cash.
• Valuable rewards. First, many business credit cards have lucrative sign-up bonuses. On top of that, continued spending with the card yields you even more benefits, from cash back to free plane tickets to discounts on merchandise for your company.
• The ability to save money. Some cards offer 0 percent introductory APRs for as long as 12 months or more. That gives you the option to fund early business operations, without incurring any financing charges, as long as you pay back in full at end of period.

Requirements for business credit cards vary with each product and company. The best rewards, sign-up bonuses and introductory APR offers, of course, go to those with a high credit score. The good news is other solid cards do exist if your personal credit score is lower, including those that offer cash back and promotional APRs.

If you’re still unable to qualify, try a secured credit card, which requires you to put down a cash security deposit for your line of credit -- typically around 90 percent, or even all -- of your total available credit.

3. Credit line builder.

Building business credit is crucial for most startups. This leads to better financing options down the line.

Enter a credit line builder, an untraditional form of funding where you work with a financing company and apply for multiple business credit cards at once. The benefit is that you can save time on the applications and get approval for a set of business credit cards, which gives you a higher limit.

Additionally, a credit line builder is a powerful tool to get your business credit looking great. But to qualify, you must have great personal credit. Typically, you need a credit score of 700 or higher.

Related: 7 Hard Money Lessons I Learned in My 20s

Getting your startup off the ground with startup loans.

Use these startup loans wisely and you’ll see your business credit improve with time. That may open up better financing opportunities, like SBA loans, which are known for their high amounts and low rates.

From secured business credit cards, if you have bad credit, to equipment financing and credit line builders, there are small-business startup loans out there for you. Explore your options, crunch the numbers, and choose the product that can get your company on the right path.

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