Financing a Business? Explore Small Business Loans for Startups

Table of Contents

1. Who is Eligible for a Small Business Loan?
2. What Types of Small Business Loans Are Available for Startups?
3. What Are Some Tips for Choosing the Right Lender for Your Startup?

Whether you’ve already started a small business or you’re thinking of starting one, one of the biggest challenges you’ll face is finding the financing you need. A lack of cash flow is one of the most common reasons that startups fail. Knowing what your financing options are, including small business loans, can help you obtain the small business financing you need to turn your business into a success.

At Addition Financial, our business members can take advantage of several funding options to help them achieve their most important business objectives. Getting a loan for a startup comes with some special challenges, so here’s our guide to help you learn about small business loans for startups and where to find them.

Who is Eligible for a Small Business Loan?

Financing a business can be accomplished in a variety of ways. One of the most common is taking out a small business loan to get the funding you need. 

It’s not uncommon for a lender to require that a business have been in operation for a minimum of two years before they’ll agree to give that business a loan. Two years is long enough to show lenders that the business owner knows what they’re doing and has the skills and perseverance to turn the business into a success. (There are options for startups, but here, we’re talking in generalities.)

There are a few other things you’ll need to qualify for business financing in the form of a loan:Qualifications for business financing

  • Good personal credit, which typically means a FICO score of 690 or higher
  • A good business credit score, usually a minimum credit score of 76 or higher
  • A debt service coverage ratio of at least 1, although 1.25 is ideal. (You can calculate your DSCR by taking your annual income and dividing it by your debt. Keep in mind that lenders will be doing the math based on your requested loan amount plus any previously incurred debt.)
  • Enough annual revenue to keep your business afloat and make your monthly debt payments. Some lenders put a minimum in place for all loans, while others may decide on a case-by-case basis.
  • A business plan and a loan proposal. The former shows that you’re serious about your business and that you understand how to allocate assets. The latter lets the lender know how you’ll spend the money if they approve you for a loan.
  • Business and financial documentation. Requirements may include copies of your tax returns, business financial statements and other reports, and copies of any other documents related to your business, including licenses, certifications and articles of incorporation/operating agreement.
  • Collateral or a personal guarantee. Many lenders, particularly when lending to startups, require that the business owner sign a personal guarantee or provide collateral to protect against a loan default.

Before you apply for a small business loan, we strongly recommend gathering the necessary documents. You’ll be less likely to experience delays during the underwriting process and more likely to get approved for the loan you need.

What Types of Small Business Loans Are Available for Startups?

Obtaining business financing as a startup may provide fewer options than doing so as an established business. That said, there are multiple loan programs and types available if you’re just getting started and need to establish a cash flow for your business.

SBA 7(a) Loan

The Small Business Administration (SBA) offers loans through a variety of programs, some of which are available to start-up businesses. The best known of these is the SBA 7(a) loan program. Here are the qualifications to apply:

  • Be an operating business (in other words, you can’t qualify before starting a business)
  • Be a for-profit business 
  • Be located in the United States
  • Meet the SBA size requirements. Size requirements vary by industry and you can read the full details here
  • Meet SBA eligibility requirements. Examples of businesses that don’t meet the requirements include non-profits and lenders and you can read the full list of exclusions here
  • Be unable to obtain the money you need on reasonable terms from non-Federal, non-State or non-local government resources
  • Be creditworthy and demonstrate that you have a reasonable ability to repay your loan

SBA 7(a) loans are not underwritten or issued by the SBA. Instead, you’ll need to use the SBA’s Match Tool to find a lender to work with to obtain the loan you need.

SBA Microloans

SBA microloans are exactly what they sound like: small loans that can be used for business purposes. The maximum loan amount available is $50,000. All SBA microloans are underwritten by intermediaries. The intermediaries are community-based, non-profit lenders.

Requirements are set by the intermediaries. However, since microloans are so small, you may be able to get one even if you haven’t started your business yet. Here are some basic requirements:

  • A personal credit score of 690 or higher
  • Collateral for the loan
  • A signed personal guarantee
  • Microloans are an ideal loan option if you need a small amount of capital to get your business off the ground. Once you’re established, you’ll have access to other loan programs.

Business Term Loans

Business term loans are traditional loans where the borrower receives the full amount of the loan up front and repays it over a specified period or term. As an example, here are the details about our Addition Financial term loans for businesses:

  • Loan amount may be up to $100,000 if secured and up to $250,000 if unsecured
  • Loan term may be up to 60 months
  • Fixed interest rate

You’ll need to provide collateral and sign a personal guarantee to be approved for a loan. You can read the full requirements here.

Small Business Line of Credit

A small business line of credit is a type of revolving credit that has something in common with a business credit card. What we mean by that is that you can borrow and repay money as many times as you want during the withdrawal period. Here are the details of Addition Financial’s Small Business Line of Credit:

  • Unsecured limit up to $100,000
  • Secured limit up to $250,000
  • Term of up to 60 months
  • Variable interest rate

With a small business line of credit, you pay only for what you borrow. You can learn more about our line of credit requirements and terms here.

Equipment Financing

Equipment financing is business lending that’s designed to be used to purchase necessary business equipment. Equipment is broadly defined and may include everything from vehicles and heavy manufacturing equipment to scanners and computers. Here are some of the specifics:

  • Minimum financing amount of $5,000
  • Equipment being purchased is used as collateral
  • Up to 80% loan to value ratio
  • Terms of up to 84 months
  • You’ll need to provide the same documentation that you would for a loan. You may be able to qualify for equipment financing even if you’re just getting started with your business.

Invoice Factoring

Invoice factoring is a form of short-term business financing. The factoring company doesn’t lend money. Instead, it purchases invoices at a percentage of their face value, usually somewhere around 75% or 80%. For example, if you had a $10,000 invoice, you might receive $8,000 from your factoring company.

Once the factoring company has purchased your invoice, they own it. Your customer will pay them. They’ll deduct their fee from the remaining balance and remit whatever is left back to you.

The most important thing to know about invoice factoring is that the rates you’ll pay are far higher than what you’d pay with a traditional small business loan. Small business owners who can’t qualify for a loan may turn to invoice factoring as a stop-gap measure. You’ll need to provide a personal guarantee to qualify.

What Are Some Tips for Choosing the Right Lender for Your Startup?

Here are a few tips to help you choose the best lender for your business needs:Choosing the right lenderWe suggest prequalifying for a loan if you can. Prequalification doesn’t guarantee you’ll be approved, but it does provide some parameters and guidance. You may want to prequalify with two or more lenders. That way, you can compare loan amounts, terms, interest rates and other features to make sure you’re making the right decision for your business.

Get the Business Financing You Need from Addition Financial

Even as a startup company, there are business financing and loan options available to you. The information we’ve given you here can help you understand your choices and choose the loan program and loan that are right for you.

Are you looking for a business lender with competitive rates and business resources to help you manage your money? Addition Financial can help! Click here to read about our business loan options and apply today.

The content provided here is not legal, tax, accounting, financial or investment advice. Please consult with legal, tax, accounting, financial or investment professionals based on your specific needs or questions you may have. We do not make any guarantees as to accuracy or completeness of this information, do not support any third-party companies, products, or services described here, and take no liability or legal obligations for your use of this information.