How to Get a Startup Business Loan
The term ‘startup business loan’ is probably relatively easy to define in your head. It’s a set amount of money that a bank or financial institution will lend you if you can convince and prove to them that your idea for a business or already started a fledgling business can grow to a point where you’ll be able to pay them back.
In reality, financial institutions use the term startup loan mainly for marketing. When you try and attain one of these, you’ll typically be offered or asking for a term loan. In some rarer cases, it’ll be a line of credit you’re after. You could end up using almost any type of loan to start a business one way or another.
A term loan is a predetermined set amount or a lump sum that you have to pay back to the lender over a pre-agreed period. They won’t just lend it to you out of the kindness of their hearts, however. The amount you pay back will have to first increase in absolute terms to align with inflation, typically around 2% annually.
On top of this, you’ll have to pay extra interest, which is what justifies the bank handing out their cash, which if worst comes to worst, they may not get back if your business goes into the red. This interest rate will come at either a fixed or a variable rate, depending on the terms of your loan. There are some things you can do to earn yourself a lower interest rate in most cases.
What Can Help You to Get a Startup Business Loan?
Good credit history doesn’t hurt, but the main thing that’ll get a bank on board with giving you a reasonable deal is whether you can provide security. This is something that you can provide as collateral. It is essentially reassurance that if something goes wrong with your business and you can’t pay back your loan, the bank will take possession of something else equal to the loan’s value.
A line of credit is slightly different and doesn’t come as a lump sum. Although there is an upper limit to lines of credit, you only take out however much you need when you want it. In this sense, it’s like a credit card, although it’ll almost always have a much lower interest rate in comparison. New startups are less often used and tend to be given to already established businesses with a reputable history of earning money.
It can be challenging as a startup business to get either a line of credit or a term loan since your lack of a track record means banks can’t be sure of your profitability going forward and, therefore, your ability to repay what you owe.
Not all is lost, though. There are a few things that financial institutions and banks will take as a good sign, therefore, making them more generous when considering your application. Good credit history and security are two we’ve already covered. Still, you’ll also get into their good books if they can see you’ve invested a sizeable chunk of your own money or you’ve had prior experience with a business that’s done well. If you have none of these in your back pocket, getting a traditional loan is likely to be a tough ask.
If you can build up an impressive presentation that genuinely shows you have a detailed, proactive, and confident plan, you have a shot at getting them on board. If you have worked out the exact early financing requirements that’ll need to last until some revenue begins to offset costs and show the bank a precise number, they’ll likely be impressed by your attention to detail. Whilst you should explain how your business will be successful, lying about there being no risk is likely to be a transparent attempt.
Showing that you understand where things could go wrong will demonstrate that you know what you’re up against and have a good understanding of the world you’re stepping into. The most important thing, though, will be a detailed budget that shows how you’ll turn their loan into a profit and when the money will be able to start flowing back their way.
If it’s not looking hopeful even with an immaculate presentation, then it may be time to get creative with your security. People use their homes, personal assets and vehicles as insurance, but you must know what you’re getting yourself into. Chasing the dream is great, but losing your house is a lot to put on the line if you know there’s a possibility of failure.
There are always other avenues through which one can get startup funding. Investors can be an option that has a lot to offer. You may make new essential business relationships or even find a mentor with an invaluable business experience they can bring to your company.
You can apply for a startup loan here.
Other useful links from our knowledge centre:
What is a micro business?
What does SLA mean in business?
Is a charity a business?
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