Running a startup can be an exciting time. You’re stirring the pot, disrupting the marketplace, and looking to achieve success at breakneck speeds. However, there are plenty of operational roadblocks on the horizon, even from the beginning. Many startups hit the ground through two routes — equity financing and debt financing. We’re going to focus on the latter and provide some concrete ways you can stay prepared and ready to qualify for startup loans.
Startup loans are diverse, offering a wide range of benefits depending on which loan product you choose. No matter which option you go with, staying prepared for the road ahead with proactive steps can ensure a smoother qualification process. We’re going to go through a comprehensive checklist that will outfit startup owners with the right tools, documentation, reporting, and information to qualify for financing.
Our Startup Loan Checklist
You have a few choices when it comes to lenders for your startup. However, banks are far less likely to lend to inexperienced business owners with little to show for taking on the risks associated with loans. Luckily, alternative lenders offer a wide range of loan products and options for startups to take advantage of today.
Note: You’ll rarely have to meet every requirement on this checklist, but the more boxes you check — the more likely you’ll qualify for startup loans and financing opportunities.
Determine Goals and Calculate Loan Amounts
The very first question you should be asking is — “Why do I need a loan?”
Answering this question can give incredible insight into not only your business objectives but also how much you’ll need. If you’re looking for a significant amount of capital, you may need to utilize collateral to qualify — especially if you lack significant time in business, credit history, and revenue.
Be prepared to provide lenders with information about why you’re taking out a loan. If it’s for onboarding new staff, make sure to showcase how many new hires you’re taking on and what their pay will be. If you’re purchasing new equipment, note the model. This can help guide which loan is best for you and give lenders an idea of how successful their investment in your startup will be in the long run.
Boost Your Credit Score
It’s no surprise that your credit score will play a crucial role in the startup loans’ qualification process. For traditional lenders, credit score can be a primary focus in your application. Online alternative lenders won’t place credit scores nearly as high on the pedestal, but it is still an important factor.
Lenders may look at your personal credit score, business credit score, or a combination of the two depending on the startup loan product.
Personal credit scores can play a significant role, even with LLCs and corporations. How a business owner manages their personal finances can be a solid representation of their business spending habits.
- Try to have a personal credit score of at least 600.
- A personal credit score of 700 or above will be extremely beneficial.
Business credit scores are obviously an important factor in business loans and will indicate your company’s history of paying back lenders in the past. For startups, this may be a difficult one to reach, as you’ll need to take out loans to gain business credit footing. Establishing a business credit score is fairly simple; all it takes is opening a business bank account, incorporating your business, or searching for your employer identification number (EIN). Here are some tips for boosting your business credit.
There are plenty of reputable business credit reporting agencies, with the three most common being:
- Dun & Bradstreet
While credit histories are a significant factor in the qualification checklist, here are some ways to get a business loan with bad credit.
Create or Update Your Business Plan
Your business plan should always reflect the current state of your company and its operational objectives. A business plan is essentially a document that illustrates the business goals and how you plan on reaching them. It’s not a super-complex process but an important one for lenders to see your startup’s vision.
Here are some of the key components of a successful business plan.
- Executive summary
- Opportunities & Objectives
- Operations and Management Summary
- Analysis of Finances
If you haven’t created a business plan — you absolutely should right now. If you have a current business plan, make sure it is up to date and reflects your business’s current state and any new strategies or goals in mind.
Report Your Startup’s Time in Business
Another key element to qualifying for startup loans and financing is your time in business. It’s a fairly simple and quick step — but it’s an important one.
Most traditional lenders such as banks require at least 2-3 years in business to receive financing, as this gives them some security in the risk they’re taking on.
However, alternative lenders are far more likely to offer cash flow to startups and usually only require about a year in business. If you haven’t been operational for two years, you can showcase your potential and unique value in your business plan.
Accurately Enter Your Industry and Entity
Here’s another simple one that often gets overlooked. When applying for a loan or various startup financing opportunities, you’ll need to accurately classify your industry and entity. Mistakes here can be a preventable hurdle that makes the funding process longer than it needs to be. It’s also crucial as many lenders restrict which industries or entities they will lend to. That means understanding whether your company is in the supermarket category, automobile category, etc.
The same can be said for accurately inputting your entity. Are you a corporation? An LLC? These make a difference when applying for a loan, as some lenders are less likely to assist certain entities. This can save you a ton of time in looking for financing options.
Prep Your Paperwork
Depending on what type of loan or financing opportunity you’re looking for — you’ll need a wide range of paperwork at the ready. It’s a time-consuming endeavor, but there’s really no way around it. If you’re going for an SBA loan — you’ll need mountains of paperwork. Some lenders, on the other hand, won’t require nearly as much documentation. Regardless, it’s always good to keep your paperwork house in order to stay prepared for any sudden needs for cash flow.
Here’s some paperwork you should have at the ready and updated at all times.
- Business licenses and permits
- Employer identification number (EIN)
- Income statements
- Balance sheet
- Bank statements
- Personal & business tax returns
- Accounts receivable aging & accounts payable aging
- Payroll from the past 6 months or more
- Business debt schedule
- Copy of your commercial lease
- Paperwork on your entity structure (LLC, S-Corp, C-Corp, etc.)
- Sales agreements
- Contract with suppliers or vendors
- Purchase agreements
- Corporate bylaws and operating procedures
For startups, many of these documents may not even exist — but many of them do. Have these prepared and updated before going into the application process to cut down on wasted time and headaches. If you’re looking for alternative financing, you won’t need to worry nearly as much about the intimidating amount of paperwork we just listed.
Some Finishing Touches
Now that you have many of the essentials in your checklist prepared, we thought a few more honorable mentions should be added.
- Prep any collateral you may need, especially if you’re planning on using a personal loan for business. However, alternative lenders usually offer a wide range of unsecured business loans that don’t require any need for collateral.
- Disclose other businesses you are involved in during the application process. Similarly, make sure to disclose ownership parameters regarding part-ownership, etc. Alternative lenders usually only require 50% ownership — which means getting a loan only requires one or two people instead of an entire panel.
- Choose your loan carefully. Although the startup loan list is limited compared to small businesses, you do have a wide range of options.
Advancepoint Capital offers a wide range of loans and financing opportunities you can take advantage of today. We offer solutions for poor credit, limited time in business, and more. Finding the right loan for your business can be a tiresome process, but it will set you up for long-term success.
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