Getting a loan for a new business is no easy task. Most lenders don’t like to loan money to a business until it has developed a track record and shown that it is capable of success (i.e. sustaining revenue), so you’ll have to work extra hard to get funding. In this article, we’ll share five tips to increase your chances of getting a startup loan.
1. Highlight Prior Industry and Management Experience
Julius Caesar once said, “Experience is the teacher of all things.” This is certainly true when you’re searching for startup financing. From the lender’s perspective, your past experience is predictive of your potential for success as a business owner and, hence, the likelihood that you’ll pay back the loan. To that end, submit a resume with your loan application that highlights relevant industry and business management experience.
For a conventional bank loan or Small Business Administration (SBA) loan, the lender will typically want to see three to five years of industry experience. For example, if you want to open a hair salon, it really helps to have a few years under your belt as a stylist at a leading salon.
Do you lack any direct industry experience? General business management experience is also very important. If you’ve run a business in the past or managed a team of employees at a previous job, skills such as hiring employees, accounting and marketing are transferable to your new role in running a startup.
2. Prepare a Solid Business Plan
A solid, well-thought-out business plan is crucial to getting a startup loan. A business plan is a roadmap for how the business will fare in the next several years, so lenders pay close attention to what you include (and fail to include) in it.
Aim to discuss at least the following in your business plan:
- Ownership and Management: Experience and qualifications for you and (if applicable) your management team.
- Company Overview: Description of the service or product your startup will provide, and an explanation of why your product or service is valuable.
- Market Analysis: Discuss the overall market for your product or service and how you stand out from competitors.
- Marketing Plan: How will you get and retain customers for your new business?
- Financial Projections: Realistic, well-supported analysis of how your business will perform financially in the next 3-5 years.
Other Information That the Lender May Require: If you don’t feel up to this task yourself, you can use a professional business plan writing service, or start writing the budgeting section of your business plan with this free template.
3. Save Up Personal Capital
You should save up as much money as you can when you’re planning to launch a startup. Running a business is costly, more so than most would-be owners think. Accordingly, lenders want to see that you have some “skin in the game.” A bank will typically want you to have at least a 20% down payment on a conventional loan or SBA loan for a new business.
Bulking up your personal savings may even help you start your business debt-free. If you have sufficient capital of your own, there’s no need to get a loan.
4. Boost Your Personal Credit Score
Since a startup business doesn’t have a track record of its own, your credit history as an individual has a big impact on your ability to qualify for startup financing and the interest rate you will have to pay. There are number of simple steps you can take to increase your personal credit score:
- Pay all your bills on time.
- Lower your outstanding loan and credit card debt.
- Use credit cards responsibly, and pay off the balance in full each month.
- Fix errors on your credit report.
- Shop for loan rates strategically to limit the number of credit inquiries.
While there are credit repair and credit counseling agencies that aim to help you raise your credit score, there are also a lot of scams out there. Sometimes it’s best to do things on your own.
5. Start Building Your Business Credit Score
It’s never too early to start building up a business credit score, which is independent of your personal credit rating. Here are some steps you can take to establish business credit before ever making a cent of business revenue:
- Get a D-U-N-S number from Dun & Bradstreet to establish a business credit file.
- Obtain necessary licenses or permits to start the business.
- Open a separate business checking account.
- Get a business credit card.
- Choose suppliers that report to the business credit bureaus.
Getting startup financing isn’t easy, but your efforts will be worth every penny. Be sure to always read the fine print and make sure to keep your future cash flows high enough to make your loan payments on time. Following the tips above will help you put your best foot forward. Good luck!