Securing a Bank Loan for Your Startup Business: A Comprehensive Guide

Jordan Brooks

Jordan Brooks

— 5 min read
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Estimated Reading Time

10 Minutes

Key Takeaways

  • Learn about the various bank loans and what you’ll need to apply for one.
  • Develop a comprehensive business plan and keep good financial records.
  • If traditional loans aren’t an option, consider alternative financing methods.
  • Shop around for loans to secure the best rates and terms for your business.

Table of Contents

Understanding Bank Loans for Startups

Getting a bank loan for your startup business is pivotal to cover your initial costs and keep your business moving. Early stage of company builds are critical and funding is a key. This guide walks you through the process so you can be certain to move efficiently and effectively through your loan search and make sure that your business has the financial kick-start that it needs. Funding of small business is important to ensure success of the project and cover the initial costs. Whether you’re getting started with your business or looking to take it to the next level, it is important to understand how to obtain appropriate and strong financial support for startups. In this blog post, we will clear the air so to speak and help set your business startup on the right path with your bank. For more details, check out Bank of America, FDIC and NerdWallet.

Types of Bank Loans for Startup Businesses

Knowing what your loan choices are will let you determine optimal funding for a startup business.

  • Traditional Bank Loans: For applicants who have strong credit, a financially secure business, or sufficient collateral. Get more tips on how to build an effective business plan.
  • SBA Loans: Government guaranteed and provide favorable terms to small businesses in need of business startup loans for bad credit or no collateral.
  • Secured vs. Unsecured Loans: "Secured" loans must be backed by assets; "unsecured" loans are riskier and have higher interest rates.

Dealing with Typical Scenarios when starting a business with no credit or collateral Starting a business can sometimes be difficult if you have bad credit or no collateral. But there are startup business financing options with no collateral, even though they may be subordinated to more stringent terms. To learn how to increase your credit score, check out our related article here.

Sources: NerdWallet, LendingTree

Eligibility Criteria for Bank Loan to Start New Business

Learning what it takes to qualify for small business bank loans can improve your odds of getting financial assistance for a startup business.

  • Credit Score: Usually at or above 690; some lenders work with lower scores. Find our guide to understanding credit scores here.
  • Business Plan A detailed plan that presents your business model, market estimations, the use of the funds.
  • Financials: Includes tax returns, cash flows, and bank statements. Vineeta Singh 1 June 2007 Good and effective financial planning is very critical.
  • Time in Business: At least two years, though some online lenders offer loans to shorter-term businesses.

Factor in risks in your industry. High-risk sectors such as restaurants and beauty services may face more stringent requirements.

Sources: NerdWallet, LendingTree, Bank of America

Application Process for Business Loans

There are several steps to get a bank loan. How to apply for a start-up business loan systematically?

  • Prepare the Documentation: Collect the personal and company documents like identity proof, address proof, financial statements, and a structured business plan.
  • Write a Business Plan: Write a detailed business plan that covers your business model and finances. For more, see our piece about crafting a successful business plan.
  • Search for Loans and Lenders: Look at various types of loans and the banks that have them – match them to your business. Our cheat sheet of loan types could lend a hand.
  • Fill Out the Application: Turn in the application with all required forms to be approved. You should be ready to share additional documents if the bank asks for them.
  • Pending Approval: The bank may ask for additional paperwork at this point.

Sources: Bank of America, NerdWallet

Interest and Duration

The bank loan for startup business interest you’ll pay is critical. This is in general how rates and terms are:

How Rates are Set

Interest rates may vary based on your credit score, loan type, collateral and your business’s risk profile. Shopping around between different banks can help secure the best rates and terms. Read more about determining the terms of a loan.

Finance Options

  • Commercial Bank Financing: Low bank rates for highly qualified customers.
  • SBA Loans: Good for small businesses looking for more favorable terms.
  • Online Lenders: Provide varying rates and terms and tend to have faster approval times.

Source: NerdWallet, LendingTree

Business Loan Calculate Loan Bank Amount Using Financial Planning and Loan And Terms Calculators

Using resources such as business bank loan calculators helps you to estimate loan terms and to get an understanding of how to manage your finances in the long term.

Tools and Planning

  • Use online calculators to figure out monthly payments, interest and total duration for loan payback.

It is very crucial to have proper financial planning once you get a loan from the bank which help you in growing business and also helps in paying back the loan amount timely. For additional financing planning tips for startups, see our full guide to the topic.

Sources: NerdWallet, LendingTree

Alternative Loan Options

If a traditional bank loan won’t work for your business, here’s some alternative financing to consider.

Alternative options

  • Non-bank Lenders: Credit unions, microlenders and online platforms have different options. For more details, explore our alternative financing options.
  • No Personal Guarantee Loans: A few lenders offer business loans without personal guarantees; however, they are few and far between.
  • Other Sources: Research crowdfunding, grants and investor funds as potential supplements/alternatives to loans.

Sources: LendingTree

Comparing Loan Offers

How the evaluation process breaks down Weigh options with interest rates, fees, repayment terms and the reputation of the lender. Choose one that is cost-effective and fits the needs of your business. Our loan offers comparison can help you out here.

Sources: NerdWallet, LendingTree

Conclusion

The bottom line: Knowing the ins and outs of getting a bank loan greatly increases the likelihood that you’ll be able to secure the financing you need. You will need to consider your own financial position and if necessary obtain professional advice to match your specific business requirements.

"If you have a bank line, you have to be best friends with your bank," Jeff Jones, president and CEO of Commercial Linen Services Inc. in Bakersfield, California, says. For additional expert guidance, the Bank of America and NerdWallet resources also offer invaluable advice.

Frequently Asked Questions

How do I qualify for a bank loan?

Be sure to at least have good credit, a great business plan, and evidence of a financially stable business. It's important to also know what the lender wants. Read about eligibility criteria here.

What are my other options for financing if I’m unable to get a bank loan?

Non bank lenders, crowd funding, investor funding. Discover alternative funding sources.

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