When can your new small business get a business loan

You’re starting a business, and you’re ready to get the show on the road. You have the dreams, but what you need is cash. Are you eligible for a startup business loan? The answer may be no. A lot of “startup business loans” come with a minimum time in business requirement, because many lenders are wary about financing younger companies. Once you have a few months or even a year under your belt, your financing doors will be much more open. But you have big things in store for your business, and you can’t always wait that long. Here’s what you need to know about lenders and how they treat startups, and how to get startup funding if the traditional financing avenues aren’t available to you yet.

A Business in Its Very Early Stages

A startup is a business in its very early stages. It has little or no business history, few customers and an uncertain future. It may be operated by a single entrepreneur attempting to make their dreams come true or by a small group of people trying to achieve a shared vision. Pure startups look to make big impacts on niche markets with disruptive products or services, as opposed to joining a known industry. The business model is experimental, and the growth rate tends to be fast. The startup must demonstrate its processes, and then it must demonstrate its product or service. This means it may be able to introduce new products to market quickly and create a buzz around them, but the high pace of growth comes with greater risk.

Startup Loans

That risk is exactly why many lenders want a business to have some history before they lend, and startups have very little. They can’t provide lenders with information about their business credit, and their current finances don’t necessarily predict that they’ll be profitable soon. It can be a Catch-22: you can’t grow without funding, but lenders don’t want to give it until you’re in business. On the bright side, plenty of entrepreneurs do manage to secure startup loans or assistance.

The first option is to bring in investors. People with an interest in your business could pay anywhere from a few thousand to a few million dollars to buy in to your company. Seasoned pros in your industry may write an initial check for equity, as might groups of financial professionals, entrepreneurs and investors who want to build their portfolio of businesses, especially ones that boast an existing client base and consistent cash flow. In return for their money, they’ll want to see the profits they hoped for. You might even get a short-term return, but in the long run, you’ll have to divvy up the big returns.

The second way is to get a traditional bank loan. Getting a business loan from a bank as a startup can be very hard. A bank loan is for businesses with assets, good credit scores, a strong financial health and solid histories of profitability and growth. And lacking the proper experience in management and business will only hurt your chances further. Another option is to get an SBA-backed bank loan. The SBA doesn’t have a specific time-in-business requirement for its loan programs, and its backing helps lessen the risk for the lender. However, their processes are rigorous and approval times can be slow.

A third route is alternative lenders, which usually require less documentation and may offer products designed for startups. Requirements vary, but generally, you must have a FICO score in the mid to high 600s and a minimum yearly revenue.

Beyond a startup loan, a line of credit gives you access to a pool of money that you can draw from to cover expenses in the beginning of your startup without taking on a lot of debt. Or you can get equipment financing to pay for equipment, freeing up resources for other areas of your business and securing the loan with the equipment instead of your personal property. There is also the option that allows you to cash in on your sales. And check their requirements - some have restrictions on time in business, while others are open to most companies that need funding.

When Can Your New Small Business Get a Loan

So should you just hold off until your business is old enough to qualify? Some founders do. They operate on a shoestring budget until their products or services start turning a profit. This gives them time to establish a business history and build credit up until the business is mature enough to be eligible for a loan. However, not all businesses can operate this way and there are some downsides to waiting.

On the plus side, waiting gives you a better idea of what you can do with a loan to get the best return. It gives you more options to take out a bigger loan. It might give you the opportunity to qualify for lower interest rates and better terms. On the other hand, if you wait, you’re likely to lack the equipment and technology you need and you’ll give competitors a chance to step into the market space you want. You’ll have to consider your industry, the market, the number of competitors you have and the products or services you provide.

The first step to apply for a loan is to figure out exactly how much money you need to get your startup off the ground. Add up the costs of your startup and subtract what you can contribute in your own savings. That’s how much you’ll want to ask for in the loan. To make yourself a good candidate for a loan, try doing market research or fine-tuning your original business plan. You should also figure out the most efficient way to spend your loan money, and prove that you’re the best person out there to connect with your target demographic. You want to demonstrate to a lender that your business is feasible and has the possibility of success. It may take a bit of time to gather, and some of it may not be as thorough since you’ve not been in business for long.

So, when can your new small business get a loan? There is no single answer. Many loans for startups have minimum time in business requirements, which means that waiting a few months or a year will open more funding opportunities. There’s no specific time-in-business requirement for SBA loans, and alternative lenders may have some solutions that can work for startup businesses. Ultimately, the decision to wait depends on your industry, market, competitors and product. Make sure you know exactly how much money you need, and that you show lenders that your business is viable.