Time in Business
The majority of lenders require a business to have been in operation for one or two years in order to qualify for business loans and financing.
But some small-business loan programs are available to startups with as little as six months in operation. A few lenders are even willing to extend financing to businesses that have been in operation for as little as three to six months, but it’s much more difficult to find. Your business might qualify for financing, but odds are you will have to pay higher interest rates and accept a shorter loan term. Many financing options open up once you’ve hit the one-year mark, and some may even be less expensive.
Most lenders look at time in business as a measure of risk. Simply put, the longer a business has been operating, the better the odds it will stay in business long enough to pay off its loan.
When you’ve only been in business for six months, a lender might not have enough information to understand how the business might handle seasonal fluctuations or supply chain problems that typically occur over the course of a year.
Of course, time in business isn’t the only consideration for the lender. Personal credit score and revenue are also important. If a new business is financially stable and has excellent personal credit, it may still be able to qualify for a loan or financing.
Willing to Lend to Newer Businesses
With at least six months behind you, there are a few places to look. Online lenders tend to be fairly flexible about their qualification requirements and might work with a business as young as three to six months old. They tend to charge higher rates and offer smaller amounts with shorter repayment periods. They offer traditional term loans, lines of credit, equipment financing, invoice factoring and merchant cash advances (MCAs).
Equipment financing, invoice factoring and MCAs might be easier to get as a newer business because they’re backed by the specific asset or sales the financing is tied to (the equipment, invoices or future card sales).
Be wary of online lenders who make their financing sound too good or too fast. Read the fine print and be sure to understand the terms before signing on. Also, MCAs can be very expensive, so consider all of your other options before going down this route.
Community lenders - such as community development financial institutions (CDFIs) - are interested in serving businesses that might otherwise be underserved, like startups, those with lower credit scores, businesses in low-income neighborhoods. They may offer microloans, which work like traditional term loans but top out at much lower amounts - usually $50,000. CDFIs may take longer to fund businesses than online lenders, but may offer more competitive rates and terms. Many provide businesses with training and coaching.
Lending marketplaces don’t lend to businesses themselves; instead, businesses make one application and the marketplace matches them with several options they can compare. Many of these lenders are online lenders that may consider lending to startups.
Some (but not all) banks are willing to lend to newer businesses. Wells Fargo, for example, offers an unsecured business line of credit for businesses with at least six months in operation. If you’re already a customer at a bank, you may have some additional flexibility there. Banks generally have the most competitive rates and terms but are also slow and prefer to lend to businesses with strong credit history, consistent revenue and collateral.
A few specific lenders show the range. Fundbox provides a line of credit, and businesses that have been operating for just three months may qualify. But the minimum credit score is 600 and minimum monthly revenue is $2,500. Fora Financial provides an online term loan with minimum six months of business operations, a minimum credit score of 570 and monthly revenue of $20,000. Funding is available within 24 hours. Giggle Finance offers a merchant cash advance for freelancers, contractors and self-employed people. It doesn’t look at credit scores, but rather uses your bank account information. eLease provides equipment financing. There’s no minimum time in business and no minimum revenue. They describe themselves as a “story lender,” which means they’ll look at the circumstances of a particular business rather than a list of requirements. altLINE offers invoice factoring for business-to-business companies. It looks at the credit of the customer rather than the requirements that would go into a traditional loan.
A Few Steps Can Improve Your Odds
If you can’t wait a full year, a few steps can improve your odds. Personal credit is a significant factor. The shorter you’ve been in business, the more important your personal credit history. Improve it by disputing any errors on your credit reports, like late payments you paid on time, or things like someone else’s activity on your report. You can also increase the frequency of payments on your debts, and become an authorized user on an account someone you trust has good credit with.
Demonstrate your ability to generate revenue, as strong revenue is important to potential funders. Share accurate, up-to-date business bank statements and financial statements. If you haven’t started earning revenue yet, you should have a comprehensive business plan that can demonstrate how you will bring in revenue and how you can pay back the loan. Your outside income, business experience, and any documents that prove that you will have incoming revenue, like purchase orders and contracts, can help as well.
If you have substantial business assets, like equipment or real estate, you can offer them as collateral for the loan. Lenders may be more likely to approve you if you are six months in and have business collateral like this. In the event of default, the lender can seize the collateral.
You should begin getting to know your lenders as early as possible. The best time to find financing is before you need it. Communicate with your bank and other financial institutions about your business, and find out what they need. Then, when you do need to borrow, you’ll be better positioned to shop around and compare offers.
So, be prepared for a shorter loan term and/or higher interest rate as a new business. If you can wait until the one year mark, there’s likely to be greater financing options available to you.
