Plan Before You Apply: How to Identify the Right Small Business Lending Program for Your Startup
With thousands of banks and lenders offering different small business lending programs, it’s important to know how to choose the one that’s right for your startup. Educating yourself on the many small business lending options available will give you an advantage. Knowing all of your options, what you need to do get approved for financing, and which small business lenders to go to will give you time to prepare. Lack of proper preparation is the reason why so many startup business owners are denied financing from banks and lenders.
In this article I discuss how to identify the right small business lending program for your startup based on several factors: stage of business, financing types (loan, line of credit, factoring, etc.) and criteria for approval. Learning and understanding these key elements before you start to apply for financing is what will enable you to increase your chances of getting approved (and on the first try).
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Classify Your Business Before You Begin Your Search for Start-up Financing
The term “startup” is rather vague and many different business owners often refer to their company as such if they haven’t reached desired milestones. The truth is, your business can be one year old, with zero revenue or six months old with $100,000 in revenue. Even though both businesses are technically startups, they will be treated very differently amongst some banks and lenders. The younger business has a track record. The older business doesn’t. The reasons why don’t really matter (yet). Just keep in mind that lenders will treat each loan request differently. Harvard Business Review’s article, “The Five Stages of Small Business Growth”, provides a good framework for identifying which stage of business your company is in. It will also give you an idea of how banks and lenders may identify the risk level associated with lending you money. The younger the business and the lower the revenue, the more likely it is to be viewed as a higher risk.
Financing Types: Small Business Lending Programs for Startups
Unsecured Business Credit – Unsecured business credit (such as unsecured business lines of credit and business credit cards) is short term, revolving debt that’s designed to be used solely for business expenses. They are much like unsecured personal lines of credit (and credit cards), however it’s much easier to track business purchases for tax deduction purposes with unsecured business credit. This type of financing is considered unsecured because it can be obtained without the requirement of pledging your assets as collateral. A well established and properly maintained personal credit history is required to get approved for unsecured business credit.
Unsecured Business Loans – An unsecured business loan is long term debt (i.e. a term loan). It’s much like unsecured business credit the only difference is one is line of credit (or credit card) and the other is loan. A line of credit or credit card is considered short term, revolving debt. A loan is considered long term debt. Furthermore, a loan doesn’t revolve. Once a loan has been completely used, you have to reapply for another loan. Access to the funds associated with an unsecured business line of credit or business credit card can continue as long as you make timely payments and keep the balance low (for the most part). A good personal credit score is also needed to get approved for an unsecured business loan. Collateral isn’t required since it is unsecured financing.
Peer-to-Peer Loans – Peer to peer loans are available online via platforms such as Lending Club. Since you are borrowing money directly from other people, interest rates and terms may be lower than traditional financial institutions like your local bank. Most peer to peer platforms offer personal loans. However, companies like Lending Club have entered the small business lending arena. Lending Club is not necessarily right for brand new startups. However, there are other peer to peer lending platforms out there that work better for startups such as Kiva. Kiva enables people to provide microloans to low income entrepreneurs all over the world.
Loans from Community Banks or Credit Unions – Community banks and credit unions are often small, community development financial institutions dedicated to financially empowering residents and businesses in specific areas. Organizations like the Independent Bankers Association of Texas offer a Small Business Lending Fund Program to community banks and credit unions that want to lend money to businesses in their community. Community banks and credit unions are able to obtain this money at very low interest rates and re-lend it to business owners.
If your local community bank or credit union offers a microloan program to small businesses and startups, chances are they are taking advantage of the Small Business Lending Fund Program to offer you business financing. The small business lending programs offered by community banks and credit unions are ideal for entrepreneurs starting brick and mortar businesses in their local area or have difficulty obtaining financing from traditional banking institutions.
Equipment Financing – Equipment financing is specifically designed to be used for purchasing equipment for your business. Equipment financing companies offer you the option to get a loan to purchase equipment or pay a monthly fee to lease the equipment. Equipment that becomes obsolete (i.e. outdated) quickly is usually leased. Equipment that lasts for a longer period of time before it becomes obsolete is usually purchased via an equipment loan.
What You Need to Look for to Determine Which Type of Financing is Right for You
Interest Rates & Terms – Interest rates and terms vary depending on the type of financing you are applying for and your personal credit history. For example, unsecured business credit will have higher interest rates than unsecured business loans. Unsecured lines of credit and credit cards always have higher interest rates than loans. This is normal for unsecured funding. Unsecured funding (of any kind) will cost more. This is because you aren’t required to secure the money using collateral.
Use of Funds – Depending on the small business lender, you may be restricted on how you can use the funds. For example, an unsecured business line of credit can be used for any expense, but a business loan from a community bank or credit union may be restricted to purchase inventory only. (This is not the case for every community bank or credit union).
Lender Track Record – New lenders pop up in the market everyday. It’s important to know how long they’ve been operating and if they have successfully funded any loans. I’ve watched many small business lenders come and go over the years. Not all small business lenders are big banks. To be sure you’re dealing with an experienced lender, ask for references. Lenders with a real track record will be eager to provide you with the contact information of past business owners they’ve helped get funding.
Time to Fund – Most entrepreneurs prefer to get funding quickly as possible. If that’s you, then you’ll want to pay attention to the amount of time it takes for a lender to tell you if you’ve been approved and how soon you’ll get the money. As a rule of thumb, you should give a lender at least 2 weeks to tell you whether you’ve been approved. Some small business lenders will give you a decision faster (e.g. in 2 days) and others can take as long as 9 months.
Application Process – The loan application process should be simple and straight forward. Difficult loan processes should be avoided if you want to obtain financing for your business quickly. Pay attention to what lenders are asking for. They will ask you to supply supporting documentation such as tax returns, bank statements, and other financial information. The more financial information or documentation they ask for, the longer the process will take if you don’t have it readily available. If you are informed before you apply, you can gather all of the documentation needed to apply before you start the process.
Criteria for Approval: What You Need to Do to Get Approved for Startup Financing
First things first, check your personal and your business credit history. Although personal credit history is still the most important determining factor in getting approved for startup financing, it’s not the only thing small business lenders look for. Business credit is becoming increasingly as important as personal credit. In addition to credit, banks and lenders also check the following to determine whether to approve or deny you for startup financing:
Years in Business
Total Monthly or Annual Revenue
Employment & Personal Income
Business & Personal Tax Returns
Business or Personal Bank Statements
Articles of Incorporation
Proof of Tax ID
Business Plan & Marketing Plan
3 or 5 Year Financial Projections
Why You Shouldn’t Apply for Startup Financing on Your Own
Finding the best small business lender or loan program for your business can be difficult because of the vast number of lenders in the market. The most important aspect of getting approved is knowing what you qualify for and what lender to approach. You can use the information I’ve outlined here, however, the best way to figure out what type of financing is right for you is to speak with an expert. Applying for financing with the help of an expert can help you determine which financing program is right for you. You may have a greater chance of getting approved for startup financing when you enlist the help of an expert.
Some experts also have great relationships with their small business lending sources. This can help you get approved for financing with a lender (even when you don’t qualify for financing elsewhere). For example, one of my small business loan broker friends obtained a $50,000 line of credit for a trucking transportation company. The owner had a 480 personal credit score. Had the business owner went anywhere else, she may have gotten denied because of her low credit score. However, my friend was able to get the business owner approved because of her relationship with the lender. My friend always refers borrowers to this particular lender and they never default on their loans or credit lines. This is why the lender was comfortable with approving a loan for my friend’s client even though her credit score was lower than their required minimum.
How to Find the Best Small Business Lending Program Experts
The best small business lending experts have a track record. For example, as of 2017, LenCred has helped business owners obtain over $173 million in financing since the inception of the company. They can also provide you with testimonials from past clients. LenCred’s success in helping business owners obtain financing is verifiable. That’s the way it should be for all small business lending program experts. If they claim they can help you get funding, they should be able to provide you with proof that’s it’s something they’ve done before.
The best small business lending program experts also have knowledge of all types of business financing. While they may specialize in a specific area, the experts who can help you determine which type of business financing is right for you will understand all of the options available. They should at least be aware of what it takes to get approved for each program, how to apply and where to apply.
How LenCred Can Help You Get Startup Financing for Your Business
LenCred specializes in helping startup and established business owners obtain unsecured business credit. The LenCred team is also excellent at helping business owners determine which types of financing may be right for them. Whether you want to apply for a loan or line of credit, LenCred may be able to point you in the right direction.
All it takes is for you to get started is to complete a pre-qualification application. The LenCred team will analyze your pre-qualification application, personal and business credit history (if applicable), and your unique business situation. After getting the full picture, they’ll discuss your financing options with you and create a funding plan. The funding plan outlines the funding process and the lenders they will help you apply to. If you qualify, you could get up to $50,000 (or more) for your business in as little as 14 days with LenCred’s help.