The idea of business credit for startups is kind of vague. I mean, a business that isn’t even operating yet can’t exactly get a business credit. The people who want to start the business can get a loan to get going, but it will technically be a personal loan, not a “business” loan in terms of a loan to the business directly.
Business Credit for Startups: Do It Exists and How Do You Get It?
The truth is, a startup isn’t just a business that hasn’t started yet. The term startup also includes any business that is still in its beginning stages. For example, they may be in their first round of financing, or still trying to get ramped up. Surprisingly, some businesses stay in the startup phase for up to two or 3 years.
Why does that matter? Because, if they have been operating for any amount of time, that changes the game. They could then potentially have business credit, which could help them get the funding they need on the merits of their business more so than their personal credit. These would be what we call business loans for startups. For many reasons, it’s harder for startups to get business loans.
Business Credit for Startups: Traditional Lenders
Not surprisingly, a lot of startups will not qualify for business loans from traditional lenders. Some will, but most will have to go the SBA route if they qualify at all. The SBA, or Small Business Administrators ation, offers loan programs through partner lenders. More startups will qualify for these loans. The reason is, their programs are government backed. As a result, the lenders are able to be a little more relaxed when it comes to eligibility and approval.
There is a lot of red tape involved, but it can be worth it if you qualify. Here are some examples of SBA loan programs that may work well for startups.
7(a) Loans This is the Small Business Administration’s main loan program. It offers federally funded term loans up to $5 million. The funds can be used for expansion, purchasing equipment, working capital and more. Lenders include banks, credit unions, and other specialized institutions in partnership with the SBA who process these loans and disburse the funds.
The minimum credit score to qualify is 680. In addition, there is a down payment requirement of at least 10% for the purchase of a business, commercial real estate, or equipment. The minimum time in business is 2 years. In the case of startups, business experience equivalent to two years will suffice.
This is by far the most popular of the SBA loan programs, and the funds are available for a broad range of projects, from working capital to refinancing debt, and even buying a new business or real estate.
These loans are also available up to $5 million and can buy machinery, facilities, or land. They are generally used for expansion. Like 7 (a) loans, private sector lenders or nonprofits process and disburse these funds. They work well for commercial real estate purchases especially.
Terms for 504 Loans range from 10 to 20 years. Unfortunately, funding can take up to 90 days. They require a minimum credit score of 680, and collateral is the asset it is financing. There is also a down payment requirement of 10%, which can increase to 15% for a new business.
There is also 2 year in business requirement, or equivalent experience for management, if the business is in the startup phase.
Microloans are available in amounts up to $50,000. They work for starting a business, purchasing equipment, buying inventory, or for working capital. Community based nonprofits handle SBA microloan programs as intermediaries.
Interest rates on these loans are 7.75% to 8% above the lender’s cost to fund, and the terms go up to 6 years. Similar to other programs, they can take up to 90 days to fund. The minimum credit score is 640, and the collateral and down payment requirements vary by lender.
SBA Express Loans
These loans max out at $350,000. They have a maximum interest rate of 11.50%. In addition, terms range from 5 to 25 years, and the SBA guarantee is less than it is with their other loan programs at 50%. To qualify, your credit score must be above 680. Another requirement is that you must have a debt to service ratio of 1.1 or higher. If the loan is greater than $25,000, collateral may be necessary. It depends on the lender.
The turnaround for express loans is much faster. The SBA takes up to 36 hours to give a decision. Also, necessary paperwork for application is less. As a result, express loans a great option for working capital, among other things, if you qualify.