For startups, mostly those below 2 years, getting a business loan/support from their lender e.g. commercial banks, microfinance companies, and loan companies, is extremely challenging. This is not due to lack of trust in the purpose of the loan. This is because the risk of startups failing is high or uncertain. Most startups are too small in staff size, too financially unstable, and too fragile to trust with huge sums of money despite having decent repayment measures in place. Hard to say, but it’s the truth.
But hey, there are ways to improve how your lenders see you! New business owners can improve their possibilities of getting a startup business loan by doing a few things which will be later discussed in this article.
Here are 5 simple steps you have to take to be able to get a Startup business loan from your lender.
How to Get A Startup Business Loan in 5 Simple Steps
Step 1: Choose the best type of loan for your startup
The first step is to choose your facility right, this should be based on your modes of business and your needs. It is true that the type of credit facility you own can make or mar your business.
It is not enough to just decide to get a loan, business owners must also decide on the kind of loan that will help the business get off the ground in any case. If possible, the business owner may consult with their relationship manager at the lending company for advice on which credit facility to get.
There are different types of startup business loans. Some of them are: term loans, asset-based finance loans, overdrafts, invoice discounting finance facilities, special government-intervention funds (e.g export financing NEXIM loan), and so on.
For instance, a startup that receives contracts once a while, executes them with their company funds, issues an invoice, and then starts to expect payment from their contract employers for the next 30 days is not supposed to opt for a term loan. A startup business term loan starts counting from the time it’s disbursed and must be fully repaid at the end of the tenor irrespective of your schedules.
The best type of business loan for such a company is an Invoice Discounting Finance Line (IDF line) – an IDF line only starts counting from when you issue your invoice to when you receive payment.
Step 2: Choose a supportive lender
The business owner’s choice of who to bank with can greatly influence the growth of the startup business.
Some lenders/financial institutions simply have a policy of not taking risks on startups, no matter how bright their future is – your startup business alone cannot come onboard to change that.
On the other hand, there are a few lenders/financial institutions that are really passionate to grow with their small startup business customers – this will be evident in the kinds of products they offer. One clear indication of a lender/financial institution that would likely support a small startup business is when they have a COT/account maintenance-free account for small companies. A good example is Fidelity Bank’s Fidelity Small Business Account.
The best thing to do is – do a deep analysis of the financial industry around you and pick the one that’s best-suited for your business. Your decisions may be premised on factors like low interest rates, turnaround time, efficiency, product offerings, reputation, fees and other costs, and responsiveness.
Step 3: Gather the important documents
Gathering and preparing the basic but important company documents for your startup business is a huge factor in boosting the odds of the startup getting a business loan. The particular documents required may vary by lender but some documents must be present in every loan application. The all-important documents include:
- Company bio (should include management/owners’ profiles, history, competition analysis, industry analysis, partners, suppliers, and key customers)
- Cash flow projection (12 months)
- Evidence of completed jobs
- Statements of accounts in the previous 12 months
- Evidence of tax returns
- Outstanding invoices
If a lender/financial institution is planning to take a risk on your business, do not make it more difficult for them by appearing disorganized or unprepared.
Step 4: Ensure good creditworthiness
After choosing the best-suited lender/financial institution and gathering all the important documents, you must also ensure that you have a good credit score to seal your startup business loan. You must promptly tidy your books as well.
There is a popular saying that a good credit score is better than no credit score – a good credit score confirms to the credit team that your business has experience in handling loans, when given. If the business has never taken a loan, that’s alright too.
Lenders have special teams that evaluate your business’ credit history to determine whether they are about to enter into a good business with your startup. Things that form your credit history may include your old loans’ amounts, the repayment modes, and on-time repayment patterns.
Step 5: Submit your startup business loan application
Last step, but not the least. You must now be the one to familiarize yourself, as a business owner, with your chosen lender’s loan submission process. Lenders have varying loan submission methods, many have moved from paper-based applications to online-based methods due to the pandemic. If you can, you may ask the lender’s representative which application method would be fastest and most seamless.
If you’re asked to fill an online application, it is important that you upload all the required documents in the correct fields to avoid back-and-forths when the review team picks up the entry.
Getting a startup business loan is not as bad as most people make it seem, if the right choices are made. The steps highlighted above will definitely help a small scale business/startup to increase the odds of getting an approval from their preferred lender.
Tags: How do I get a loan to start a new business, how to get a startup business loan in Nigeria, how to get a startup business loan with no money, government small business loans