Starting a new business is an exciting time, but getting the funding to get your startup off the ground can be stressful. Learning how to get a loan to start a business can help you understand what commercial lenders are looking for, what you can qualify for and some alternative approaches you can take.
1. Establish your Business Identity
In order to obtain financing for your business, you’ll need to create a separate identity for your business. This process can include several steps.
Create a Business Entity
Sole proprietorships make up the vast majority of businesses in the U.S., but it can be more difficult to get a business loan as a sole proprietor than if you were to create a separate entity.
As you consider how to structure your business, there are several options, the most common of which include a partnership, limited liability partnership (LLP), limited liability company (LLC), S corporation, and C corporation.
Each of these entities has benefits and drawbacks when it comes to taxes, liability, and other features, so it’s important to take your time to research each one to ensure you choose the right one for you. It may also be worth consulting with tax and legal professionals to get some advice for your situation.
Get an Employer Identification Number
An employer identification number (EIN) acts like a Social Security number but for businesses. While it’s not required for every business to have an EIN, having one can help you separate your business and personal finances and give you a better chance of qualifying for a business loan and checking account.
You can get an EIN for free by requesting one on the IRS website . The process is quick and painless.
Get a Separate Phone Number and Address
Depending on the nature of your business, it may also make sense to get a separate phone number and address. If your business is home-based, consider getting a P.O. box or using a mail forwarding service.
These actions aren’t absolutely necessary, but they can show potential lenders that you’re serious about keeping your business and personal life separate.
Separate Your Business and Personal Finances
Another thing you’ll want to do to separate your business is to open a business bank account, and possibly a savings account as well. This will make it easy to manage your accounting and file taxes.
2. Learn How Lenders Assess You
Depending on the type of loan you’re applying for and the lender, you may see different approval criteria. In general, though, here are some of the factors that lenders consider when you apply for a business loan :
- Credit
- Cash flow
- Time in business
- Industry
- Collateral
Make sure your business is lender-ready before you apply for a business loan. Our course will guide you step by step to establish your business, build your business credit, and become an expert on business lending so you can apply with confidence.
Personal and business credit scores
Even though you’re applying for a loan for your business, your personal credit scores may play a big role in your business loan application. There are two reasons for this: your business likely doesn’t have a credit history of its own, and the loan may require a personal guarantee.
Since a startup probably hasn’t had the chance to build its business credit scores , lenders only have your personal credit history to see how risky of a borrower you may be. And many business loans require a online payday loans in IL personal guarantee, which means that you’ll be personally on the hook to pay back the debt if your business can’t.
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