Looking for funding to help you grow your new business? Maybe you need to invest in expensive equipment or need access to working capital to expand your current services. While an injection of cash can be helpful for accelerating growth, there are several important things to consider before taking out a startup business loan.
In this article:
- Taking out a startup business loan can impact cash flow and taxes, so it’s important to discuss options with your CPA first.
- There are several startup business loan types, including term loans, lines of credits, and SBA loans.
- Loan eligibility is dependent on a number of factors, including personal and business credit scores, time in business, and annual revenue.
- Many startup business loans require a personal guarantee.
Talk to your CPA first
Before applying for a startup business loan, the smartest move is to talk first with your business CPA. (No, we’re not just saying that because we are CPAs!) As with any debt you take on, there are risks involved, and it’s important to understand how a startup business loan will affect cash flow and taxes.
For example, loan payments cannot be counted as a tax-deductible business expense (though in many cases the interest payments can be deducted).
Let’s say you made $25,000 in loan payments in 2024 for a loan you took out in 2023. Of those payments, $5,000 went toward interest, and the other $20,000 went to the loan itself. That $20,000 in principal payments cannot be taken as a business deduction, impacting your total taxable revenue for the year — and potentially leading to a higher tax bill.
That’s why it’s wise to consult your tax advisor before taking on a startup business loan.
Consider your options for startup business loans
Many CPAs also offer business advisory services. If your CPA offers this, they can help you determine the best startup business loan options. Below are three common options.
Term Loans
A term loan is the most common type of business loan. You receive the funds in one lump sum, then pay the loan back in fixed installments until the balance is paid. Interest rates can either be fixed or variable.
Line of Credit
A business line of credit is much like a credit card. You are approved up to a certain amount, then only draw upon funds as needed. You also only pay interest on the funds you draw.
SBA Loans
SBA loans are backed by the United States Small Business Administration. However, SBA loans are issued through banks, credit unions, or other financial institutions. Because a portion of the loan amount is backed by the SBA, lenders can be more willing to offer these types of loans to new businesses that are considered riskier.
Are you eligible?
Lenders will often look at these factors to determine startup business loan eligibility:
- Corporation or LLC status
- Personal credit score
- Business credit score (if available)
- Time in business
- Annual revenue
Corporate or LLC status
Without establishing your startup as a corporation, partnership, or LLC, any loan you take out will be considered a personal loan. Personal loans tend to come with higher interest rates than business loans.
Personal Credit Score
Above, we pointed out that your business should be established as a corporation, partnership, or LLC to be considered for a business loan. However, your personal credit history still comes into play when applying for a startup business loan.
For most startups, lenders will look primarily to your personal credit score to help determine loan eligibility, funding amounts, and interest rates. This is because most new businesses do not yet have many business assets or a well-established business credit score that lenders can review to determine lending risk. So the better your own personal credit score, the better your startup loan options.
Business Credit Score
If you’ve already started building a credit score for your business (with, for example, a business credit card), the lender will take this into consideration. However, for most new startups, your personal credit score will carry greater weight than your business credit score.
Time in Business
Time in business requirements vary by lender and are usually from six months up to two years. You’ll want to research both traditional and online lenders to find the right fit for you.
Annual Revenue
Most lenders want to see a history of revenue to feel confident you won’t default on the loan. Some lenders offer a lower threshold for annual revenue, while more traditional bank lenders will typically want to see revenue ranges that are higher.
Many startup loans require a personal guarantee
Most lenders require a personal guarantee for startup business loans — as in, if your business fails, you will still be personally liable for making loan payments. That also means your personal assets can be up for grabs if you default on the loan.
It’s very important to take this into consideration when forecasting your ability to repay any startup business loans you take on.
Get guidance for your business startup
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