Securing funding for a startup can be challenging. According to recent statistics, around 20% of startups launched in 2013 didn’t survive their first year, and less than 35% were still operating by 2023. These high failure rates can make lenders hesitant to approve loans, especially for new businesses. In fact, the 2024 Small Business Credit Survey revealed that only 48% of startups under five years old received the full loan amount they applied for, leaving 52% with partial or no funding.

Despite the risks, some lenders are willing to bet on startups. For instance, the Small Business Administration (SBA) approved over $3 billion in 7(a) loans for startups in fiscal year 2025 alone. Understanding the process, eligibility requirements, and documentation needed to secure a loan can significantly increase your chances of success. Here’s a step-by-step guide to help you navigate the process.

1. Calculate how much funding you need

One of the most common mistakes business owners make is requesting more funding than necessary. Borrowing an excessive amount can lead to high interest costs, unmanageable repayments, or even default. On the flip side, overestimating your needs may result in a rejected application.

To avoid these pitfalls, create a detailed financial forecast that includes projected income and expenses. This will help you determine how much capital you need to sustain operations until your business generates positive cash flow. These projections are a key component of your business plan and provide lenders with a clear picture of your financial strategy. Additionally, ensure you have all the necessary documents, such as a BPI bank certificate for visa applications if your funding is tied to international operations or expansions.

2. Choose the right type of loan

Not all business loans are created equal — different loans serve different purposes. For instance:

1. Lines of credit: Flexible funding that works like a business credit card.
2. Equipment financing: A lump sum loan where the equipment you purchase acts as collateral.

Each loan type comes with its own pros and cons, so carefully assess your business needs before deciding which option is best.

3. Check your eligibility

Eligibility criteria vary depending on the lender and loan type, but most lenders evaluate similar factors:

1. Annual revenue: Many lenders require yearly revenue of $100,000 to $250,000, although some online lenders have lower thresholds, such as $50,000.
2. Personal and business credit scores: Startups often rely on the owner’s credit history. A score of 600 to 670 is typically required, though some lenders accept lower scores in exchange for higher interest rates.
3. Debt obligations: Lenders assess your existing debt and the debt service coverage ratio (net profit divided by annual debt) to ensure you can handle additional payments.
4. Time in business: Traditional lenders may require two or more years in operation, while online lenders often support newer businesses, sometimes with as little as three months of activity.
5. Personal guarantee: Many loans require a personal guarantee, meaning you’re personally responsible for repaying the loan if the business defaults.

Understanding these requirements can help you target lenders more likely to approve your application.

4. Compare lenders

When searching for a loan, it’s vital to compare offers from various lenders, including banks, credit unions, and online providers. Online lenders typically offer quicker approval and less stringent requirements, but traditional lenders may provide lower interest rates and fees.

Key factors to evaluate include:

1. Interest rates and terms: Ensure the loan terms align with your budget and repayment capabilities.
2. Fees: Look for hidden costs, such as application, origination, or guarantee fees. For example, SBA 7(a) loans over $1 million come with a 0.25% guarantee fee.
3. Funding speed: If you need funds quickly, prioritize lenders known for fast disbursement.

Many lenders offer prequalification, allowing you to see potential loan terms without affecting your credit score. Use this to compare options and identify the best fit for your business.

5. Gather required documentation

When you’re ready to apply, having all the necessary documents prepared can streamline the process. Commonly required documents include:

1. Business plan with financial projections and funding allocation.
2. Recent personal and business tax returns (last three years).
3. Profit and loss statements and cash flow reports.
4. Balance sheet.
5. Business loan proposal, detailing requested loan amount and repayment strategy.
6. Personal and business bank statements.
7. Employer identification number (EIN) and business license.
8. Schedule of existing business debts.
9. Any outstanding invoices (for invoice factoring).
10. Personal identification (e.g., Social Security number).

Keep in mind that documentation requirements vary by lender. Reach out in advance to confirm what is needed to avoid delays or rejected applications.