That’s good news if your business can qualify for a startup loan. They are excellent ways to increase cash flow and cover the big expenses that might arise as you expand. But before you take on any debt — or even submit an application — know how you will manage your startup business loan and what happens if you cannot repay.
A startup business loan can help new companies develop and grow, covering everything from bringing in new headcounts to buying key equipment
If you default on the loan, you could risk not only your company but also your personal assets
Before you take out this type of financing, make sure you have a plan around how to manage a startup business loan
Avoiding additional debt and staying in communication with your lender can go a long way toward avoiding default
What happens if you don’t repay a startup loan?
The consequences of default — being unable to pay your loan — can affect both your business and personal finances. Avoiding default is always important but especially critical in the startup phase.
Since startup loans typically require a personal guarantee, your personal credit score will be impacted along with your business credit. The lender could sue you for your personal assets to cover their losses. And the lender will seize any collateral you put up. So before you take out any financing for your company, make sure you know how to manage a startup business loan.
According to data from the 2022 Small Business Credit Survey, the top three reasons startup business owners apply for financing are:
5 tips for managing a startup business loan
A startup business loan is just like any form of financing. As you figure out how to manage a startup business loan, focus on on-time payments to make paying down your debt as quick and easy as possible.
1. Prioritize loan payments within your budget
Clearing debt should be the priority as you move forward. Shape your budget around the monthly payment for your startup business loan. Avoid falling behind, even if it means cutting expenses elsewhere. Ultimately, your loan will build your business credit score and make it easier to borrow more in the future.
2. Sign up for automatic payments
If you’re looking for ways to manage a startup business loan as easily as possible, get on autopay. If you have regular cash flow, automatic payments are one of the best ways to keep your loan on top. Since these payments get deducted directly from your bank account, you have one less bill to pay manually each month.
You must ensure the payment goes through — but it should still save time overall. And provided you always have enough in your account to cover your loan payments, your business will avoid late payments and fees.
3. Avoid taking on additional debts
Startup loans can be a valuable cash infusion for new businesses. But you should never borrow more than your business can reasonably afford to repay. Even small additional debts can be a risk that strains a startup’s budget, so only take on one debt at a time. A low debt-service coverage ratio (DSCR) as a business will put you in a better position if you need to borrow for expansion or unforeseen costs in the future.
4. Put extra cash toward payments
While funding a new project or hiring a new employee may be necessary for growth, excess revenue may be better spent by paying back your loan. If you see a seasonal increase in revenue, even one or two extra payments can make a big difference in the amount your business pays in interest over the life of the startup business loan.
Use a business loan calculator to determine if this route makes sense. Also, check your loan agreement for prepayment penalties that could make this route cost more than it saves.
5. Communicate with your lender
Stay in contact with your lender, especially if you borrow through your bank. Direct communication is the key to working through problems. A lender who knows your business and its operations may be able to restructure your loan, defer payments or help you develop a debt consolidation strategy if you have issues making payments in the future.
The 2022 Small Business Credit Survey showed that startups applied for business loans and lines of credit more than SBA loans, personal loans or equipment loans. If you’re still looking, the following guides can help you choose the right type of startup loan for your needs:
The bottom line
Before taking on any debt, plan how you will repay it and handle contingencies if you run into problems. And if you receive a high interest rate on your startup business loan, you may want to consider refinancing as your credit improves and your business expands to lower your monthly costs.
Frequently asked questions
Is it hard to get a startup business loan?
Yes. Most traditional lending institutions want to see that you’ve been in business with consistent revenue for at least two years. But some newer online lenders will offer a startup business loan to a company that’s only been around for six months. Having a solid business plan and a good personal credit score can help you get the loan you need.
Can I get a startup loan if I have bad credit?
This will make it particularly tricky, but it is possible. Some online lenders will work with borrowers with a credit score as low as 500, but these loans generally come with high interest rates.
You can also explore microloans, including those backed by the Small Business Administration (SBA). And if you’re part of a minority group or an otherwise underserved community, minority depository institutions (MDIs) and community development financial institutions (CDFis) might be able to help you.
What credit score is needed to get a startup business loan?
Generally, lending institutions want to see a credit score of at least 670. Even better credit will help you get access to loans with lower interest rates, longer repayment terms and fewer fees. But some lenders will work with borrowers with scores in the 500s, and 580 and above is generally preferred.