How to Get Approved for a Commercial Loan to Finance Your Startup

How to Get Approved for a Commercial Loan to Finance Your Startup

Part two of our "Guide to Financing Your Startup"

Be Prepared Before Seeking a Commercial Bank Loan

If you are looking for business loans to help your startup grow, commercial banks are the most likely first choice. Unfortunately for startups, banks prefer to lower their risks by favoring an established business with a solid credit rating. This makes the chances of getting a bank loan tougher for a startup, but not totally impossible.


The likelihood of getting your loan approved will increase if you complete the groundwork beforehand. Banks will need to know as much as possible about you and your business, and it takes a great deal of work to put all the answers together.

To increase your chances of getting that bank loan approved, consider the following preparation checklist.

The key questions the banker will be asking are:

  • Will your business be able to repay the loan?
  • How do you expect to pay back the loan if your business fails? (Is collateral sufficient to repay the loan?)
  • Are you managing your bill collection process properly?
  • How do you manage your inventory?
  • Is your business able to pay its bills?
  • Are the company’s managers committed to succeeding?
  • Does the business have a profitable operating track record?
  • Does the business match its sources and uses of funds?
  • Is the sales outlook promising?
  • Are business expenses under control?
  • Are profits increasing as a percentage of sales?
  • Is there any discretionary cash flow?
  • What is the potential of your market?
  • How do you expect to differentiate your business from your competition?

Determine Your Ability/Capacity to Repay Your Loan

Banks want to feel confident in a startup’s ability to repay in order to justify their business loan package. Cash flow from the business and a secondary source, such as collateral, are two primary sources of repayment.

Lenders will review the business's past financial statements by analyzing the company’s cash flow. Generally, loans will be approved once the business establishes that it can consistently make a profit and that profit can cover the payment of additional debt.

However, if the startup is barely breaking even, but has a new opportunity to grow, banks will require a thorough loan package that details the ability to repay.

Obtain Your Credit History Report

To determine whether or not you are a good credit risk, banks will obtain a personal credit report to determine your credit history. A credit report contains your history of loan payments, which the bank uses to help evaluate your business loan application. Before you go to the bank, or even start the process of preparing a loan request, make sure you order your credit report to determine if your credit rating is where it needs to be.

You can obtain a free report by contacting one of the leading credit bureaus, including Experian, TransUnion and Equifax. It is important that you review your current personal credit report to identify errors or out of date information. The law allows you to order one free copy of your report from each of the nationwide consumer reporting companies every 12 months.

Once you obtain your credit report, how do you know what it says? The following should help in interpreting and checking your personal credit report. 

1. The personal information section of your credit report lists some basic
information about you. Read all the entries that list your name, social security number and address, date of birth and other data that verifies your identity. Make sure everything is correct.

2. Carefully review the credit history section—credit cards, mortgages, student loans, etc. Each account will be listed individually with detailed information about credit accounts in your name and how you paid that credit. If you find any information that is incorrect, you'll need to submit a dispute letter to the credit-reporting agency.

Entries in this section will include: when you opened the account, the kind of credit (installment, such as a car loan, or revolving, such as a credit card), the amount of loan and the balance, and how well you’ve paid the account. Any credit problems or difficulties in paying will be highlighted and listed towards the top of the list. These credit problems may affect your ability to obtain a bank loan.

3. Even if your credit history indicates you’ve been late on an occasional payment, this will not adversely affect your loan application. However, if you show a frequent pattern of late payments, any outstanding credit balances that were never paid off, a lawsuit or unpaid judgment against you, or declared bankruptcy in the last 7 years, the chances of obtaining a loan are very unlikely.

You Need Collateral

Commercial banks will be looking for collateral as a security or guarantee for a business loan other than income from the business being financed. Collateral are those personal and business assets that can be sold to pay back the loan if the borrower defaults.

Lenders may require a personal guarantee, such as the equity in your home, property, securities, or the cash value of an insurance policy; or business assets, such as computers, equipment, and amounts owed to you by customers.

If you don’t have business assets to put up as collateral, you may be asked by lenders to sign a personal loan guarantee. This document lists the assets you’re pledging and outlines the default terms and consequences. Default triggers and penalties often vary from lender to lender.

The following table gives a general approximation on how different forms of collateral are valued by a typical bank and the SBA:

HOUSE: Market Value x .75 – Mortgage balance Market Value x .80 – Mortgage balance
CAR: nothing nothing
TRUCK & HEAVY EQUIPMENT: Depreciated Value x .50 same
OFFICE EQUIPMENT: nothing nothing
FURNITURE & FIXTURES: Depreciated Value x .50 same
INVENTORY (Perishables): nothing nothing
JEWELLERY nothing nothing
OTHER 10%-50% 10%-50%
RECEIVABLES Under 90 days x .75 Under 90 days x .50
STOCKS & BONDS 50%-90% 50%-90%
MUTUAL FUNDS nothing nothing
IRA nothing nothing
CD 100% 100%


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