The Best 8 Small Business Startup Loans & How To Get A Startup Loan Explained

The best small business loans for startups are out there, but they can be tough to find. Most new small business owners need a business loan to get their new small business started. Chances are, though, you may have been denied loan financing in the past.

You don’t have the required time in business to work with this lender, and you don’t have the documentation required by that one. You need money for your startup, but you can’t seem to find it.

Don’t worry—there are loan options for startup businesses. This post reviews eight of the best options, including the benefits, drawbacks, and what to know before you apply.

What Are The Best Small Business Startup Loans?

The best types of business loans for startups include microloans, personal loans, equipment loans, and SBA loans. Though not technically loans, startups can also use business credit cards, invoice financing, and crowdfunding to finance their startup. You might also consider borrowing from friends and family to kickstart your startup business.

1) Microloans

Microloans are smaller loans that provide up to $50,000 for small businesses and startups. This type of financing is best for companies with smaller capital needs.

Microloans can generally be used for any business purpose, although specific lenders may have their own restrictions in place. Generally, microloans can be used to purchase supplies or inventory, or equipment, or they can be used as working capital.

The Small Business Administration’s Microloans program is a very popular choice for small business owners. This program is open to any startup or business that fits the definition of a small business set by the SBA, which limits the number of employees, annual revenues, and net worth of a business. For-profit businesses and non-profit childcare centers located in the U.S. are eligible to apply. Loans of up to $50,000 with repayment terms of up to six years are available through non-profit intermediary lenders. The average microloan given by SBA intermediaries is $13,000.

Other nonprofit organizations also offer microloans. Repayment terms and maximum borrowing amounts vary by lender.

Benefits Of Microloans For Startups

One of the biggest benefits of microloans is that they typically come with very low-interest rates and are more affordable than other startup loans. Non-profit organizations and SBA intermediary lenders that offer microloans may also provide additional resources for small business owners, including training, workshops, and mentorships.

Disadvantages Of Microloans For Startups

The biggest drawback of microloans is the low maximum borrowing amount, which could be limiting for businesses that have larger expenses, like the need to purchase commercial real estate. Another drawback is the length of time it takes to receive a loan. From application to funding, getting a microloan can take several weeks or longer.

The availability of microloans may also be limited. Many non-profit organizations get their money through government grant programs, limiting the number of new borrowers that are accepted.

2) Personal Loans

When applying for a business loan through a bank or other conventional lender, both personal and business information will be considered, including personal credit score, business credit score, and annual business revenues. For new businesses that don’t meet these qualifications, getting a bank loan is out of the question, right?

Not necessarily. Business owners with high personal credit scores can apply for a personal loan from a bank or credit union. The credit history and income of the applicant — not the business — will be considered when applying for a personal loan.

Benefits Of Personal Loans For Startups

Even businesses that don’t meet the credit and income qualifications of banks and credit unions can get a personal loan to use for business expenses. This can be accomplished through alternative lenders that have fewer requirements for qualifying for a loan.

A personal loan is a good choice for a startup business because the history of the business is not a consideration for approval. For personal loans, the borrower will just need to prove their personal creditworthiness and show that they are financially able to pay back the loan.

Many personal loans can be used for most business purposes, but some may have restrictions on how the proceeds are used based on the lender’s specific policies.

Banks and credit unions offer low-interest rates and long repayment terms, resulting in more affordable loans. Of course, these low-cost loans are reserved for the most qualified borrowers with credit scores at least in the low 700s.

Disadvantages Of Personal Loans For Startups

Applicants with a low personal credit score will face higher interest rates and a higher overall cost of borrowing. In some instances, applicants with credit or income challenges will need to seek out alternative lenders for personal loans.

Maximum loan amounts may be lower for personal loans than business loans. Depending on the amount needed, a business loan with higher limits may be a better choice for business owners with higher capital needs.

Be aware that, at tax time, business owners with a business loan can write off interest payments. With personal loans, business owners are unable to write off these payments, therefore missing out on these tax benefits.

3) Equipment Loans

An equipment loan is a loan that is used to finance long-term equipment, such as machinery, industrial kitchen appliances, or a commercial vehicle. This type of financing allows business owners to purchase expensive equipment through affordable monthly payments instead of paying the full cost upfront.

Benefits Of Equipment Financing For Startups

One of the great things about equipment loans is that many businesses, including startups, can qualify. Revenue, time in business, and credit requirements are not as strict, with most lenders requiring a score in the low 600s to qualify. Approvals can be given within just days of applying, although timelines vary based on the lender.

Disadvantages Of Equipment Financing For Startups

Equipment financing isn’t for everyone, though. This type of loan can only be used for the purchase of equipment. The equipment purchased could also become obsolete and may need to be replaced again before the loan is fully repaid.

4) Business Credit Cards

Business credit cards work just like personal credit cards. The lender provides a set credit limit, and you can use your card up to and including that credit limit to pay merchants, vendors, suppliers, and other business expenses.

Benefits Of Business Credit Cards For Startups

Since there are fewer requirements to qualify for a business credit card than there are for other types of loans, many startups go this route when they need extra capital. Unsecured cards are available to business owners with scores in the low 600s, although higher scores get higher credit limits and lower interest rates. Borrowers with bad credit scores may qualify for a secured card, which requires a deposit or collateral and helps rebuild credit.

One of the perks of business credit cards is that many have rewards programs. When the card is used for qualifying business purchases, points can be racked up to redeem toward airline miles, cash back, and other rewards.

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Disadvantages Of Business Credit Cards

The downside of business credit cards is high-interest rates, which can really add up over time. Keeping a high balance for a long period of time will result in a loan that is more expensive than other options. This is why it’s recommended to pay down debt as quickly as possible to avoid potentially paying thousands of dollars in interest.

5) Small Business Administration (SBA) Loans

The Small Business Administration doesn’t just offer microloans. In fact, the SBA has several loan programs to help startups get the funding they need.

The SBA 7(a) loans program offers up to $5 million for almost any business purpose, from refinancing existing debt to purchasing real estate or acquiring a new business.

The Veteran’s Advantage program offers the same benefits with reduced fees for military veterans, while the Community Advantage program provides funding options for businesses and startups in underserved communities.

The SBA also has the CDC/504 loan that funds 40% of project costs for the purchase or improvement of commercial real estate.

For all programs, applicants must be a small business as defined by the SBA and can apply for these loans through an SBA intermediary lender. Applicants should have a solid credit score in the high 600s and no bankruptcies, foreclosures, or past defaults on government loans.

Benefits Of SBA Loans For Startups

SBA loans are popular with small businesses and startups because of their low-interest rates and long repayment terms of up to 10 or 25 years. SBA loans are some of the most affordable loans available. Because large portions of SBA loans are guaranteed by the government, lenders are more willing to lend to small businesses. Many businesses qualify for SBA loans when banks and other lenders have turned them down.

Disadvantages Of SBA Loans For Startups

However, SBA loans aren’t without their drawbacks. The application and approval process can take weeks (or, in some cases, months), so these loans aren’t ideal for startups that need funding immediately.

The application process is also time-consuming, and qualifying can be difficult. Business owners must have a strong credit history and meet all qualifications of the SBA to apply for these loans.

6) Crowdfunding

Crowdfunding is a relatively new type of business financing, but it’s really growing in popularity, especially among startups.

With this type of loan, you pitch your idea on a crowdfunding platform. Through this platform, you can reach investors and others that believe in your business and are willing to invest their money to help you get your idea off the ground.

Benefits Of Crowdfunding For Startups

Crowdfunding gives you access to thousands of investors. A successful campaign can yield the funds you need in a very short amount of time without the fees and interest that come along with other loan options. In exchange for their investment, most businesses offer rewards and perks like first access to a new product.

One of the benefits of crowdfunding is that anyone can do it, even if you have poor credit or other challenges that make you ineligible for other types of loans.

Disadvantages Of Startup Crowdfunding

Even though anyone can make a campaign, not everyone can be successful. In order to get the money you need through crowdfunding, you have to put in the work, which includes sharing your campaign on social media, websites, and blogs, marketing effectively to potential investors, and offering incentives that make donors want to give.

7) Invoice Financing

If your new business has a shortage of capital due to unpaid invoices, invoice financing may be an option to consider. With invoice financing, you receive a payment for your unpaid invoices to resolve short-term cash flow issues. The very best invoice factoring companies can assist you with your cash flow problems.

Benefits Of Invoice Financing For Startups

There aren’t strict requirements on credit scores, time in business, or annual revenues with invoice financing. The quantity and quality of the invoices are typically the most important factor. In other words, are the invoices enough to cover the lender’s fees, and are the customers likely to pay? If so, you have a good chance of qualifying for invoice financing.

Disadvantages Of Invoice Financing For Startups

While invoice financing is quick and easy, this type of loan doesn’t come without its drawbacks. Fees could be as high as 30% of the invoice total, making this a very expensive form of financing.

This is also a loan that fills a very specific niche: businesses that have cash flow issues because of customers that are slow to pay. If you don’t have unpaid invoices or the quantity or quality is not up to par based on the lender’s standards, another loan option will need to be explored.

8) Friends & Family

To get your startup off the ground, you may turn to an investor you already know: a friend or family member. Just because you know them, though, doesn’t mean that you should just expect them to lend to you. Instead, you should be prepared with a presentation similar to what you would give a bank to let your friend or family member know why they should place their bets on your business.

When working with friends and family, you’ll need to create a payment schedule and sign an agreement. Remember, everything should be in writing. There are even online platforms that help you create and sign agreements and set up a repayment schedule.

You can negotiate a deal with friends and family that works for both of you, which is something you can’t do with other lenders. However, business — especially a deal gone bad — has the potential to destroy relationships, so make sure everything is in writing and treat the business relationship just as you would with a formal lender.

How To Get A Startup Loan

Ready to apply for a startup loan for your business? Before you apply, there are a few steps you should take to ensure you’re ready to receive your funds.

Which Startup Loan Is Right For Your Small Business?

Choosing the best small business startup loans requires a bit of time and patience. Getting a business loan for your startup may take research and a few additional steps, but don’t let a closed door leave you feeling defeated. Understand the types of loans to pursue, pick the ones that make the most sense for your small business, and you’ll soon be on your way to receiving the business loan you need.

FAQs About Small Business Startup Loans