Small Business Startup Loans: Your 8 Best Options
Getting a small business loan can be tough. As a business owner, you have to prove to a lender that you’re worth taking an investment risk. You have to demonstrate that both you and your business are creditworthy and provide evidence that your business is bringing in enough revenue to cover the cost of the loan. For an established business, the process is time-consuming but not too difficult. For startups, however, this can be more than a little tricky.
Unless you’re independently wealthy, you need capital to get your startup business off the ground. Chances are, though, you keep hitting brick wall after brick wall when it comes to financing. 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. In this post, we’ll review eight of the best options, including the benefits, drawbacks, and what to know before you apply.
|Loan Type||What Are They?|
|Microloans||Installment loans of $50,000 or less.|
|Personal Loans||Loans in which the borrower's eligibility is based on their personal profile, not the business profile.|
|Equipment Loans||Loans used to purchase equipment.|
|Business Credit Cards||Credit lines for everyday business expenses.|
|SBA Loans||Low-cost loans offered by the Small Business Administration and its partners.|
|Crowdfunding||Financing in which the funds are sourced from a pool of investors or backers.|
|Invoice Financing||Financing in which the business's unpaid invoices are leveraged to obtain working capital.|
|Friends & Family||Financing sourced from the borrowers friends and family.|
Table of Contents
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, equipment, or 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 6 years are available through non-profit intermediary lenders. The average microloan given by SBA intermediaries is $13,000.
|SBA 504 Loans|
$500 - $50,000
Up to 6 years
6.5% - 13%
Possible fees from the loan issuer
Guarantee required from anybody who owns at least 20% of the business
Collateral normally required, but depends on the lender
Other non-profit organizations also offer microloans. Repayment terms and maximum borrowing amounts vary by lender.
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 businesses owners, including training, workshops, and mentorships.
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.
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 a more affordable loan. Of course, these low-cost loans are reserved for the most qualified borrowers with credit scores at least in the low 700s.
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 a personal loan.
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 up front.
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.
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.
Ready to apply for equipment financing? We recommend the following lenders:
|Lender||Borrowing Amount||Term||Interest/Factor Rate||Additional Fees||Next Steps|
|$2K-$5M||Varies||As low as 2%||Varies||Visit Site|
|Up to $10 million||Up to 10 years||Starting at 3.5%||Varies||Visit Site|
|$5K-$500K||24-72 months||Starts at 5%||Yes||Compare|
|Up to $250K||1-72 months||Starts at 5.49%||Varies||Compare|
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 for other business expenses.
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.
Chase Ink Business Preferred
18.24% - 23.24%, Variable
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 programs to help startups get the funding they need.
Small business loans that can be used for many many business purchases, such as working capital, business expansion, and equipment, inventory, and real estate purchasing.
Small loans, with a maximum of $50,000, which can be used for working capital, inventory, equipment, or other business projects.
Large loans used to acquire fixed assets such as real estate or equipment. 504 Loans are offered in partnership with Community Development Companies (CDCs) and banks.
Loans used to rebuild or maintain business following a disaster.
The SBA 7(a) 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.
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.
|Borrower requirements for SBA 7(a) loan:
• In business at least 2 years
• Owner’s personal credit score is 650 or above
• Business credit score is 150 or above
|Visit the SmartBiz website
Read our full review
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.
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.
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.
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.
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.
|Invoice Financing||Invoice Factoring|
Uses invoices as collateral for a line of credit
Sell invoices for immediate cash
You are granted a credit facility based on the value of your unpaid invoices, and can draw from your available funds at any time
Factor gives you an advance when the invoice is sent and sends you the rest once the customer pays (minus a factoring fee)
You are responsible for collecting invoice payments
Factor is responsible for collecting invoice payments
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.
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 are 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.
Are You Prepared For A Startup Loan? What You Need To Do Before Applying
Once you’ve selected the type of loan you’d like to receive, you may be tempted to visit a lender or jump online to begin filling out your application. However, before you apply, there are a few steps you should take to ensure you’re ready to receive your funds.
Register Your Business
Before getting started, you’ll need to register your business. How you do this depends on your business structure. For most startups, naming your business, registering in your state, and getting a federal tax ID are the basic steps you need to take.
You’ll also need to find a registered agent in your state, file all state documents, and pay any applicable fees.
Get A Business Bank Account
Before applying for a loan, you’ll need to open a business bank account. A business bank account will be where any funds are direct deposited. A business bank account also makes it easy for bookkeeping purposes by keeping your personal expenses separate from business expenses.
Opening a business bank account will also help you establish a relationship with a bank or credit union. As your business expands, you can open additional accounts, such as a business credit card or loan, with your financial institution.
Check Your Credit Score
Credit score plays a huge role in most loans, so it’s always important to know your score before filling out an application. To see where your credit stands, go online to pull your free credit report and score.
To qualify for the best rates and terms, your score should be in the 700s. Scores in the high 600s still qualify for SBA loans and other affordable options. Scores that are in the low 600s and below will have more limited options with higher interest rates and terms that are not so favorable.
While you can still get a loan with a low credit score, it’s wise to boost your credit before applying to get a more affordable loan. You can do this by making your payments on time every month, avoiding hard inquiries, and paying down your debt to lower credit utilization. Find out more about how you can raise your credit score.
Make A Business Plan
One of the main challenges a startup will face is proving to the lender that their business will be successful. Since this won’t be documented by historical success, a startup will have to prove themselves in a different way: with a solid business plan.
To create a business plan, remember to have a few key elements including:
- Executive Summary: An introduction to your business that summarizes your plan.
- Business Outline: How does your business stand apart from the competition? What problem does your business solve?
- Marketing Plan: How will you reach your target market and bring in customers?
- Operations Details: An overview of your operations, including your location, available space, and equipment.
- Financial Projections: How much profit you expect to make over a set period of time.
Prepare Financial Documents
When applying for a business loan, your lender will require personal and business documentation. Although requirements vary based on the type of loan and the lender’s requirements, you should be prepared with the following documents:
- Personal tax returns
- Personal financial statements for all owners
- Balance sheet
- Income statement
- Business financial statements
- Profit and loss statement
- Business licenses and registrations
Decide How Much You Need
You should know how much money you want to borrow before applying for a loan. To do this, you’ll need to perform a few calculations. For example, if you need money to purchase inventory, get estimates from suppliers. If you’re purchasing new equipment, get a few quotes for the equipment you need.
When applying for a loan, you’ll need to tell the lender the exact amount you’re seeking, as well as an explanation of how the funds will be used. It’s also important to remember that just because you need it doesn’t mean you can afford it. Learn more about calculating the affordability of your loan.
Startup Business Loan FAQs
Do startup business loans require a down payment?
A down payment may be required based on the type of loan and the amount selected. A down payment shows a lender that you’re serious about your business and you have something to lose if the business is not successful.
Some SBA loans and personal loans require down payments. Other types of funding, such as invoice financing, do not have down payment requirements.
Can I get a startup business loan if I have bad credit?
There are small business loans available for borrowers with bad credit. However, you should be aware that the interest rates for these loans are often much higher and your options are more limited.
If you have bad credit, loans such as equipment financing, business credit cards, lines of credit, and invoice financing are available. Term loans may also be available through alternative lenders.
To open up more options and get better rates, it’s best to work on boosting your credit before applying. However, if your financial needs are urgent, make sure to shop around for the most affordable option. Taking out a high-cost loan that doesn’t offer a good return on investment can throw you further into debt and drag your credit score down with it.
Can I get a startup business loan with no credit check?
Almost every lender will at least perform a soft pull of your credit to get an idea of where you stand in terms of credit. However, depending on the type of loan you select and the lender you choose to work with, other factors — such as the performance of your business — may play a larger role in approval than your credit score.
Conventional lenders like banks will always require a credit check, but there are a few alternative options available that do not have this requirement.
Do banks offer business loans to startups?
Banks have very strict lending requirements for business loans. Startups are seen as risky investments from a lender’s standpoint. While it isn’t completely impossible to receive a loan from a bank, it will be extremely difficult.
To qualify, a borrower must have a very high personal credit score, extensive industry experience, and very detailed business plans. Financial projections will also be required, in addition to other documentation proving that the business has a high chance for success — and paying back the loan.
Because it is so difficult for startups to qualify for bank loans, many startup owners turn to SBA programs for their funding needs. A government guarantee on loans takes some of the risk off of lenders while providing startup and small business owners with rates and terms that are competitive with bank loans.
What is the quickest way to get a loan for my startup?
There are several ways to get quick funding for your startup. Financing options like lines of credit, business credit cards, and short-term loans from alternative lenders can be approved in just minutes, giving you access to funding almost immediately.
However, a speedy loan comes at a price. These loans come with high interest rates, extra fees, and are much more expensive over the long term.
What type of startup business loan has the lowest interest rates?
SBA loans have among the most competitive interest rates among all business loans. If you have a high credit score, personal loans from banks and credit unions also have very low interest rates.
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, what you need to do before applying, and how to present your business, and you’ll soon be on your way to receiving the business loan you need.