A startup business loan is any type of financing available to businesses with little to no history. A variety of business loans and financing methods are available to startups—including SBA microloans, asset-based loans, business credit cards, and more—although it can be difficult for new small businesses to access funding.
There isn’t a single type of financing that qualifies as a “startup business loan.” If you’re looking for small business loans as a startup, many types of financing can accommodate newer businesses.
You might access a startup business loan that functions as traditional debt financing—where you receive capital and pay it back over time with interest. Or you might find that equity financing is better suited for your startup—in this case, you’ll receive funding in exchange for shares or stock in your business.
In any case, although business startup loans can work differently based on the specific product and lender, the most important thing is that the loan works for your business. The right financing product for another startup might not necessarily be what’s right for your startup—so you’ll want to make sure that whatever type of startup business loan you choose is one that can meet your unique funding needs, and of course, is one that you can afford.
Let’s take a look at some of the top options for startup business loans:
With this overview in mind, let’s break down these small business loans for startups in more detail:
If you’re looking for a lump sum startup business loan that can be used for a variety of purposes, an SBA microloan will certainly be worth considering.
Through their Microloan program, the U.S. Small Business Administration loans money to intermediary non-profit lenders and financial institutions, that then issue loans to small businesses. You can access loans up to $50,000 with terms up to six years. SBA microloans generally have interest rates that range from 8% to 13%.
Although these SBA loans are only available in smaller amounts, they offer affordable access to funding that can be hard for startup businesses to find. Microlenders will often work with business owners with average credit, as well as those with limited time in business. Additionally, because SBA microlenders are community organizations, they often focus on minority or women-owned businesses, as well as those operating in disadvantaged areas.
Asset-based financing encompasses any type of financing backed by an asset—whether real estate, invoices, equipment, or another form of collateral.
Since this financing is backed by tangible collateral, lenders are more likely to be flexible with their requirements and offer business loans to startups.
The most common types of asset-based financing are invoice financing and equipment financing. With invoice financing, a financing company will offer you an advance of capital in exchange for your outstanding invoices—typically up to 85% of the invoice value. When your customers pay the invoices, the company will give you the remainder of the funds, minus their fees.
Invoice financing is great for B2B businesses who have capital tied up in outstanding invoices. With the advance from an invoice financing company, you can cover your working capital needs.
With equipment financing, a lender will finance the purchase of your equipment, sometimes up to 100% of the value of the equipment. Typically, equipment financing will be issued similarly to a traditional loan—where you receive a lump sum of capital to purchase the equipment and then you pay back the lender over time, with interest.In this case, equipment financing is a worthwhile option for startups who need to purchase equipment.
If your startup has been in business for less than six months—or only needs a limited amount of financing—you might turn to a business credit card.
A business credit card is a useful financing product for any business owner—however, they can be particularly helpful in place of a business startup loan for a few reasons. First, it’s quick and easy to apply. Second, they give you the freedom to borrow as much or as little as you need each month. And finally, they don’t require collateral to secure the credit line.
Of course, you’ll want to make sure that you pay your balance off each month to avoid high interest rates on the balances you carry over.
If you’re looking for a business credit card to cover larger startup expenses, you’ll want to start with those that offer 0% introductory APR periods.These 0% intro APR business credit cards will allow you to carry a balance for a limited time, interest-free—making this card very similar to using a free loan. After the intro period expires, you’ll need to pay off your balance in full to avoid facing interest at the variable APR that sets in.
Personal loans for business can be an option for very new businesses.
In essence, a personal loan for business is exactly what its name implies—it’s a loan you take out as an individual, based on your personal finances, but used for business purposes. One of the benefits of this type of startup business loan is that it can be less expensive than a business loan. Additionally, it can be much easier to qualify if you have strong personal finances, but limited business history.
However, it’s extremely risky to take on a personal loan for business—if your business fails and you can’t pay back the loan, your personal finances and credit history are on the line. Moreover, mixing your personal and business finances can put you at risk for organizational, bookkeeping, and even legal issues.
This being said, if you’re looking for a small amount of capital when you first start out, a personal loan for business can be worth considering if you don’t have any alternatives—as long as you understand the risks and manage your finances wisely.
Small business grants aren’t a traditional replacement for startup business loans. However, if you think you can qualify for a grant, you’ll find one of the most affordable types of startup financing out there because grants don’t need to be repaid.
There are a variety of types of grants you can apply for, including those from the federal government, state and local governments, as well as those from corporate organizations. In particular, the Small Business Innovation Research Program and Small Business Technology Transfer Program are great options for small businesses involved in science, technology, and innovation.
In addition, you’ll find that there are a number of grant options reserved for certain kinds of businesses, like mission-oriented businesses, minority-owned businesses, businesses operating in specific communities, women-owned businesses, veteran-owned businesses, and immigrant-owned businesses.
With business grants, it’s important to remember that applications are very competitive. Therefore, you may spend a significant time gathering and preparing your application materials with no return.
Similar to business grants, if more traditional small business startup loans aren’t available to you, another option is to turn to friends and family to raise initial funds. Or, if you have received a startup business loan, you might work with friends and family to supplement this capital.
Although many successful businesses have been built off the backs of generous friends and family members, this type of business funding can be risky for startup owners.When you fund your startup with money from friends and family, both your business’s financials and your personal relationships are on the line.
For that reason, you’ll want to be sure to work with people you trust. Before you get into a funding agreement, you should make sure that the contributors understand your business plan, what you’ll be doing with the money, and what their role will be in the funding relationship. Handling the situation as professionally as possible will help prevent issues that could arise in the future.
Finally, another creative form of funding for startups is crowdfunding. Like grants or investments from friends and family, crowdfunding can be a worthwhile alternative when you can’t yet qualify for a more traditional business startup loan—or as a supplement to initial capital.
In essence, crowdfunding lets you raise capital from online campaigns—typically through a dedicated crowdfunding platform, like Indiegogo or Kickstarter.
With crowdfunding, you set a specific amount of capital as a “goal” you’re trying to hit. Users on the platform can donate money to your campaign if they feel inspired to do so. Unlike equity or debt financing, you don’t have to give up ownership in your business or pay interest to these funders. Instead, you’ll usually repay their generosity with a perk, a free gift, or a simple “thank you” note.
Crowdfunding is a good way to raise a small amount of capital from a large amount of people. It tends to work best for product-based businesses or those with creative, innovative ideas.
Overall, because there is no single option for small business startup loans, it’s difficult to detail specifically how to get a loan to start a business.
Ultimately, the business loan requirements will depend largely on the particular product you’re interested in, as well as the lender, financial institution, or investor you’re working with.
However, there are some general tips you can keep in mind when trying to qualify for business startup loans.
First and foremost, if you’re looking for more traditional types of financing, you’ll want to make sure the lender works with younger businesses. Generally, it’s harder for businesses with less than six months in operation to find traditional loans. In this case, you may turn to one of the alternative options we’ve discussed—like a business credit card or grant.
Or, if you can offer collateral to secure your financing, like with invoice or equipment financing, you might find that a lender is more likely to work with your business, regardless of how long you’ve been operating.
On the other hand, if your business is older than six months, you should be able to find a lender, like a microlender, that will work with your startup.
In addition, another of the most important things to consider when trying to qualify for a startup business loan is your personal credit score.
Almost any lender will look at your personal credit score when you apply for financing—the higher your score, the better your chances are for qualifying for a loan—and one with the best terms and rates.
Of course, this isn’t to say that there aren’t business loans for bad credit—however, as a startup, it may be even more difficult to access those types of products.
Therefore, if you need to work on improving your credit, you may again decide to turn to more creative funding methods to finance your business in the meantime.
The application process you’ll need to complete will vary based on the type of startup loan you choose, as well as the lender or investor you’re working with.
If you’re applying for a more traditional type of financing, like a microloan or line of credit, you can expect to fill out an application with your basic personal and business information, as well as provide certain documentation:
If you’re applying for asset-based debt financing, you’ll need to provide information and documentation regarding the outstanding invoices you have or equipment you’re looking to purchase.
More creative financing methods will have different application processes: