One of the biggest challenges associated with starting a small business is accessing the capital you need to cover your startup costs. Although you may have budgeted carefully and invested some of your personal resources into your new business, most startups will need to find external financing to help cover a range of expenses—from purchasing equipment to renovating storefronts.
This is where startup business loans come in. In this guide, we’ll walk you through some of the best options for startup loans, as well as important tips to keep in mind as you search for the right financing for your new business.
Fast Facts About Small Business Loans for Startups
Before we explore your options, let’s review some fast facts about startup business loans that will help guide you through your search and better inform you as you learn more about these different products:
- There is no single or standard type of startup business loan. As you’ll see below, the term startup business loan can be used to describe a range of different products and sources of financing used by startup companies. In fact, in some cases, “startup business loan” is even used to refer to forms of financing that aren’t actually structured as a loan at all.
- Startup business loans can originate from a variety of sources. These sources can include online, alternative lenders; equity financing; or other, more creative sources. Traditional banks, however, are much less likely to lend to startups.
- If you’re looking for a debt-based startup business loan, your personal credit will be a top qualification used to determine your eligibility. If you have bad credit, receiving a loan isn’t impossible, but will be more difficult (and expensive).
- Not only are startup business loans harder to qualify for, but they’re also often more expensive. Banks and commercial lenders prefer to work with established companies. Even alternative lenders see newer businesses as riskier, which leads to higher interest rates. The better your other qualifications, however, (e.g. credit score, cash flow, etc.) the more flexibility you have in negotiating these rates with the lender.
- It’s very possible that you’ll need to combine multiple startup business loans or multiple forms of funding to completely finance your startup. Startup loans are usually available in smaller amounts with shorter terms. You may have to consider how you can work with a few different funding sources to access the capital you need.
Best Startup Business Loans
Keeping these points in mind, let’s look at some of the top startup business loan options:
Best for traditionally structured loan financing; business owners in underserved communities.
Structured like traditional term loans, microloans are issued by community organizations and nonprofit lenders that are designed to offer financing to startups and underserved business owners, including women, minorities, and veterans.
Compared to other business term loans, these products are available in smaller amounts—usually up to $50,000—but still offer low interest rates. In fact, the SBA offers a microloan program, which is one of the only SBA loan programs that’s accessible to startups.
Business Line of Credit
Best for flexible funding, especially for working capital needs.
Similar to a credit card, a business line of credit gives you access to a set amount of funds from which you can draw from at any time. Unlike a typical loan, you only pay interest on the funds you use—and in most cases, when you repay what you’ve borrowed, your credit line resets to the original amount.
Business lines of credit are available in a variety of types (e.g. short-term, long-term, etc.) from different lenders—but many online lenders offer options for startups with at least six months in business.
Best for covering cash flow gaps due to unpaid invoices.
If your new business is already up and running—and you invoice customers—invoice financing is a way to cover cash flow gaps due to unpaid invoices. With invoice financing, you receive an advance of capital in exchange for a percentage of the value of your outstanding invoice.
When your customer pays the invoice, you receive the remaining percentage, minus the invoice financing company’s fees. Although invoice financing can be on the expensive side, it’s fast to fund and many financing companies will work with businesses with as few as three months in business.
Plus, invoice financing is a worthwhile startup business loan for bad credit. Although financing companies will look at your credit score, they’ll often weigh the payment history of your customers more heavily than your personal credit history.
Best for financing an equipment purchase.
Equipment can be one of the largest costs associated with opening a new business. Luckily, if you need to purchase a specific piece of equipment, equipment financing can be a great option for a startup business loan.
With an equipment loan, the equipment that you’re looking to buy serves as collateral on the loan itself—and therefore, if you default on the loan, the lender can seize the equipment to cover their losses.
For this reason, lenders are much more willing to work with startups. Instead of using a time in business requirement to evaluate risk, the lenders are more concerned about the value of your equipment.
Business Credit Cards
Best for covering day-to-day financing needs.
Although a business credit card may not be what you typically think of as a startup business loan, this is a financing tool that all new businesses should have. In essence, a business credit card works just like a personal credit card, except it’s used exclusively for business purposes.
That said, a business credit card is particularly useful for startups that have been in business for less than six months and may not be able to qualify for other debt-based products. Business credit cards can be used for everyday business purchases—and many of them allow you to earn rewards and build business credit while doing so.
In particular, business credit cards with a 0% intro APR period will allow you to carry a balance interest-free (like an interest-free loan) during the promotional period, which is great if you plan on making large purchases when you first get the card. Of course, you’ll need to pay the balance off before the promotional period expires and a variable APR sets in.
Personal Loans for Business
Best for brand-new startups with strong personal finances.
Taking out a personal loan to use for business purposes can be a risky form of financing, but for certain business owners, it may be a startup business loan option worth considering.
In general, personal loans have lower interest rates, flexible payment schedules, and longer terms compared to many business loans—especially compared to most of the ones available to startups. While usually available in smaller loan amounts, they can be viable options for brand-new business owners who have solid personal finances and a strong relationship with their bank.
Of course, if your business fails, your personal finances are on the line for the loan—so that’s always something to keep in mind.
Best for testing a business idea or raising smaller amounts of capital.
Unlike some of the startup business loans we’ve listed so far, crowdfunding is a much more creative form of financing. With crowdfunding, you use a platform like Kickstarter or IndieGoGo to ask for a large number of individuals to help support your business through small investments.
Typically, you set a goal and then market your business with social media, promotions, and other campaigns to attract individuals to contribute. In some cases, you might offer a discount, gift, or early product access in exchange for contributions.
Crowdfunding requires a significant amount of time and effort and usually only raises small amounts of capital. However, it’s a great way to test your business idea with a broad audience, especially if it’s product-based, particularly creative, or has some kind of incentive behind it.
Friends and family
Best for business owners with a network willing to invest.
If you have friends or family in your network that are willing and able to invest in your new business, then you might have access to one of the fastest and easiest startup business loans.
As you might expect, however, borrowing money from friends and family can be complicated, so if you do opt for this route, you’ll want to ensure that you set clear and agreed-upon terms from the beginning and draw up a loan agreement just like you would with a bank or other lender.
Best for startups in tech, science, research, or other specific industries.
When it comes to grants, these aren’t really startup business loans at all—instead, they’re awards of money for your business that you don’t have to repay. That said, grants are available from a variety of sources including the federal government, state and local governments, private companies, nonprofit organizations, and more.
Some of the most well-known grant programs are the Small Business Innovation Research and Technology Transfer programs offered by the federal government. In general, grants are an excellent option for businesses in the tech and science industries.
Keep in mind, though, grants are extremely competitive and require thorough qualification processes to apply.
Best for businesses just getting started.
Finally, if you’re just launching your business, you may find turning to your personal savings is your only solution for a startup business loan. Although this may not be the most desirable option, if you’re confident in your business idea, it might give you the boost you need to get off the ground.
Of course, using your personal savings has a variety of risks and you’ll want to consider other small business loan options for your startup as soon as you can. But, if you need some extra funds here and there and have the means to support your business, your personal savings may be able to help in this regard.
How to Get a Startup Business Loan
Getting a startup business loan will largely depend on the type of loan that’s right for your business. After all, if you’re applying for an SBA microloan, the process will differ from launching a crowdfunding campaign. Nevertheless, there are a few steps you’ll want to take regardless of the type of startup business loan you plan on pursuing:
1. Evaluate your business’s qualifications.
First and foremost, you’ll want to look at your personal credit score—as this will be a significant requirement when you’re applying for financing as a new business. On the other hand, if you’re looking for a startup business loan for bad credit, you’ll want to place a greater focus on qualifications like your business’s cash flow and revenue.
Your business plan will also be important if you haven’t actually started your business yet—in this case, you should be able to show financial projections, sales models, and thoroughly explain how your business will make money.
2. Gather the documentation and information you’ll need to apply.
Whether you’re submitting a traditional loan application or pitching your business idea to a family member, preparation is key.
If you plan on applying for a debt-based startup business loan (i.e. microloan, line of credit, equipment financing, etc.), you can expect to provide information and documents such as:
- Business licenses and registrations
- Business plan
- Personal and business tax returns
- Personal and business credit reports
- Financial statements
- Personal and business bank statements
Of course, the exact documents you’ll need to provide will vary based on the lender and the product.
3. Consider the financing you can afford.
Although this may be most applicable to debt-based forms of startup business loans, it’s a particularly important step to keep in mind. You never want to take on more debt than you can afford, especially if you’ve signed a personal guarantee, taken out a personal loan for business, or even borrowed money from friends or family.
The best startup business loan is usually the most affordable one. And if you find you can’t afford to take on debt financing right now, consider alternative forms of funding like crowdfunding or a simple business credit card.
If you’re having trouble figuring out how much financing you can afford, use an online loan calculator, talk to a business accountant, or consult with a loan specialist for advice.
As you begin looking for the right small business loan (or another form of financing) for your startup, we hope this guide has given you the necessary information to propel your search forward.
Although established businesses often have an advantage when it comes to accessing financing, there are now more options than ever for startup business loans—and you have an opportunity to get creative, combine multiple solutions, and use the variety of available resources to fund your new business.
Randa Kriss is the senior staff writer at JustBusiness and Fundera.
Randa specializes in reviewing small business products, software, and services. She has written hundreds of reviews across a wide swath of business topics including ecommerce, merchant services, accounting, credit cards, bank accounts, lenders, and payroll and human resources solutions. She has also written for PeopleKeep, Bench, RocketLawyer, Zoho, and KNF&T Staffing, among others.