Business Finance Loans for Startups: Funding Options Before You Hit Year Two

If you launch a startup, you're in go-mode from day one. You're figuring things out as you go and navigating hurdles along the way. The goal is profitability and to scale the business. But that can be difficult without outside financing. The problem is that many traditional banks require a minimum of two years in business. If you need a business finance loan, you have alternatives to look into, before you hit year two. In this article, we cover why startup founders face financing hurdles and what financing options are available.

Why Startups Under Two Years Face Challenges Securing Traditional Business Financing

Founders who want to scale their business and grow often need financing to get to the next level. But early-stage enterprises under two years typically face many challenges in securing traditional business financing.

Many banks have strict underwriting criteria. These lenders want borrowers with a proven track record, typically with a minimum of two years of experience or more. The annual revenue requirements may also be out of reach when you have an early-stage startup. You may not have the established credit history or documentation to qualify for a traditional business finance loan. Ultimately, these factors combined can lead to a loan denial.

The size of the bank can also impact the likelihood of lending to a startup. According to the 2024 FDIC Small Business Lending Survey, 66% of small banks typically lend to startups, whereas only 54% of large banks do. In other words, larger banks and financial institutions may have more barriers to entry, making it challenging for early-stage startups to get a business finance loan.

Options for Business Finance Loans for Early-Stage Startups

Startups under two years can face hurdles when trying to access traditional business finance loans from a bank. But other options exist that can help you with your financing needs.

Online Lenders

Online lenders may have more flexible underwriting criteria than traditional banks or credit unions. They may also use alternative data to determine your approval and not exclusively rely on your credit score or revenue.

This can include payment processing history, cash flow patterns, or reports from your accounting software.

Generally, online lenders may offer:

• Term loans: A term loan provides a lump sum of business capital funding, making it a common option for startup founders, who need upfront financing. Repayment is often on a fixed schedule with a fixed interest rate, which simplifies the process and leads to predictable monthly payments.

• Working capital loans: This is typically a short-term financing option that helps business owners cover day-to-day operational expenses. Cash flow matters, so having a buffer to cover rent, inventory, payroll and any other necessary expenses can provide breathing room for your budget.

• Business line of credit: An alternative to a business finance loan is a business line of credit. Instead of getting a lump sum upfront, borrowers can tap a line of credit with ongoing access. This allows you to borrow only what you need and gives you the flexibility to draw more later.

Like with any lender, there are benefits and drawbacks to consider when getting a business finance loan with an online lender.

Pros:

• May offer fast business funding

• More flexible underwriting criteria

• Digital application process

Cons:

• May have higher interest rates

• Typically have shorter repayment terms

• Quality, reputation, and service vary widely by lender

What you might need to get approved:

• A minimum of one year in business

• Annual revenue threshold of $100,000 or more

• Minimum credit score of low to mid 600s (you may qualify with certain lenders if you have bad credit, but you will likely have higher interest rates)

Basic documentation requirements:

• Business EIN

• Minimum of three months of bank statements

• Profit and loss statements

Small Business Administration Microloans

The Small Business Administration (SBA) is an invaluable resource for business owners and startups. The agency has various loan programs and types of SBA loans. But for early-stage startups under the two-year mark, you may want to look into microloans. These are small-dollar loans up to $50,000. According to SBA.gov, the average microloan is $13,000.

The SBA provides the funds to a third-party non-profit community-based lender. As such, each lender has different eligibility requirements. However, they often require collateral and a personal guarantee.

Note that microloans aren't available to pay for any existing debt or commercial real estate purchases. Here are the pros and cons to consider.

Pros:

• Potentially lower interest rates than banks

• May have easier credit requirements

• Maximum repayment term of 7 years

Cons:

• May have a longer approval process

• Eligibility requirements may vary by lender

• Typically requires more documentation

What you might need to get approved:

• May need a minimum credit score of 620

• Time in business (some lenders may work with founders of businesses under two years, some may not)

• Collateral

• Personal guarantee

The specific requirements may vary by lender.

Basic documentation requirements:

• Cash flow statement

• Business EIN

• SBA Form 1919 or SBA Form 912

• Business plan

• Tax returns

• Bank statements

• Balance sheet

• Profit and loss statement

Revenue-Based Financing Options

New startups looking for business finance may want to consider an alternative: revenue-based financing options. Through this type of financing, small business owners can raise capital. The funds are repaid through a percentage of the company's Estimated future receivables.

Revenue-based financing can be an attractive option. Unlike equity financing, it doesn't require you to give up a portion of your company's ownership. There also isn't a standard, fixed monthly payment. Instead, there is a set percentage of your monthly revenue.

Pros:

• Flexible payments

• May be more accessible

• Relies more on revenue, not credit approval

Cons:

• May cost more over time

• Must have consistent, solid revenue

• Not ideal for all small businesses

What you might need to get approved:

• May accept a credit score in the high 500s

• Typically, at least a year in business

• Could require a higher annual revenue of $250,000 or more

Basic documentation requirements:

• Recent bank statements (typically three to six months)

• Sales transaction reports

• Business EIN

Other documents may be required and can vary by lender.

How to Avoid Costly Business Finance Loans

When you're a founder of an early-stage startup, getting a business finance loan can be a challenge. Some options are available, but you want to avoid costly loans that may do more harm than good.

You might want to steer clear of any lenders who guarantee approval. The same goes for any lenders that don't have clear interest rates and fees. Your Annual Percentage Rate (APR) has a significant impact on total borrowing costs.

Extremely short repayment terms of three to six months may also not be sustainable. Some things to review when comparing lending options:

• Look at the true Annual Percentage Rate

• Check for prepayment penalties, origination fees, etc.

• Review the repayment term and structure

• Verify if there are personal guarantee requirements

Doing your research and not rushing into things can help you avoid costly business finance loans.

Alternatives to Business Finance Loans

If you're not eligible for any business finance loans or you want to minimize borrowing, you can look into alternatives:

• Business grants: Check out any local, state, or federal grant programs that you may qualify for.

• Crowdfunding: You can raise funds from family, friends, and your community through options like Kickstarter or Fundable.

• Invoice factoring: If your startup uses invoices for payment, you may consider invoice factoring. It's not a business finance loan exactly, but a way to get cash upfront by selling your unpaid invoices to a third-party factoring company. The company may give you a percentage up from and to a percentage in fees. After the invoices are paid, you'll receive the remaining amount after the fees are taken out.

Final Thoughts

When you're running a new startup, you have your work cut out for you. As you work on a path toward profitability, you might want outside financial support to help you navigate cash flow challenges or grow. While you may not qualify for some traditional bank loans, other financing options exist. These financing solutions can help you get on a solid foundation and expand your enterprise.