Small Loans Online for Startups: Funding Opportunities for New Businesses

Why Startups Need Funding

The cost of starting a business depends on your industry, region, whether your business is online or brick-and-mortar, and whether you provide products or services. Regardless, it can easily be thousands of dollars to get up and running.

Some initial startup costs can include:

• Business registration fees

• Filing articles of incorporation

• Necessary permits

• Supplies

• Equipment

• Technology

• Company website

• Rent

• Utilities

• Inventory

• Labor

• Insurance

• Advertising

Fees can vary by city and state. For example, in New York, the cost of filing your Articles of Organization for an LLC is $200. Business registration fees depend on the county, with fees of $100 for businesses in Manhattan and $120 for those in Brooklyn.

California-based LLCs must pay a minimum annual tax of $800. LLCs in California that earn more than $250,000 may owe an additional fee based on tiered income thresholds. For example, the fee caps out at $11,790 for LLCs that earn $5,000,000 or more.

These business expenses can limit your working capital, creating a cash flow issue. Any unexpected expenses that arise can hinder your momentum. Getting small loans online can give business owners a cushion to fall back on.

How Small Loans Online Can Help

A major thing that lenders consider when applying for financing is the loan amount. Small loans online typically refer to funding you get online with a relatively low loan amount. For example, $500, $5,000, or up to $50,000.

A smaller loan amount can mean less risk for the lender and a lower monthly payment for the borrower.

Online lenders that offer these loans may have more flexible eligibility requirements and faster funding compared to banks. In some cases, certain borrowers may receive same-day funding or receive loan funds as soon as the next business day. However, timelines vary by lender and based on the specific application and risk factors.

New startups in need of financing can easily apply online for these small scale loans, with a streamlined digital process. Some online lenders use automated underwriting, which speeds up the timeline, getting funds into your hands faster so you can invest in your business.

Types of Small Loans Online Available for Startups

Startups that need financing but have a relatively low loan amount have several options to consider.

1. Term Loans

Term loans can come in different sizes, but they may also be available for small loan amounts. These may be short-term loans repaid over a designated term, such as 12 months. Generally, these come with fixed interest rates. For startups that need a lump sum of capital to navigate cash flow challenges, a term loan may be a good financing solution.

2. SBA Microloans

The U.S. Small Business Administration (SBA) is a government agency supporting entrepreneurs and small business owners. While the SBA has multiple loan programs, microloans are a solid small scale loan option.

Microloans are specifically available to small businesses that are starting up or expanding. While the maximum loan amount is $50,000, the typical average is about $13,000.

3. Business Line of Credit

Business lines of credit are more akin to a credit card than a traditional loan. But it’s still a viable financing solution for startups looking for funding with relatively low amounts. Through a line of credit, lenders approve borrowers for a specific limit. From there, borrowers can use the amount needed, repay, and reuse it again.

In some cases, this can be more appealing than a one-time lump sum as it offers ongoing funding and more flexibility.

Pros and Cons of Taking Out Smaller Loans Online

Though taking out smaller loans may pose less of a risk, it’s key to consider both the pros and cons before borrowing.

Pros:

• Online applications: Borrowers can apply now or later with easy online access.

• Faster approval: Many online lenders have faster approval and funding timelines, allowing you access to capital sooner.

• Different eligibility requirements: Some lenders may approve new startups with less time in business or place less of an emphasis on credit than traditional banks.

• Multiple options: Online lenders aren’t bound by geography. As a result, borrowers have more options in terms of lenders, as well as types of loans.

• Minimum loan amount: Fintech and online lenders may have smaller minimum loan amounts than banks, making it easier to get small loans online.

Cons:

• Higher interest rates: Small loans from online lenders that are available to startups typically come with higher interest rates, due to added risks such as limited operating history and revenue.

• Shorter repayment terms: Smaller loans typically have shorter repayment terms, which could result in higher monthly payments and impact cash flow.

• Potential fees: Some lenders and loan options may have origination fees, prepayment penalties, or other charges.

• Underwriting criteria: While some online lenders may have more lenient credit and time in business requirements, funding can still be a challenge for startups with limited to no operating history.

• Individualized support: Borrowers may receive faster approval with online lenders but typically lack individualized support that you might get from your local bank or credit union.

How to Qualify for Small Loans Online

Every online lender has unique underwriting criteria and eligibility requirements. As a result, you may be eligible for a small loan amount with one lender but not another. To qualify for small loans online, lenders generally review:

• Personal credit history (especially important for startups)

• Business plan

• Operating history

• Revenue

• Industry risk

• Debt-to-income (DTI) ratio/debt service coverage ratio (DSCR)

• Financial projections

Taking steps to improve your credit profile and increase your revenue may help with approval.

How to Apply for a Small Loan Online

To apply for small loans online, follow this step-by-step guide:

1. Determine Financing Needs

Calculate your initial startup costs, including supplies, technology, marketing, labor, equipment, and more. Knowing exactly what you need avoids a common mishap —overborrowing.

2. Choose a Loan Option

Evaluate your primary business needs to help you choose a loan option. If a lump sum will kickstart your business, a term loan can be a useful financing solution. If you need more flexibility, a business line of credit may be the better choice.

3. Compare Several Online Lenders

Once you choose the right loan option, it’s time to choose the right lender. As part of that process, compare several online lenders and evaluate Annual Percentage Rates (APRs), loan terms, fees, and eligibility requirements.

4. Prepare Supporting Documentation

As part of the application process, lenders may ask for different information and supporting documentation. For example, your ID, tax returns, bank statements, and profit and loss statements.

5. Submit the Application

Go to the lender’s website to fill out your loan application online. Some may allow you to prequalify first. Complete every section and provide supporting documentation, as necessary. Review for any errors, missing sections, or inconsistencies. Submit the application. From there, if you’re approved, you’ll receive funding to help your new business and begin repayments.

Alternative Funding Options

Startups may still face challenges securing financing, despite requesting a smaller loan amount. Some alternative funding options to consider include:

• Business grants from private companies and foundations (notably, there aren’t startup grants from the SBA)

• Crowdfunding using platforms like Kickstarter

• Personal savings

• Family and friends financing

Final Thoughts

Startups often lack the funding to get started or grow consistently. If eligible, getting small loans online can help cover the cost of necessary equipment, inventory, and supplies, through a streamlined, digital process.

Online lenders may have more flexible requirements, allowing entrepreneurs with less-than-perfect credit or less than two years of operating history to qualify for funding. Determining your needs and thoroughly researching options can help you in the decision-making process, so you’re informed and prepared.