Business Startup Loans: What New Entrepreneurs Need to Know

Aspiring business owners often don’t have the necessary capital to get their business idea off the ground right away. For new entrepreneurs, business startup loans can make the difference between an idea staying an idea and becoming a reality. Even small startup business loans can provide the capital necessary to acquire initial inventory, get necessary licenses and insurance, and purchase fixed assets like commercial real estate, equipment, or office furniture.

What is a business startup loan?

Simply put, a business startup loan is any type of small business loan that a new business gets to support its growth or navigate financial challenges. Lenders usually define a business as a startup if it has been operating for less than two years.

Business startup loans are available from both traditional lenders, like banks and credit unions, and online lenders. Traditional lenders, however, are less likely to fund startups because of the risk involved with lending to businesses without any existing track record. Online lenders tend to have more flexible eligibility requirements and quick business loans for startups, but may charge higher interest rates and have shorter repayment terms than banks or credit unions.

Types of business startup loans

Depending on your business’s needs, time in operation, annual revenues, and your personal credit score, you may have access to several or all of the following types of loans.

SBA loans

The U.S. Small Business Administration works with lenders to partially guarantee loans for small businesses that can otherwise not qualify for funding. These loan programs offer some of the most competitive interest rates and loan terms on the market, but they’re also some of the most difficult to qualify for.

The SBA 7(a) loan program is among the most popular for borrowers, but it’s usually reserved for established businesses with consistent revenue, strong collateral, and a demonstrated ability to repay loan proceeds. However, your business could qualify if you have strong personal credit and an excellent business plan.

Microloans

The SBA offers a microloan program, with loan amounts of up to $50,000 for small businesses looking to start or expand. You can also access these smaller loans from microlenders and nonprofit lenders.

Microloans are typically much easier to qualify for, making them better business startup loan options than others. However, if you need significant business financing, the loan amount might not be enough to meet a variety of business needs. Nonetheless, if you need some working capital when starting out, microloans might be your best bet.

Term loans

Microloans are a type of term loan, but conventional loans typically have a value of more than $50,000. It’s exceedingly difficult for startups to qualify for major term loans, which give small businesses a large, upfront lump sum in exchange for repayment over a set period of time. That said, there are online lenders that are willing to work with startups, provided the startup has significant potential and can show they’ve already made progress towards earning revenues.

Small business owners may have to make a down payment, provide collateral, or accept smaller loan amounts and higher fixed rates to secure one of these loans.

Equipment financing

If equipment, like manufacturing equipment or vehicles, is central to your business, an equipment loan can be useful as a business startup loan. Essentially, equipment financing provides the upfront capital to purchase a piece of equipment, and you make monthly payments to the lender to continue using the equipment. The equipment itself serves as collateral, so if you default on the loan, the lender may repossess the item.

Invoice financing

Revenues can be touch-and-go when you’re just starting out. Invoice-based businesses that need cash flow or working capital may turn their unpaid invoices or accounts receivable into ready cash with invoice factoring. This type of business financing involves selling unpaid receivables for upfront cash to a third-party factoring company.

Factoring is much faster and accessible than a traditional bank loan and doesn’t require you to take on debt. However, it may be expensive depending on the factoring company’s fees.

Merchant cash advances

A merchant cash advance (MCA) is not a business startup loan. It’s an agreement between your business and an MCA provider in which the provider pays you cash now in exchange for a percentage of future credit and debit card sales. It’s a short-term financing option that is usually very fast and, since it’s based on your sales, can be useful for startups that haven’t quite started earning consistently yet. That said, MCAs often have high fees and can be more expensive than a traditional loan in the long run.

How to get a business startup loan

Qualifying for a business startup loan can be a challenge when you’re just starting out. However, you can still do it with the proper preparation. Here’s the step-by-step process:

1. Determine your funding needs: Most startups will have a lot of business needs, but the more specific you can be, the better your chances of qualifying for a loan. Plus, when you think critically about business financing, you may realize you just need equipment financing or a commercial real estate loan rather than more open-ended business startup funding.
2. Evaluate your credentials: Some of the most common business startup loan requirements include a qualifying personal credit score, strong personal finances, available collateral, and any available business data. The stronger your personal finances, creditworthiness, and collateral on your loan application, the more likely you are to qualify for more competitive rates and terms.
3. Research and compare lenders: When you have an idea of how much you need, research lenders to understand where you might qualify and what terms might be available. When you compare lenders, consider loan types, interest rates, repayment terms, fees, the application process, funding speed, and lender reputation.
4. Gather documentation: When you’re ready to apply, gather basic information, business licenses, personal and business bank statements, personal and business tax returns, financial statements, cash flow projections, collateral information, and a detailed business plan.
5. Apply and review options: Most lenders allow you to apply online today. If you’re approved for multiple loans for your new business, you’ll have to review the offered terms and decide what makes most sense for your business. Once you sign the business loan agreement, the underwriting process will begin.

Alternatives to business startup loans

While startup loans can be a great way to finance your new business, they might not always be the best option. For one thing, you might struggle to qualify for funding. You also may not want to immediately put your business into debt when you’re just starting out. Fortunately, there are alternatives to business startup loans to get your business the capital it needs:

• Startup business grants: Private foundations, government agencies, and small business incubator programs may provide free access to capital. Grants are very competitive and require extensive preparation and application processes. If you’re part of a specific demographic, like women, minority, or veteran business owners, you may have access to additional grants.
• Business credit cards: While credit cards have high interest rates, they can be effective short-term financing solutions for startups since they’re easy to qualify for. As you use them, you can typically get rewards like cash back, points, or airline miles.
• Family and friends: Many entrepreneurs finance new business ventures by borrowing money from friends or family. These are less formal than conventional business startup loans, but you shouldn’t treat it like a casual arrangement. You don’t want to risk burning a bridge with a loved one because you mishandled their money. You should still put the loan terms in writing so everybody clearly understands what’s to be expected.
• Bootstrapping: When you use personal funds to start your business, that’s bootstrapping. You might dip into personal savings or clear a retirement account to cover your startup costs. Self-funding is a good way to avoid debt, but it’s also very risky since if the business fails, you’ll lose personal investments, too.

Final Thoughts

Starting a business takes a lot of hard work, but it also frequently requires capital. Getting a business startup loan from a traditional lender can be very challenging, but there are other types of loans that can be more accessible for startup entrepreneurs. Provided your personal credit and finances are in a good place and you have a strong business plan, you can get the funding you need to start your business.

FAQs About Business Startup Loans

What are the requirements for a business startup loan?

Requirements vary between lenders, but generally, online lenders have less strict eligibility requirements than traditional lenders.

How long does it take to get a startup loan?

It depends on the type of loan and lender. Traditional loans may take weeks or months to fund, but online lenders may be able to provide funding quicker.

Is it smart to get a loan to start a business?

Loans can help you cover your initial startup expenses and get your business in a better place to start earning revenue quickly. However, some business owners may feel more debt-averse or want to explore other avenues of raising capital before getting a loan.

Who offers loans to startups?

Business startup loans are available from banks, credit unions, and online lenders. That said, online lenders tend to be more accessible to startups.

How much can I get for a startup loan?

It depends on your business plan, creditworthiness, and other lender-specific factors. Often, though, startups pursue microloans when they’re just getting started out, which have maximum values of $50,000.

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