Getting the financing you need to launch and grow your business is one of the biggest challenges new business owners face In order to proudly turn on your physical or metaphorical “open for business” sign, you may need to get startup small business financing. That may be challenging, but entrepreneurs are often used to challenges.
Here we’ll explore what types of startup loans and funding may be available to your new business and how to qualify.
What Is a Startup Business Loan?
A business startup loan is financing meant to help with the startup costs of a new business. Startup small business loans can go towards things like working capital; the purchase of equipment, machinery, supplies, inventory, and furniture; and the purchase of construction equipment or real estate.
How Can a Startup Loan Help Your Small Business Grow?
New employer small businesses are the primary source of U.S. job growth but are much more likely than larger firms to face financial challenges accessing borrowed capital.
Beyond getting you the funding you need to start your business, a startup loan can also help you expand your business. If you’re looking to grow your business, a loan can help you pay for things like:
- Fees to form your business entity
- Inventory to expand your sales
- Equipment like laptops or cell phones
- Paid advertising
- Office utilities, including wifi, electricity, etc.
- Machinery to expand operations
- Business vehicle
Basically, anything that may require more funding to expand your business could be covered by a startup business loan, if your business qualifies.
Ready to grow your small business? Explore our list of the best business loans and find the financing you need.
The Best Financing Options for Startups
If you’ve already started your hunt for a loan, you’re well aware that there is a seemingly infinite amount of small business lines of credit and loans out there, available from banks and online lenders. New businesses are considered high risk, so their options will be more limited. But you do have options.
Here are the most popular financing options to consider for small business startup loans:
1. Business Credit Cards
This is one of the top choices for new businesses. Why? Because most small business credit card issuers don’t care how long you’ve been in business, As long as you meet their minimum requirements— typically that means good or excellent personal credit scores and sufficient income from all sources, not just the business— you may qualify.
And while you may think of a credit card as a convenient way to pay for purchases or earn perks like cash back, at its core, a credit card offers a credit line. In the Federal Reserve Small Business Credit survey, 53% of small businesses reported using credit cards to help fund their operations.
That means business credit cards can be a viable alternative to startup business loans when you need immediate access to a credit line.
To qualify for a business credit card, issuers will generally look at your personal credit scores and combined income (personal and business). While they may not require collateral, they typically do require a personal guarantee. Most business credit cards have the added bonus of great rewards programs and sign-up bonuses.
2. SBA 7(a) Loans
For the most part, the U.S. Small Business Administration (SBA) doesn’t make loans—it guarantees them. Individual lenders are approved by the SBA to make loans under SBA programs, and these generally offer lower interest rates. The exception is Disaster Loans which are made by the SBA.
There are roughly ten different types of SBA loans, and among the most popular is the 7(a) program, which offers loans up to $5 million. If you’re wondering if you can get an SBA loan to start a business, keep in mind that in the 2021 fiscal year, 17% of the money lent to small businesses through the 7(a) loan program went to startup businesses.
Getting an SBA loan isn’t a super-fast or easy process, though the SBA Express loan program (which generally offers loans of up to $500,000) aims to speed it up somewhat.
There are a number of qualifications required, including acceptable credit. There is no minimum personal credit score required, but for 7(a) Small Loans of $350,000 or less, the SBA requires a minimum FICO SBSS credit score of 155 to avoid a manual credit review. (This commercial credit score can take into account the personal credit of multiple owners along with the business credit of the business. The score ranges from 0-300.)
SBA 7(a) loans for startups are more likely to go to business owners with experience in their industry (a veterinarian opening her own practice, for example) or those purchasing an existing business. Because the terms are favorable, it is a financing option worth exploring.
In addition, SBA 504 loans may be helpful for businesses looking to acquire real estate or equipment, while SBA Export Loan programs may be available to businesses that will be participating in international trade. Learn more about SBA loans here.
Crowdfunding platforms allow anyone with a vision, including entrepreneurs, to raise money for their project or venture.
There are three main types of crowdfunding that may be available to startups:
- Rewards (e.g. Kickstarter, Indiegogo)
- Debt (e.g. Kiva)
- Investment (e.g. Wefunder)
A business startup seeking capital through crowdfunding will require the business owner to share their business goals and objectives with a large group of people in hopes that multiple people (the crowd) will help fund their request.
These campaigns take lots of marketing effort, but the end reward, should you raise the needed funds, is startup funding and validation of your business idea by many potential future customers for your business. It’s worth noting that equity (investment) crowdfunding may be a more accessible funding option than finding investors via angel funding or venture capital for businesses that need to raise up to $5 million.
4. SBA Microloans
SBA microloans are made by approved intermediaries, often community development financial institutions (CDFIs) and other non-profit organizations. While the total maximum loan amount is $50,000, the average loan is closer to $14,000. An SBA microloan is a term loan, with a maximum term of 72 months; the average is about 40 months. Funds may be used for working capital or the purchase of inventory or supplies, machinery or equipment, or fixtures and furniture.
5. Other Microloans
The SBA is not the only microlending option. Microlenders offer small businesses the opportunity to secure financing in smaller amounts. When it comes to microlenders, be sure to check out these options:
Ascendus (formerly Accion): Loans are available from $5,000-$100,000 through CDFI partners. These tend to be more flexible on credit requirements and lenders provide technical assistance to applicants.
Kiva: Kiva operates on a largely community-based, trust-driven platform. Entrepreneurs can crowdfund business loans from philanthropic-minded individuals up to $15,000. These loans carry a 0% APR and no fees.
Local Microlenders: You can find microlenders in many communities across the US. Because they are often smaller nonprofit organizations, they don’t advertise widely so you may have to look for them. They often make smaller loans to borrowers who have trouble accessing capital otherwise. Find a CDFI here.
6. Equipment Financing
Specifically designed to pay for the purchase of equipment and machinery, equipment loans are similar in structure to conventional loans, with monthly repayment terms over a set period of time. However, the proceeds are used to purchase equipment or machinery.
The lending standards on equipment financing can be less strict because your equipment will be used as collateral for the loan—in other words, if you default, the bank has the right to seize your equipment to cover the cost of their lost money. (Note that some SBA loans may be used to finance equipment. In particular, the SBA 504 loan is helpful for financing larger equipment and real estate purchases.)
Equipment leasing is another option that you should consider. Keep in mind that many different assets you use in your business may be leased, including computers, a pizza oven, or even the furniture in your restaurant.
7. Bank Loans
While a traditional loan from a bank or credit union may be your first choice, for the majority of startup businesses, bank loans will be out of reach. Banks have strict small business lending standards, and what they offer is often not available to brand new businesses.
For banks to make startup loans, they need to make sure the loan is not too risky. They will usually look for strong personal qualifications, including experience in your industry or starting other businesses, excellent credit, a down payment, and will likely require a personal guarantee. Also consider SBA loans made by banks.
8. Line of Credit
Business lines of credit work a little differently than business loans: rather than you getting a lump sum of cash up front, you are approved for a certain amount of capital that you can borrow from at any time.
Pay back what you borrow, and it’s available again. Unlike a loan, a line of credit can be open long-term, whereas a loan closes once it’s paid off.
9. Short-term Financing
Working capital loans are short-term loans used for day-to-day expenses as needed. As you may have already guessed, these loans have short repayment periods, typically a few months to a couple of years. They may have higher interest rates than other options listed here, but also less stringent requirements to qualify.
10. Vendor Financing
Vendors or suppliers may offer payment terms that allow you to purchase supplies for your business and pay for them later; hopefully out of cash flow. Vendors that report to business credit reporting agencies can also help your business build business credit.
Ask your suppliers if they offer payment terms or use this list to find net-30 vendors that report.
While vendor credit won’t provide a lot of money upfront, it can help you improve cash flow so you don’t have to borrow quite as much as you would otherwise.
11. Invoice Financing
If you will get paid by business customers via invoices, invoice financing (which is different from invoice factoring) is a convenient, albeit more expensive way to avoid cash flow issues caused by long invoice cycles. This is a speedy option—you can get your financing in as little as a day—that requires little paperwork. However, it will only be available to businesses that have invoiced business clients for goods or services, and are waiting to get paid so brand-new startups aren’t likely to use this option.
12. Small Business Grants
Small business grants are not easy to land, especially for startups, but if you are successful, this funding will not have to be repaid. (You will likely have to pay taxes, however, so make sure you factor that in.)
Grants are available from several sources:
- Federal government
- State and local governments
- Private foundations
- Businesses supporting entrepreneurship
You can search for grants in various places. Three great resources include:
- Grants.gov (federal grants)
- Opengrants.io (free and paid searches)
- GrantWatch (paid search)
Keep in mind the federal government does not make grants to start a small business.
13. Friends, Family, and Personal Funding
Yes, personal funding is a viable option and is one of the most popular ways many small business owners access capital. But using personal funds or personal loans does involve risk, and you’ll need to do a solid job of calculating all of your costs so that you don’t run out of money before the business can support itself.
Even if you use personal funds to start, we advise you to start taking steps to establish business credit right away. That way you can start to leverage business credit and access more capital in the future. The business should be able to stand on its own without commingling personal assets and credit.
Other Short Term Loans and Financing for Startups
As we just mentioned, personal funding is a popular source of capital for new businesses. Here are a few different options when it comes to personal funding:
Personal Credit Cards: if you can’t secure a business credit card (our preference over a personal card), a personal credit card (or two) with a reasonably high limit can help you get those first few purchases and your business underway. Keep a close eye on your credit utilization and pay your bills on time, because putting business expenses on personal credit cards can hurt your personal credit scores.
Savings/Home Equity: Dipping into your savings is an even riskier business, but if you have a good amount set aside this could be the cheapest option for you. Borrowing against your home equity is a cheap option but very risky.
401K/ IRA Savings: You may be able to withdraw funds from your retirement plans, borrow against a 401(k), or use a ROBS plan to shift retirement funds to your business. Keep in mind that it may not be wise to bet your whole retirement savings on your brand new business.
Friends and family: Many businesses have been funded with the help of family members. In fact, it’s one of the biggest sources of startup capital available to early-stage businesses. Tread carefully, and don’t apply pressure, but if they’re willing, family can be a good, positive backing for your new venture. (Another way to approach it is to ask them to be the first backers in your crowdfunding campaign.)
Pros and Cons of Small Business Loans
It’s important to consider both sides of taking out any kind of financing for your startup.
- May help grow your business faster
- Can be used to acquire equipment, inventory, retail or warehouse locations, etc.
- Essential for capital intensive businesses
- Can be expensive
- Can be hard to qualify
- Business may fail and owner may be personally liable
How Can I Get a Business Loan to Start a Business?
You have the end in mind, but where do you start? A good place to start is with your personal credit scores. As you’d probably guess, good credit scores can make it much easier to qualify for various loan options than a bad credit score.
Note that while some business loans involve a business credit check, as a new business you’re not likely to have strong business credit scores. (You can learn more about how to build business credit scores here.)
That means lenders are likely to review personal credit scores when making a loan decision, and many will require a personal guarantee as well.
It’s also important to look at it your business from the lender’s perspective:
- How risky is the type of business you’re starting?
- What is your experience or expertise?
- What are your credit scores?
- How quickly will the business become profitable?
- If the business were to fail, is there equipment or assets that can be liquidated?
A well-thought-out business plan can answer many of these questions.
Some lenders will not lend to sole proprietorships. Forming a business structure such as an LLC or corporation may help open up the door to more loan offers.
You’ll then need to identify which type of startup financing you’d like, and for which you qualify. Before gathering documentation for your business, you need to know what the lender will be looking for; the application for a microloan will likely be very different from that for a business credit card. Knowing what you can afford for monthly payments can help you best narrow down what financing products you’re interested in applying for.
When you’ve pinned down a loan type and lender, you can then begin to fill out your business loan application. If you’ve done the legwork ahead of time, this won’t take as long.
Determine How Much Funding You Need
Start the process by asking yourself, “What do I need the money for?”
Lenders call your answer your “loan purpose.” Calculate what it will cost to meet your loan purpose and that is the amount to look for. If you can clearly articulate your loan purpose to a lender, your crowdfunding campaign, the SBA, or your uncle Fred, you are more likely to get the money you need as opposed to simply looking for, “As much as I can get.” What’s more, you’ll avoid the financial stress and repercussions of borrowing more than you really need.
How to Qualify for a Startup Business Loan
Qualifying for startup financing may vary from one lender to another, but generally, you can expect a few factors to be considered for eligibility.
First, credit. Established businesses may have a business credit history, but your startup may not. In that case, lenders may look at your personal credit history and scores, so make sure you know your credit scores and that they are as strong as possible.
Most lenders also look at time in business. As a new business, that won’t apply. However, the sooner you can get your business officially started by incorporating or at least getting a business license and EIN, the better.
What Is Required to Get a Small Business Loan?
Requirements vary significantly by lender, but you should be prepared for the following types of information:
- Personal credit reports and scores from all three major credit bureaus. (Lenders will obtain their own copies of your credit reports, but check yours first to know where you stand.)
- Business forecast with details on future cash flow and costs.
- Tax returns and supporting IRS documents for both your business (if available) and personal tax accounts (including personal documents for all owners or registered agents of the business).
- Any applicable licenses and registrations for doing business in your state.
- All financial documents that would be deemed relevant (including bank statements, credit card sales, unpaid invoices, and accounts receivable due to you, if available).
- Any legal contracts that would be relevant (franchise, incorporation, leasing).
- Business checking account info to deposit loan proceeds.
- Updated business plan with details on your growth and marketing strategies. Not all lenders will require a business plan, but the information in the business plan will be essential to helping you find and apply successfully for financing.
As a startup business, you probably won’t have business credit reports or business tax returns. In that case, the lender may rely on your personal credit, tax returns and/or a personal financial statement. If, however, you are purchasing an existing business, the lender will likely require information about that business.
Once you’ve submitted the application, you may have to be patient. Some financing options can be approved in minutes; some may take weeks or even months. Be sure that you’re aware of the wait time before you begin the application process. You don’t want your urgent business needs to be on hold or miss an obligation waiting for a loan to be approved.
Common Mistakes to Avoid when Applying for Small Business Loans
Here are three of the most common mistakes business owners make when applying for small business loans:
Failing to Understand Qualifications
Banks and other lenders aren’t going to get excited about your business idea unless you can clearly demonstrate how your business will generate more money to repay the loan. You need to think from a lender’s perspective, and understand that they want to make loans that aren’t too risky. Look at your qualifications—credit, revenue, industry etc— from their perspective.
You’ll have to provide various types of documentation when you apply, and the more organized your information is, the easier it will be to fulfill the lenders requirements. Specifically you’ll want to be organized with:
- Up-to-date bookkeeping so you can supply financial information
- Business bank account statements for the past six months to demonstrate monthly revenues
- Easy access to key documents like articles of organization or articles of incorporation, personal information about key owners/shareholders
- List of business assets and liabilities
Waiting Too Long to Find Financing
If you wait until your business desperately needs financing, you’re likely to settle for financing that’s available fast, even if it’s not best for your business. Look for financing proactively—before you’re in a cash crunch. At a minimum, lining up a line of credit can give your business flexibility and access to short-term financing when needed.
How to Choose a Small Business Loan
When it comes to choosing a startup business loan, you have to start from the reality that your options are much more limited than if you have an established business that is making money.
The most important factors to consider are how you’ll use the funding to help your business make money, whether you can make payments on time until your business earns money, and what happens if your business does not succeed.
Entrepreneurs are often optimistic and excited about starting their businesses, but must also be realistic, especially when debt is involved.
Key Factors to Consider When Choosing a Small Business Loan (Interest Rates, Loan Terms, Repayment Options)
If you have found potential financing and you decide you want to proceed, here are some of the factors you’ll need to consider:
- How much debt are you willing and able to handle?
- How quickly will you receive funding?
- What is the repayment schedule?
- How much are the payments?
- What is the interest rate?
- How much will you pay in fees?
- Do you need to pledge collateral?
- Is a personal guarantee required?
All of these questions can help you decide whether a new business loan is affordable for your business, as well as to you personally since you’ll likely be the one making payments until your business can afford to do so. Watch out for advertisements for “guaranteed approval” loans that require an upfront fee. It could be a loan scam.
Average New Business Loan Rates
Interest rates for startup loans will vary significantly depending on the type of financing you get. Among the lower-cost options, for example:
Business credit card interest rates can vary from 0% intro APR business credit cards to 21%+ on purchases. Your interest rate will depend in part on your credit score and other qualifications.
Microloans often carry lower interest rates, in the 10—18% APR range. And, as we’ve mentioned, Kiva.org charges 0% for its crowdfunded microloans.
SBA loan rates vary by type of loan and lender but most are currently in the low double digits (less than 10—15%).
Crowdfunding is often available with no interest, though the platform itself will charge fees, plus there will be a cost for the incentives you provide for a rewards crowdfunding campaign, or the equity you give for an investment crowdfunding campaign.
Maximum Loan Amounts For Startup Businesses
There’s no set maximum amount for startup small business loans. Individual lenders and loan programs typically have maximum amounts that can be borrowed, though. For example:
- SBA microloans are available for up to $50,000.
- SBA 7(a) loans are available up to $5 million.
- Kiva loans go up to $15,000 in the US.
- Reward-based crowdfunding has no limits.
- Investment crowdfunding currently allows businesses to raise up to $5 million annually.
It’s rare for startup founders to get a single loan that meets all their needs. Instead, they will often piece together different types of financing to get the money they need to get to the next stage.
How To Get a Startup Business Loan With No Credit or Revenue
It is challenging to get a startup business loan if you have no credit or revenue. Options that may be available in this situation are:
- Friends and family funding
- Angel funding or venture capital
How Do I Get a Startup Business Loan with Bad Credit?
Even when a business has at least two years’ time in business and strong annual revenues, business lenders still often check personal credit scores to understand the borrower’s creditworthiness. A business owner with bad credit (or low credit scores) will find it tough to qualify for many types of financing, though there are a few startup business loans for bad credit that may be an option.
Among them, microloans and crowdfunding may be worth exploring, as they may be available to business owners with less than perfect credit or no credit. Vendor credit may also help improve cash flow.
What To Do if You Are Denied a Startup Business Loan
Being turned down for a small business loan is discouraging but it’s not uncommon. If you are turned down your goal should be to find out why, and see what steps you can take next to get financing.
Small business lenders aren’t always required to tell you specifically why you were turned down for a loan. (Find out here what lenders must tell you when you’re denied a business loan.) However it never hurts to ask for specific reasons, and to be persistent if you can’t get that information right away.
Look at the reasons supplied and see whether there is additional information you can supply the lender, or if there are other loan products that would be a better fit.
Final Word: Startup Business Loans
Running your own business can be difficult, and starting a business might be the toughest part for entrepreneurs. While it can be challenging to find a lender from whom to borrow, don’t assume it’s impossible to obtain a startup business loan.
Don’t be afraid to consider alternative lending options. Nonprofit lenders offering microloan programs may be the right choice for some businesses, or tapping a business credit card may sometimes be worth the risk, if your plan is solid and the interest rate is affordable. Business credit cards for startups can help build good business credit for your business and could help bridge gaps in cash flow if absolutely necessary.
Again, think this through carefully. You will sign a personal guarantee so if your business doesn’t make it, you will be personally responsible for paying it back.
While starting a small business loan can be exciting, take your time here and be prepared to do your research and due diligence when you’re looking to borrow. Be realistic with your business and your ability to repay the loan, even if you’re approved for a high credit limit.
Above all, keep your motivation for starting the business in mind. It can be a rough process finding and being approved for a startup business loan, but the right motivation and the right business can push through it and get the job done.
FAQs Startup Business Loans
This article was originally written on November 13, 2019 and updated on July 10, 2023.