8 Options for Small Business Startup Loans

8 Options for Small Business Startup Loans

The 8 Best Startup Business Loans

What is a Startup Business Loan?

A business startup loan is financing meant to help with the financial needs of a new business. Business startup loan proceeds can go towards things like working capital; the purchase of equipment, machinery, supplies, inventory, and furniture; and the purchase or construction of real estate. New business owners can also consider business credit cards, business grants, and crowdfunding.

One of the biggest challenges a new small business must face is obtaining the capital necessary to support their initial growth. 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 like access to capital, according to a 2019 Federal Reserve report. In order to proudly turn on your physical or metaphorical “open for business” sign, you’ll likely need to have access to money in the form of a small business startup loan.

If you’ve already started your hunt for a loan, you’re well aware that there is a seemingly infinite amount of small business loan options out there. Each one will come with their own set of pros and cons, and perhaps you’ve discovered that most of the low-cost options are not available to business owners without a couple years of business under their belts or ones with established business credit scores. You can establish and build your business credit data for free using Nav.

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Where Do I Get a Small Business Startup Loan?

1. Startup Consultants

Running and growing a new company comes with unique challenges, and the reality is that half of all new businesses will not survive five years. Making one bad decision — like getting the wrong financing — can sink you in those early years.

That’s why using a startup consultant can make sense. These consultants typically charge a premium to connect you with funding, but it can be well worth it.

Beyond finding you funding, they can check your viability for financing and make sure you’re covered with all the basic services that a startup business needs, from business plan creation to business insurance and more.

2. Equipment Financing

Banks are traditionally known for their lending opportunities, and if you have a good relationship with yours, this may be a place to turn. But for the large majority of startup businesses, a traditional loan will not be the best option. Banks have strict small business lending standards, and what they offer is generally only available to established businesses. You might, however, be able to work with your bank to secure equipment financing.

Specifically designed to pay for the purchase of equipment and machinery, equipment loans are similar in structure to a conventional loans, with monthly repayment terms over a long period. However, the proceeds must only be 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.

3. Business Credit Cards

Business credit cards can be a great alternative to a small business startup loan, and can help you get off on the right foot separating business and personal finances and establishing business credit. To qualify you 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, some may ask for a personal guarantee. Most business credit cards have the added bonus of great rewards programs and sign-up bonuses.

A good tip would be to choose a card with a 0% introductory financing offer. Doing so allows you to make purchases and carry a balance for 9, 12, or even 15 months without paying interest while you get your business going. In a recent Federal Reserve Small Business Credit survey, 59% of small businesses used business credit cards to fund their operations.

4. SBA Microloans

In addition to the SBA 7(a) and 504 loan programs, the SBA also offers microloans which are typically made through community development financial institutions (CDFIs) and non-profit organizations. Available up to $50,000, a microloan through the SBA can be used for working capital or the purchase of inventory or supplies, machinery or equipment, or fixtures and furniture.

5. Other Microlenders

The SBA is not the only microlending option. Microlenders are non-profit organizations that offer small businesses the opportunity to secure financing in small increments (less than $35,000). When it comes to microlenders, be sure to check out these two options:

  • Accion: Available up to $10,000, this is a great small business startup loan if you’ve been in business for less than six month and have an incubator-based or home-based business. Since the required credit score is 575 or higher, this is also a good option for borrows who may have bad credit.
  • KivaZip: Kiva operates on a largely community-based, trust-driven platform. Businesses can crowdfund business loans from philanthropic-minded individuals up to $5,000. These loans carry a 0% APR and are provided to struggling entrepreneurs who have proven their character, invited their own network of lenders, were unable to access other financial means, and have a business that has a perceived positive social impact.

6. Invoice Financing

If you get paid by your customers via invoices, invoice financing (which is different from invoice factoring) is a convenient, albeit usually 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.

Fundbox is one such invoice financing provider that works with businesses with only three or more months in business and three or more months of accounting software data (Quickbooks, Sage, Xero, Freshbooks, and more).

7. Crowdfunding

Fairly similar in design to KivaZip is a newer source of funding called crowdfunding. Popular crowdfunding platforms like KickStarter allow anyone with a vision, including entrepreneurs, to raise money for their project or venture.

A business startup loan through crowdfunding will require the campaigner to share their business plan and objectives with a large group of people in hopes that multiple donations or backings will eventually lead to the desired funds. These campaigns take lots of marketing effort — but the end reward, should you raise your funds, is a startup loan and validation of your business idea by many potential future customers for your business.

8. Personal and Friends/Family Funding

Yes, personal funding is a viable option; that’s why it’s here on the list. But using personal funds is a gamble, 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 using personal funds to start, we advise you 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 co-mingling personal assets and credit. There are a few different options when it comes to personal funding:

  • Personal Credit Cards: if you can’t secure a business credit card, a personal credit card with a reasonably high limit can help you get those first few purchases and your business under way. Keep a close eye on your credit utilization and pay your bills on time, because making business expenses on personal credit cards can ruin your personal credit history.
  • 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 is a cheap option as well.
  • 401K/ IRA Savings: If you plan to incorporate your business, you can use your retirement plan to invest in the company. Keep in mind that it may not be wise to bet your whole retirement savings on your brand new business.

And, while they may not be venture capitalists, your family may be a good source for investors (and can save you equity in your home). Tread carefully, and don’t apply pressure, but if they’re willing, family can be a good, positive backing for your new venture. 

How Do You Apply for Startup Business Loans?

You have the end in mind, but where do you start? A good place to start is with your business credit score, which is a measure of the creditworthiness of your business. You can check your business and personal credit scores with Nav. A good credit score can put you in a much better spot than a bad credit score, so be prepared to put in the work if you want to improve your business credit score. 

It’s also important to give your business a holistic look. How is your cash flow? How long have you been in business? Is your business plan up-to-date? How much can you budget for monthly payments if you’re approved for a loan? Are you prepared to put up collateral or to backup a personal guarantee? All of these are important to know and have on hand when approaching a lender with an application. 

You’ll then need to identify which type of startup financing you’d like. Before gathering documentation for your business, you need to know what the lender will be looking for; the application for microloan will likely be very different than that for a business credit card. Having a budget in mind for monthly payments can help you best narrow down what financing products you’re interested in applying for. 

This is also a good time to choose which lender you’d like to go with. Be aware that the world of banking stretches well beyond your local bank or even the financial institution where you do your business banking. This isn’t to say that those banks or credit unions can’t be the best option for you, but be sure to do your due diligence. Be sure to check if the lender has an online application process, which can save you an errand and precious time that can be put back into your business. 

When you’ve pinned down a loan type and lender, you can then begin to fill out the application. If you’ve done the legwork ahead of time, this won’t take long. 

Common Documents Lenders Ask for with Startup Business Loans

  • Updated business plan with details on your growth and marketing strategies
  • Business and personal credit report (the lender will obtain their own copies, as well)
  • Business forecast with details on future cash flow and costs
  • Tax returns and supporting IRS documents for both your business and personal tax accounts (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)
  • Any legal contracts that would be relevant (franchise, incorporation, leasing)
  • Documentation of underserved representation (for loans to which this would be important)

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. 

Who Qualifies for Startup Business Loans?

Just as there are a variety of startup business financing options, a wide variety of young businesses can potentially be approved for them. Those who have more time in business will certainly have a better chance than a business with mere months or weeks under their belt, and a business with positive business credit history can stand out as well. 

The king, however, is cash flow. Depending on the lender and loan type, a financial institution may be more willing to overlook short time in business if your cash flow is strong. Your industry type is important as well; certain industries, such as real estate, are known to be higher-risk and may get the side eye from lenders. Be sure that your NAICS code is correct, if the lender asks for it. 

If your business isn’t in shape to qualify to borrow money, consider business grants. Grants are free money granted by certain organization or individual to promote a certain cause, much like a college scholarship. If you’re based in an underserved area or work in a niche industry, you might qualify for a grant. 

As you review the state of your business and look over what type of financing you may need, it will become clear which financing options are more realistic for your business. Continue to keep an eye on your business credit score, keep your business plan up-to-date, and adjust your budget and marketing strategies as necessary to keep your application looking tip-top. 

Final Word: Startup Business Loans

Running a small business is difficult and expensive, and starting a business might be the toughest part for entrepreneurs. While it can be difficult to find a lender from whom to borrow, it’s not impossible to obtain a startup business loan. 

Cash is king, both in running your business and when you’re looking to borrow money. The lender will look at your personal credit score, business credit score, and a number of factors when underwriting your startup business loan. Bad credit can sink your application, good credit can keep you in the game. 

Don’t be afraid of alternative lending options. Nonprofit lenders offering microloan programs may be the right choice for your business, or a cash advance on your retirement account or home equity line may be a risk worth taking. Business credit cards are becoming more and more popular and can help build good business credit for your business, and could help bridge gaps in cash flow if absolutely necessary. Keeping tabs on what business grants are available can pay dividends, as well. 

Whatever option you choose to pursue, be prepared and 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.

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30 responses to “8 Options for Small Business Startup Loans

  1. I’m trying to start a welding and fabrication shop. I have some of the equipment and tools I need to start but there are a few larger items that I need to start but I’m in debt up to my eyeballs already. Who or what can help? There are only 4 thing’s I need to start: truck-mounted welding machine, lathe, drillpress or milling press and materials to put together for advertising the basics to the complex work I can do.

  2. I am looking for a start up loan to purchase a medical billing software for medical billing company. I have been working in healthcare for many years and believe this is a good investment. 20.000. I have some cash in the bank but don’t want to use it for the start up.

  3. Hi there! My husband and I both have FT jobs. I’m a Nurse, he is a manager. We want to purchase a commercial property to renovate into a wedding chapel. We live in Greenville SC. We are looking at a property listed for 215k and we have 20% down. What kind of loans would be best for us as a start up company? Thank you!

  4. WILLIAM
    I/M LOOKING TO START MY OWN HAULING BUSINEES, IN NEED OF FUNDS TO BUY MY FIRST TRUCK, $10.000. CANT SEEM TO GET A START UP LOAN, WHAT CAN I DO? WHO LEND MONIES BESIDE A BANK FOR START UP LOAN?

  5. Thanks for sharing. Great work!
    If you try to appeal to everybody, you’ll end up appealing to nobody. keep posting such a knowledgeable blog.

  6. I experienced the same kind of issues with my new business. Building business credit requires time, patience and know how.. A great way to start is by getting Net 30 terms from suppliers that will report to your business credit.
    I used Uline.com, Grainger.com, Quill.com and Theredspectrum.com. These will get your business credit profile going and help you further your business credit. All with a Personal Guarantee !

  7. I am starting a new printing company. I have purchased my first 2 machines, 1 million each, and own free and clear. How can I use these as collateral for a load of $750,000 -$1million for other expenses. I really do not want to use a bank. Who is left?

  8. Hello,
    I’m looking at starting a business just an idea now. It would be a franchise business and they are wanting almost 900,000 in liquid accounts. How do people that don’t have that kind of money go to for help?

    1. Robert,

      I get that frustration! Not all franchises have such steep requirements though. In addition, there are many people wanting to sell their business who may be willing to offer seller financing. If you are purchasing an existing business, you may be able to get an SBA loan or other type of financing based in part on the current success of the business. You may want to consider casting a wider net in your search for a business to start.

  9. I have lousy credit. I am just starting my business but I need at least 400 dollars to register my company name.I have lousy credit because I have been working at low paying jobs for 18 years. I got tired of it and I opened my own business. I need to register my name of my company and EIN but I don’t have the money to do it yet. I am looking for a credit line or small grant min of 400 dollars

  10. Hello:
    I am in need startup money of approximately $20k-$50k for my new school bus business. I have been in this business 11 years and have much experience.

  11. Overall some really good comments. One additional resource that was not mention is the Community Advantage loan guaranteed by the SBA. Most are only offered by Government Chartered non-profit lenders called a Community Development Financial Institution (CDFI) and approved by the SBA to offer it. The normal 2 years in business does not apply and personal assets are not liened on loans up to $150,000. This is a huge break for fairly new businesses or start-ups.

  12. Hi I am in need of start up money to open my real estate office in Maryland. The amount I will be requesting will cover the cost of office space at a local firm in the DMV area. This amount will be approximately $5,000.00. I did start my business credit profile through Nav as well as my personal credit profile and combined it. My personal credit score is very low but I was informed that your business work with all credit types. Based on the information I just provided. Would your company be a good fit for me?

    Warmly,
    April Dent

    1. April,

      Now that you have created your Nav account you can use MatchFactor to see what options may be available to you. If you are unclear about your options you can reach out to our Credit & Lending team (you’ll see that in the financing tab) – they will be more than happy to talk with you (no pressure).

  13. You can find this information on any web-site pertaining to obtain a business loan. Nothing new, like company’s that help build credit, lender that lend to risky statup business owners. Same old stuff.

  14. I’m seeking 150,000
    Or less I’ve been in business for myself for 7 years and brought my income from 0 to 3000. I’m wanting to go commercial I’m finding it very difficult in my position to find funding. I have an EIN number now, but I have not filed taxes as of yet with it yet, any thoughts or ideas would be very appreciated.