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.
As one might assume from the title, a business start up loan is a loan meant to help with the financial needs of a new business. Small business start up 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.
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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.
To help you get started, here is a list of 8 viable options to secure a business startup loan.
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). Most business credit cards have the added bonus of great rewards 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 not have stellar 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 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).
Fairly similar in design to KivaZip is a newer source of funding called crowdfunding. Popular crowdfunding platforms like KickStarter allow anyone with a vision 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.
Nav connects you to business financing offers that you are more likely to qualify for based on your business needs and credit — all without a hard credit pull. See my top options now.
This article was originally written on October 12, 2015 and updated on June 25, 2019.