As a new enterprise, you have so many expenses: business startup costs can go through the roof, and that’s even before you make a dime. That’s why many new entrepreneurs go looking for routes to find working capital for startup businesses. Because, as much as you’d love to pay for odds and ends rolling in by simply generating more revenue, that’s hardly a solution anyone can pull out of thin air. Especially brand-new business owners.
Unfortunately, finding working capital for startup businesses is tougher than tracking down standard working capital loans, which usually aren’t a fit until you’ve had a couple of years of operating history under your belt. The good news? You’re not entirely out of options—you just might have to get a little creative.
We’ll take you through why the experience of vetting working capital options is a little different for startups, plus what your best route might be to finance your startup.
There’s no way around the reality that your position as a startup puts you at a disadvantage to secure a small business loan. Most lenders have general minimum requirements for time in business and revenue to make certain that your business is viable—and that they’re going to see a return on their money.
Put yourself in the shoes of a business lender for a moment and think about the risk that they’re taking. If you have no business history, they have zero idea whether or not you know how to run a business or if your business idea is sustainable. Without this history to reference, how can they be certain that you’ll be able to pay them back? Remember: getting paid back is their business. If you don’t have any credentials for them to vet, they can’t make an informed determination as to whether or not you’ll be able to repay your loan.
None of that means you’re totally out of luck when it comes to finding working capital for startups. Here are your best options to explore via traditional small business financing routes:
A business line of credit works a bit like a loan and a bit like a credit card. You’ll work with a lender to get approved for an amount of funding with certain terms. But instead of getting it delivered in a lump sum, like a term loan, you’ll only draw from the line in the amount of working capital that you need to use—and, in turn, only pay interest on that amount.
You can borrow up to the full amount of your working capital line of credit, and once you’ve repaid what you’ve borrowed, you can access that amount again. Lines of credit are not only a nice source of working capital for startup businesses, but they’re a great safety net to have in place for all businesses.
Although lenders do prefer to have business history when evaluating line of credit candidates, some lenders are more flexible about their requirements. You might have to do a bit of shopping around, but if you have a strong personal credit score and a few months of operation under your belt, this could very well be a viable, practical option for you.
SBA Microloans are part of the US Small Business Administration’s SBA loan program. These government-backed loans are highly desirable with great terms—and they’re highly competitive to qualify for.
The SBA Microloan program is in place specifically to kickstart smaller businesses with smaller amounts of capital. These loans, administered by institutions partnering with the SBA, can provide working capital for startup businesses up to $50,000 with extremely competitive interest rates, and repayment terms up to six years.
To be eligible for these loans, you’ll need average credit and a US-based, for-profit business with a strong business plan. These applications are paperwork-intensive, and, as such, slower to process—so if you’re in a time crunch, this won’t be your best bet. But, still, an SBA Microloan is an amazing option if you can qualify, and worth checking out.
Yes, you can use a personal loan to finance your business—and, especially in the early days when you have limited working capital options, you might need to. Many entrepreneurs do!
There are, of course, risks to taking out a personal loan any time, for business or otherwise. You put your personal credit at risk, and if you can’t repay your loan, that could have long-term implications for your score. But if you’re helming a startup, you’re likely comfortable with at least a little risk.
If you do go the route of personal loan for business, we’d recommend that you keep the loan small at first and work with your accountant to take stock of your cash flow. That way, you can borrow an amount that you’ll be absolutely certain you can pay back—helping your business with necessary working capital while keeping your personal credit as safe as possible. At the same time, you’ll be able to work on building your business credit, and getting that all-important time-in-business stat established.
These ideas are a little more creative. You might try these first, or decide to give them a shot if using a traditional approach doesn’t work:
You might already have a business credit card as an entrepreneur. But if you have to pay off your bill every month, or if you’re carrying a balance that’s accruing interest, then you’re eating into your working capital.
Instead, think about applying for a 0% intro APR business credit card. These cards offer long, interest-free periods during which you can carry a balance—think of it like an interest-free loan. And card issuers don’t care when you opened your business!
For startups, we particularly like the American Express Blue Business Plus. Foremost is for its 12-month 0% intro APR period. After the 12 months, a variable APR will set in based on your creditworthiness and the market prime rate, so you’ll want to check with the card issuer for details. But for a year, you’ll not only have access to working capital for your startup—you can also plan for a way to pay it off without adding a dime of interest on top.
Raising capital in exchange for equity isn’t an option for every business owner.
But if you find that you’re tight on working capital, and you’ve bootstrapped your operation so far, now might be the time to seek investors.
Giving away a piece of your company could seem terrifying—and with good reason. But if seeking outside financing or going it on your own is the difference between sink-or-swim, now might be the time to look into equity financing.
More realistic for many than professional investors or investments from venture capitalists is the help of friends and family. If you’re finding that traditional financing options to seek working capital for startup businesses aren’t quite the right fit for you, consider asking for a loan from those you know.
But wait: As much as you’d love to take a $2,000 from your favorite aunt in exchange for an IOU, there are guidelines to this. If you do make a deal, put it in writing. Not only does this take the pressure off of your relationships (think of your favorite aunt, up at night, resenting you because she doesn’t know if you remember that $2,000… and did you talk about interest?), but it’s important for tax purposes, too.
For instance, did you know that it might be possible to write off your small business loan interest—but only if you have the right documentation for a friends and family loan? If not, these tips from the SBA will help.
Turns out that there’s quite a bit of free money out there for startups. You just need to know where to look.
Many organizations across the country offer small business grants for entrepreneurs across industries, genders, ethnicities—you name it. Applying for grants is an intensive process, sure: You’ll need to research to find the right ones for you, do some heavy paperwork, and, more than likely, apply to a bunch of grants before you hear anything. But if you’re able to secure free working capital for your startup, it’s time very well spent.
The best thing you can do is something you’re not going to want to hear: Wait it out.
Since the business lending game is all about making sure that lenders aren’t taking on too much risk, the only thing you can really do to prove to them that you’re a strong borrower is show them lots of evidence that you’re trustworthy. That comes with being able to present strong financial statements, predictable cash flow, and good credit month after month in business. Patience is never fun.
That said, one thing you do have control over is your business credit score. Use this time now to make sure you’re building solid business credit history by spending on your business credit card, and paying off your bills on time and in full. Although you can’t make the days go by, you can make sure you’re doing everything to nudge you credit score higher. That way, when time does come for a business loan, you’re in the best position possible.
Meredith Turits is a contributing writer for Fundera.
Meredith has worked as a writer and editor for more than a decade. Drawing on her background in small business and startups, she writes on lending, business finance, and entrepreneurship for Fundera. Her writing has also appeared in the New Republic, BBC, Time Inc, The Paris Review Daily, JPMorgan Chase, and more.