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What Is a Startup Business Loan?

Last Updated: July 02, 2020

A startup business loan encompasses any type of financing aimed specifically toward startups with little to no business history. Although it may not be as easy to access funding as a new business, there are still a variety of business loans and financing methods available to startups, including—SBA microloans, asset-based loans, business credit cards, and more.

Pros
  • Different types of loans (as well as alternative financing methods) available
  • Usually fairly quick to fund
  • Many asset-based financing options, including equipment and invoice financing
Cons
  • Can be more expensive
  • Not many options for traditional term loans or longer-term financing
  • Requirements often rely heavily on personal credit and business financial projections

How Does a Startup Business Loan Work?

When you’re looking for small business loans as a startup, you might be unsure of how the process of acquiring financing works. If you’re searching for business financing for the first time, this is completely understandable—plus, things are all the more confusing because there isn’t a single type of financing that qualifies as a “startup business loan.”

As we mentioned above, a startup business loan can refer to any type of financing that’s designed to accommodate newer businesses.

Therefore, you might access a startup business loan that functions as traditional debt financing—where you receive capital and pay it back over time with interest. On the other hand, you might find that equity financing is better suited for your startup—in this case, you’ll receive funding in exchange for shares or stock in your business.

In any case, although business startup loans can work differently based on the specific product and lender—the most important thing is that the loan works for your business. The right financing product for another startup might not necessarily be what’s right for your startup—so you’ll want to make sure that whatever type of startup business loan you choose is one that can meet your unique funding needs, and of course, is one that you can afford.

All of this being said, let’s take a look at some of the top options for startup business loans, summarized below:

Best Startup Business Loan Options

Type of Financing

Best For

Where to Get It

More Information

SBA Microloans

Affordable, traditionally structured loans; qualified business owners

Local SBA microlenders

Learn more about the SBA Microloan program.

Asset-based financing

Specific financing needs—receiving capital for outstanding invoices or purchasing equipment

Invoice financing: BlueVine, Fundbox


Equipment financing: Crest Capital, Balboa Capital

Learn more about asset-based lending.

Business credit cards

Fast access to a line of credit; startups with less than six months in business

Chase, American Express, Capital One

Compare the best business credit cards for startups.

Personal loans for business

Very new startups; business owners with great personal finances and credit history

Rocket Loans, local or national banks that you already have a relationship with

Find out more about when it’s worth using a personal loan for business.

Small business grants

Access to capital that you don’t have to pay back; startups in specific industries or communities

Government programs, like SBIR or STTR; corporate organizations like FedEx and Visa

Explore the different options for small business grants

Friends and family

Flexible and fast funding; business owners who have a network willing to invest

Friends and family within your network

Find tips for raising money through friends and family.

Crowdfunding

Small amounts of capital; testing a product or creative idea

Crowdfunding platforms like Kickstarter or Indiegogo

Learn more about how crowdfunding works.

With this overview in mind, let’s break down these small business loans for startups in more detail:

SBA Microloans

Of all of the options on this list, SBA Microloans are most akin to traditional business loans. Through their microloan program, the SBA loans money to intermediary non-profit lenders and financial institutions, who then issue loans to small businesses.

Through this program, you can access loans up to $50,000 with terms up to six years. Although the rates can vary, generally, SBA Microloans will have interest rates that range from 8% to 13%.

Although these SBA loans are only available in smaller amounts, they offer affordable access to funding that can be hard for startup businesses to find. Typically, SBA loans require a minimum of two years in business, as well as strong credit and business financials.

With this program, however, there is more flexibility—microlenders will often work with business owners with average credit, as well as those with limited time in business. Additionally, because SBA microlenders are community organizations, they often focus on minority or women-owned businesses, as well as those operating in disadvantaged areas.

Therefore, if you’re looking for a lump sum startup business loan that can be used for a variety of purposes, an SBA Microloan will certainly be worth considering.

Explore some of the top SBA lenders here.

Asset-Based Financing

Asset-based financing can be a great option for your startup if you’re looking for funding for a very specific purpose. On the whole, asset-based financing encompasses any type of financing backed by an asset—whether real estate, invoices, equipment, or another form of collateral.

The most common types of asset-based financing are invoice financing and equipment financing. These types of financing make worthwhile startup business loans because—since they’re backed by tangible assets—lenders are more likely to be flexible with their requirements.

In this way, a lender may be willing to offer you asset-based financing even if you have limited time in business.

With invoice financing, a financing company will offer you an advance of capital in exchange for your outstanding invoices—typically up to 85% of the invoice value. When your customers pay the invoices, the company will give you the remainder of the funds, minus their fees.

Invoice financing is great for B2B businesses who have capital tied up in outstanding invoices. With the advance from an invoice financing company, you can cover your working capital needs.

With equipment financing, on the other hand, a lender will finance the purchase of your equipment, sometimes up to 100% of the value of the equipment. Just as the invoices back your invoice financing, the piece of equipment you’re purchasing serves as collateral on the financing.

Typically, equipment financing will be issued similarly to a traditional loan—where you receive a lump sum of capital to purchase the equipment and then you pay back the lender over time, with interest.

In this case, equipment financing is a worthwhile option for startups who need to purchase equipment.

All in all, asset-based financing is akin to a traditional business startup loan—but backed by physical collateral—making it easier for newer businesses to qualify.

Business Credit Cards

If your startup has been in business for less than six months, you might turn to a business credit card for a source of financing.

Although business credit cards are not necessarily traditional startup business loans, they can give you access to a line of credit that you can use to cover big expenses, or day-to-day spending. Of course, you’ll want to make sure that you pay your balance off each month to avoid high interest rates on the balances you carry over.

On the whole, a business credit card is a useful financing product for any business owner—however, they can be particularly helpful in place of a business startup loan for a few reasons.

First, it’s quick and easy to apply for a business credit card. Second, they give you the freedom to borrow as much or as little as you need each month. And finally, they don’t require collateral to secure the credit line.

With this in mind, if you’re looking for a business credit card to cover larger startup expenses, you’ll want to start with those that offer 0% introductory APR periods.

These 0% intro APR business credit cards will allow you to carry a balance for a limited time, interest-free—making this card very similar to using a free loan. Of course, after the intro period expires, you’ll need to pay off your balance in full to avoid facing interest at the variable APR that sets in.

In any case, if you have a newer startup that can’t yet qualify for more traditional business startup loans—or one that only needs a limited amount of financing—you might start with a business credit card.

Personal Loans for Business

Just as business credit cards can be worthwhile for startups with less than six months in business, personal loans for business can be an option for very new businesses.

In essence, a personal loan for business is exactly what its name implies—it’s a loan you take out as an individual, based on your personal finances, but used for business purposes. One of the benefits of this type of startup business loan is that it can be less expensive than a business loan. Additionally, it can be much easier to qualify if you have strong personal finances, but limited business history.

On the other hand, of course, it’s extremely risky to take on a personal loan for business—for if your business fails, and you can’t pay back the loan, your personal finances and credit history are on the line. Moreover, mixing your personal and business finances can put you at risk for organizational, bookkeeping, and even legal issues.

This being said, however, if you’re looking for a small amount of capital when you first start out—a personal loan for business can be worth considering if you don’t have any alternatives—as long as you understand the risks and manage your finances wisely.

Small Business Grants

Next, if you’d prefer a form of startup funding that you don’t have to pay back, you might look into small business grants. Once again, like business credit cards, grants are not your typical type of startup business loan.

This being said, however, if you can receive a grant for your business, you’ll have access to free capital—which you won’t likely find with any other type of financing product.

There are a variety of types of grants you can apply for, including those from the federal government, state and local governments, as well as those from corporate organizations. In particular, the Small Business Innovation Research Program and Small Business Technology Transfer Program are great options for small businesses involved in science, technology, and innovation.

In addition, you’ll find that there are a number of grant options reserved for certain kinds of businesses, like mission-oriented businesses, minority-owned businesses, businesses operating in specific communities, women-owned businesses, veteran-owned businesses, and immigrant-owned businesses.

With business grants, though, it’s important to remember that applications are very competitive. Therefore, you may spend a significant time gathering and preparing your application materials with no return.

On the other hand, although business grants aren’t a traditional replacement for startup business loans, if you think you can qualify for a grant, you’ll find one of the most affordable types of startup financing out there.

Friends and Family

Similar to business grants, if more traditional small business startup loans aren’t available to you, another option is to turn to friends and family to raise initial funds. Or, on the other hand, if you have received a startup business loan, you might work with friends and family to supplement this capital.

However, it’s important to keep in mind that although many successful businesses have been built off the backs of generous friends and family members, this type of business funding can be risky for startup owners.

In short, when you fund your startup with money from friends and family, both your business’s financials and your personal relationships are on the line.

For that reason, you’ll want to be sure to work with people you trust. Before you get into a funding agreement, you should make sure that the contributors understand your business plan, what you’ll be doing with the money, and what their role will be in the funding relationship. Handling the situation as professionally as possible will help prevent issues that could arise in the future.

Crowdfunding

Finally, another creative form of funding for startups is crowdfunding. Like grants or investments from friends and family, crowdfunding can be a worthwhile alternative when you can’t yet qualify for a more traditional business startup loan—or as a supplement to initial capital.

In essence, crowdfunding lets you raise capital from online campaigns—typically through a dedicated crowdfunding platform, like Indiegogo or Kickstarter.

With crowdfunding, you set a specific amount of capital as a “goal” you’re trying to hit. Users on the platform can donate money to your campaign if they feel inspired to do so. Unlike equity or debt financing, you don’t have to give up ownership in your business or pay interest to these funders. Instead, you’ll usually repay their generosity with a perk, a free gift, or a simple “thank you” note.

Crowdfunding is a good way to raise a small amount of capital from a large amount of people. It tends to work best for product-based businesses or those with creative, innovative ideas.


How to Qualify for Startup Business Loans

Overall, because there is no single option for small business startup loans, it’s difficult to detail specifically how you can qualify for financing as a startup.

Ultimately, the business loan requirements you’ll need to meet will depend largely on the particular product you’re interested in, as well as the lender, financial institution, or investor you’re working with.

This being said, however, there are some general tips you can keep in mind when trying to qualify for business startup loans.

First and foremost, if you’re looking for more traditional types of financing, you’ll want to make sure the lender works with younger businesses. Generally, it’s harder for businesses with less than six months in operation to find traditional loans. In this case, you may turn to one of the alternative options we’ve discussed—like a business credit card or grant.

Or, if you can offer collateral to secure your financing, like with invoice or equipment financing, you might find that a lender is more likely to work with your business, regardless of how long you’ve been operating.

On the other hand, if your business is older than six months, you should be able to find a lender, like a microlender, that will work with your startup.

In addition, another of the most important things to consider when trying to qualify for a startup business loan is your personal credit score.

Almost any lender will look at your personal credit score when you apply for financing—the higher your score, the better your changes are for qualifying for a loan—and one with the best terms and rates.

Of course, this isn’t to say that there aren’t business loans for bad credit—however, as a startup, it may be even more difficult to access those types of products.

Therefore, if you need to work on improving your credit, you may again decide to turn to more creative funding methods to finance your business in the meantime.

See If You Qualify

How to Apply for Business Startup Loans

Once again, like the requirements you need to qualify for a business startup loan, the application process you’ll need to complete will vary based on the method of financing you choose, as well as the lender or investor you’re working with.

If you’re applying for a more traditional type of financing, like a microloan or line of credit, however, you can expect to fill out an application with your basic personal and business information, as well as provide certain documentation.

Overall, you can expect to provide any or all of the following:

  • Employer identification number (EIN)
  • Business bank account statements
  • Personal credit score
  • Financial business plan
  • Business financial statements

Additionally, if you’re applying for asset-based debt financing, you’ll need to provide information and documentation regarding the outstanding invoices you have or equipment you’re looking to purchase.

On the other hand, more creative financing methods will have different application processes:

  • Business credit cards have a very simple application process, only requiring your federal tax ID or your Social Security number.
  • If you’re applying for a personal loan for business, the lender will first and foremost require information about your personal finances, credit history, and existing debts.
  • The application process for a small business grant depends on the grant you’re applying for, but may require a drafted statement, presentation, or other documentation.
  • Working with friends and family or crowdfunding won’t necessarily require an application, but instead that you come to a mutual agreement or get set up on a crowdfunding platform.

Startup Business Loans FAQs

Is it hard to get a startup business loan?

Generally, it’s much more difficult for a startup business to access a traditional, long-term loan from a bank or other lender. In short, lenders are hesitant to issue traditional loans to startups because they don’t have the time in business to demonstrate that they’ll be able to pay back the money they’ve borrowed. In this way, working with startups is much riskier for lenders.

This being said, however, some online, alternative lenders will be more likely to offer financing to startups—and can provide short-term loans, lines of credit, or certain types of asset-based financing. Of course, it’s important to remember that these products may be more expensive, with small amounts and shorter repayment periods, than more traditional term loans.

With this in mind, it will be easier for you to get a startup business loan if you have strong qualifications (credit history, financials or financial projections) and significant collateral to secure the loan.

What loan amount can a startup business get?

If you’re looking for financing, it’s important to understand how much capital you can get from a loan as a startup. Generally, because startups are riskier to work with, you’ll find that lenders will offer smaller amounts with shorter repayment periods.

As an example, SBA Microloans are available in amounts up to $50,000 with a maximum repayment period of six years. If you’re working with an alternative lender, you may be able to access larger business loan amounts, up to around $250,000—but these products will typically have terms of one year or less—and can have higher interest rates.

Ultimately, however, the amount you can get for a startup business loan will depend largely on the type of loan, the lender you’re working with, and your qualifications.

Do banks give loans to startups?

Although it is possible to receive a bank loan for your business as a startup, it’s not very likely. In fact, even businesses who have been operating for a few years will find it much more difficult to qualify for a bank loan than any other type of business loan.

Generally, banks will require that businesses show the highest qualifications to qualify for a loan—including a few years in business, strong business financials, and excellent credit. This being said, however, if you have great personal credit, can offer up sizable collateral, and have impressive financial projections, you may be able to find a bank that can offer you a startup loan.

In this case, you may start with your local or community bank, as these banks may be more flexible than larger, national banks.

On the other hand, if you don’t have strong qualifications, you’ll find that a bank isn’t likely to lend to your startup. In this situation, you may turn to alternative financing options to gain access to capital while you build up your credentials, or you might decide to work with online lenders who typically have more lenient requirements for businesses to qualify for a loan.

Compared to other loan types
Loan types Max amount Interest rate Speed
Startup Business Loan $150K 7.9 - 19.9% As fast as 2 weeks
SBA Loan $5K - $5M Starting at 6% As fast as 2 weeks
Business Term Loan $25K to $500K 7 - 30% As fast as 2 days
Business Line of Credit $10K to over $1M 7% - 25% Under 24 hours (in some cases)
Invoice Financing Up to 100% of invoice value Approx. 3% + %/wk outstanding As little as 1 day
Equipment Financing Up to 100% of equipment value 8 - 30% As fast as 2 days
Short-Term Business Loan $2.5K - $250K Starting at 10% As fast as 1 day
Merchant Cash Advance $2.5K - $250K 1.14 - 1.18 As little as 2 days
Personal Loan for Business $35K 5.99 - 35% APR As fast as 1 day

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