New companies can get started with startup business loans. To cover operating expenses, startup owners can use term loans, lines of credit, asset-based financing, business credit cards, and lines of credit. Funds from family, friends, and crowdfunding campaigns are more flexible for startups with poor credit histories.
Tips to Compare Startup Business Loans
These tips are important when you compare startup loans.
- Take into account time in business and annual revenues. Startup businesses are often new ventures with short business history. It’s important to find lenders who will consider your business. Lenders have minimum requirements for annual revenue and time in business. Compare lenders to ensure you find lenders who have the minimum time in business and annual income requirements your startup needs.
- Decide how you would like to receive your funding. You can choose between a lump-sum payment and an as-needed basis. A traditional term loan is best if you need your funds immediately. A business credit may be better if you only need the funds as they are needed.
- Be aware of the flexibility and repayment terms. Every business financing lender has its own repayment structure. Some types of financing require monthly payments while others require weekly or daily payments. When choosing your lender of choice and business loan, compare the repayment terms offered by different lenders.
- Be aware of additional fees. Many lenders do not charge origination fees, late payment fees, or other fees. It might not be true every time. When shopping for the best terms, make sure you confirm the fee structure of the lender. Consider additional fees when making a decision.
- Consider the support options available to you from the lender before you sign the loan agreement. If you have problems with repayment, customer support can make all the difference. Review customer reviews and research the customer service department to ensure it is a good fit.
Based on 16 data points, we evaluated 15 lenders. These data points included loan details, loan costs and eligibility, accessibility, customer experience, and application process. The weighting given to each category was what we used to determine the top lenders.
- Loan cost 35%
- Loan details: 20%
- Customer experience: 20%
- Accessibility and eligibility: 10%
- Application Process: 10%
We also looked at the available loan amounts, repayment terms, and fees within each category. We also considered minimum credit score, time in business requirements, and geographic availability of the lender. We also evaluated the customer service tools and borrower perks offered by each provider. These include online applications, prequalification options, and mobile apps that make it easier to borrow.
We awarded partial points to lenders that met each criterion where appropriate.
What Is a Startup Business Loan?
A startup loan is a type of financing that’s available to small businesses with poor credit histories and limited business. Term loans and U.S. Small Business Administration loans are the most popular types of startup loans. However, entrepreneurs can also choose to use business credit cards or other asset-based financing. Startup founders can also use crowdfunding as a financing option to raise the capital they need to grow and start their businesses.
How Startup Business Loans Work
Business loans for startups are a variety of financing options that are available to companies without a credit record or track record. Different types of startup loans require different qualifications and apply processes. The loan terms and available loan amounts vary depending on the lender. Startup business loans are generally less restrictive than traditional business loans and therefore more accessible to new companies.
8 Types of Startup Business Loans
If your company hasn’t had success in the past, it can be difficult to get a small-business loan. There are many types of startup loans available that can be tailored to different needs and qualifications.
Online Term Loans
Online lenders and traditional banks can offer term loans. However, online lenders may have more stringent qualifications than banks. Online lenders typically limit term loans to $250,000-$500,000. However, startups that are just starting out won’t be eligible for these loan amounts. Online lenders often require that startups be in operation for six months to one years before they are eligible.
Startups with less than six months of experience can use online term loans to obtain business financing to grow their business. Consider the seven startup loans below if your startup is not yet in business.
Eligible business owners can get startup loans of up to $50,000 through the SBA Microloan Program. The terms can be extended up to six years, and the interest rates are typically between 8% and 13%. However, this number may vary by lender.
Nonprofit lenders and financial institutions are able to issue loans, which are generally more accessible for startups with poor credit records and limited financial history. SBA microlenders, although not all businesses will find them helpful, are more likely to fund startups in disadvantaged regions and owned by women or minorities.
Asset-based financing refers to a type of lender financing that is secured by the business’ valuable assets such as inventory, machinery, equipment, and accounts receivable. Because it is less risky for the lender, secured financing can often offer more flexible lending terms. It is a great option for startups who don’t have the traditional requirements for a business loan.
Invoice factoring is one of the most popular types of asset-based lending. It involves selling off outstanding invoices to third parties in return for a lump sum of cash, usually between 80% and 90%. This is a quick way for startups to get working capital without the need to have a good business credit rating or meet any other borrowing requirements.
Personal loans for businesses
Startup founders might also be able to benefit from taking a personal loan instead of a traditional loan. Personal loans are much easier to get than a traditional business loan, especially for those who have a limited or nonexistent history of business.
Additionally, some lenders may have a simpler application and approval process than those for business loans. Startup owners may be able to access lower annual percentage rates (APRs), than with business loans. However, borrowing limits are generally lower.
Personal loans are not available to borrowers who finance their startup businesses. They will be responsible for the repayment of the loan. However, lenders will still consider the applicant’s credit score when considering a loan application for startup businesses. Startup founders may be responsible for repaying the loan.
Be aware that personal loans for business purposes can also involve commingling personal assets and business assets. This could lead to tax, bookkeeping, and/or legal problems down the road. You should also know that some personal loan lenders do not allow funds to be used for business purposes. Before applying, make sure you confirm this with your lender.
Credit cards for businesses
Business credit cards are similar to personal credit cards. They offer revolving access funds that can be used to purchase everything, from office furniture and supplies to equipment, legal fees, and larger purchases.
Startup owners have a better chance of getting approved than traditional loans because the application and approval process takes less time than traditional loans. Business credit cards are also unsecured, so no collateral is required for new business owners.
Cardholders can use business credit cards on an as-needed basis. They pay no interest on unpaid balances, which is typically every 30 days. It is a great option for monthly operating expenses and any other expenses that can easily be paid each month to avoid interest. Many cards offer introductory APRs which allow borrowers to make interest-free purchases for up to six months.
Friends & Family
A startup without a good credit record and poor financial records can find it difficult to get business financing. If a business owner is unable to get a traditional loan for their business or another way like a credit card for business, or if they are only able to get a small loan for their startup, then it may be a good idea to borrow money from family or friends.
Startup owners must confirm that they are comfortable with entering into a business relationship before agreeing to lend money. This includes reviewing the business plan and discussing the role of each party in the business. It is important to ensure that all parties are in agreement about the loan amount, repayment terms, and interest rate. This will prevent any conflicts later.
Crowdfunding may be an alternative to traditional lending options. Potential borrowers can also use crowdfunding platforms like Indiegogo and Kickstarter to get cash to cover operating expenses.
Start by choosing an online fundraising platform. Once you have created an account, decide how much money to raise. Users can set up crowdfunding campaigns and donate cash in a variety of amounts. Cash will be available once the campaign is over.
This type of funding is not only available to businesses without the need to qualify through a financial institution; business owners don’t even have any obligation to donate equity for the funds. The startup doesn’t pay interest or any other lender fees.
This strategy works best for startups that don’t have to raise large amounts of money or businesses with innovative or other attractive offerings. Although it is not essential to give a thank-you gift, campaigns can be more successful if the startup offers a unique product, service, or gift.
Grants for small businesses
A small business grant can be money that is given to start-ups and other businesses to aid them in their growth. Grants can be offered by many entities, including the state and local governments, the federal government, and corporate organizations. Small business grants are not subject to repayment and don’t charge interest or fees.
This type of financing is highly competitive, and the applications can be time-consuming and rigorous. Many grants are also targeted at specific types of businesses, such as those that are owned by women, veterans, and immigrants. It can be hard to find the right open grant, apply for it, and wait for the award.
How to Qualify for Startup Business Loans
Lenders generally look at the personal and business credit scores of startup owners when considering a loan application. It can be difficult for startups to get a loan for their business because they have poor credit records and financial history. The lender will in this instance rely solely or primarily on the borrower’s creditworthiness.
Before you submit an application for a loan to start a business, gather these documents:
- Credit scores and reports. A lender will perform a hard credit inquiry to confirm your creditworthiness. This can temporarily lower your credit score by as much as five points. Get copies of your credit reports, and verify your credit score prior to applying for a loan. This will help you understand your chances of approval and the interest rate that you might be eligible for.
- Tax returns. Be prepared to provide tax returns for business from the past two years, if possible. Keep copies of all your tax returns, as well as IRS documents, for the same time period. If your startup is new or has not had any returns in the past, personal returns are especially important. They may also be required for all registered agents and owners of the company.
- Additional financial records. The lender may request startup bank statements, accounts receivable, and unpaid invoices in order to complete the application. Lenders will often require records that go back at least four years. This may even be possible for startups.
- Business Plan. Without lengthy financial records, a current business plan shows lenders that your company is capable of paying its debts. A business forecast should be included in this document to show future revenues and expenses.
- Registrations, business licenses, and legal documents. You may be required to submit copies of any licenses or registrations that are necessary for you to conduct business in your state. Lenders might also request copies of incorporation documents and franchise agreements.
- Bank information. To deposit funds, the lender will need banking information if you are approved for a loan to start up a business. This information is usually provided during the application process.
How to Get a Startup Business Loan
Although the process for getting a startup loan differs by financing type and financial institution, most banks and online lenders have similar requirements. You may have additional difficulties if you are a startup with poor credit records or financial records. These steps will help you obtain a loan for your startup.
1. Consider what type of loan you require. The loan amount and repayment terms can vary depending on the lender and loan type. Consider whether other types of financing are available for startups, or if your personal credit is sufficient to be eligible for a loan for business purposes.
2. You should check your credit score before you apply for a loan for your startup. This will help you determine your chances of being approved for traditional financing. Improve your credit score before you apply for a startup loan. If your startup has been operating for at least one year, you may be able to get a credit score from Experian, Equifax, or Dun & Bradstreet. It can take up to three years to establish credit for a business.
3. Preparing your startup for due diligence. The review typically includes reviewing the applicant’s personal and business bank statements, as well as other financial documents. You may be required to submit copies of any applicable business licenses or legal documents. Also, you might need to describe how you plan on using the funds. It is even more important for startup founders to have a solid business plan that clearly shows the likelihood of success.
4. Compare lenders to get the best deal. It may not be possible to qualify for the lowest rates depending on your credit score and how long your startup is operational. However, comparing rates from multiple lenders can help you secure the best rate for your business.
5. Submit an application. Once you have identified your preferred lender, go through the application process and gather the documentation. Although the underwriting and application processes for business loans vary from lender to lender, most applications can be made online, by telephone, or in person at a branch. After you have submitted your application, a representative of the lender may contact you to provide additional information, documentation, or business projections.
6. Look at other options. Consider borrowing money from a friend or relative who is interested in the support of your new venture. You can also use a crowdfunding platform such as Kickstarter to attract investors and new customers.
What If You Are Denied a Startup Business Loan?
There are several steps you can take in the event that you are denied a loan for your startup business. Find out why you were denied. You can contact the lender directly, or in this case, if you are eligible for an SBA Microloan review the notice of denial.
After you have understood the reasons for your rejection, take steps to rectify them. You may need to wait until your startup is financially stable before you can apply for a loan. Or, take steps to improve credit scores by paying off debts and making timely payments.
You might also consider other types of startup financing that have less stringent lending criteria. A business credit card, for example, may be able to provide the funds you need if you have been denied traditional loans. However, it will require less stringent qualifications. Start a crowdfunding campaign if your startup is too new to be eligible for conventional financing.