Startup business loans encompass a variety of loan types, from SBA loans to microloans, tailored to young businesses just starting out.
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When you run a startup, finding funding is one of the most pressing challenges you will encounter. Since many lenders require borrowers to have a healthy financial track record, it can be a struggle for new businesses with little history to obtain financing. However, there are a number of financing options available to startups.
What is a startup business loan?
Startup business loans generally refer to loans that are tailored to young businesses—typically those that have been in business for under a year. While many business founders rely on their own savings and assistance from family and friends, it’s common to need additional capital to help your business grow, and many lenders offer products specifically for new businesses.
Loans from traditional banks may have strict requirements that make them difficult for startups to access. Although many lenders require businesses to have been operational for at least a few years before qualifying, there are a number of loan types and funding sources that are suitable for new startups, including SBA loans, microloans, and more.
How do startup loans work?
There are many types of loans for startups, and their requirements vary widely. In general, you will need to have a good idea of how much money you will need and a strong plan for how you will use it. Your business plan is the most important part of your loan applications as a startup, as the lender will want to see that you’re prepared to succeed. Lenders will also likely consider your personal credit score and financial information, business bank account statements, and business credit score if you have one. Some loans may also require collateral.
The amount of time you’ve been operating your business has a big effect on your loan options, with more options becoming available the longer you’ve been in business. You are more likely to be able to receive loans from online lenders, microloan lenders, and other sources after you’ve been in business for at least six months.
Loans can be used for a variety of purposes, including purchasing equipment, supplies, furniture, inventory, or real estate, as well as general working capital. Some loans may have restrictions on how they can be used, while others are open to most business purposes.
What types of startup business loans are there?
Startup businesses have a variety of options when it comes to funding. Below, we review a few of the most common financing products for startups.
You can receive a number of loan options through the U.S. Small Business Administration. With programs such as the 7(a) loan program and the 504 loan program, the SBA does not directly lend funds but partners with lenders to guarantee up to 85 percent of the loan, taking on some of the lender’s risk. Requirements for these loans vary depending on the individual lender, but in some cases, startups may be eligible, especially if the founders have previous experience in the industry in which they plan to operate their business.
New startups are most likely to qualify for the SBA microloan, which offers loans of up to $50,000, although the average microloan amount is around $13,000. Unlike the SBA’s other loans, microloans disburse funds directly from the SBA through local nonprofit lenders. Lenders have their own individual requirements for microloans, but it’s common for a personal guarantee or collateral to be required. Funds can be used for most business purposes but cannot be used to purchase real estate or refinance existing loans.
The SBA also provides resources and assistance to business owners, helping them create a business plan and complete loan applications.
The SBA is one of the largest providers of microloans, but other organizations offer these loans as well. Microloans are generally defined as short-term loans of less than $50,000. It’s a good idea to look for lenders in your area, as microloans are often provided by local or regional organizations. Nonprofits such as Kiva and Accion Opportunity also offer microloans.
Microloans are generally flexible and can be used for a variety of business purposes. In addition, they can help you build business credit, which will make it easier to obtain other additional funding later on.
When you apply for a microloan, lenders typically consider your business and personal credit scores, revenue, length of time in business, and the amount of funding you are seeking. As a new startup with less established finances, you will need to have a strong plan for how you will use the funds and a good business plan to qualify for a microloan.
Purchasing equipment can be a major portion of the costs of starting a business. Equipment financing allows your business to purchase equipment and pay it off in installments over time, similar to a car loan. Equipment financing is generally easier to get than other types of loans since the equipment itself can act as collateral, reducing the risk for the lender. Banks, credit unions, and online lenders may offer equipment financing.
Equipment financing typically has favorable terms, with fixed interest rates that are usually fairly low, and longer loan terms that keep payments manageable. You may be required to pay a down payment of 10 to 25 percent of the equipment’s cost.
If your business sells products or services, you may allow customers to buy on credit. This is especially common for business-to-business companies. When your company is new, waiting for invoices to be paid can have a major impact on your cash flow.
Invoice financing can help companies cope with this problem by allowing them to borrow money against their unpaid invoices, with the invoices themselves serving as collateral. For new companies that deal with invoices, this can be a helpful way to get through tight spots. Invoice financing is usually relatively easy to qualify for compared to other loans.
Business Credit Cards
Business credit cards are a common and useful source of funds that most businesses will take advantage of. If you’ve been in business for six months or less, you can still qualify for a business credit card, and the application process is typically simple, only requiring your federal tax ID or social security number. No collateral is generally required. You can borrow as much or as little as you need, up to your credit limit.
Many business credit cards offer a period of zero percent introductory APR, which functions like a free loan, allowing you to carry a balance without accruing interest. You can make use of this as you launch your business, but it’s critical that you pay off your debts before this period ends to avoid paying interest, as business credit cards have high interest rates compared to loans.
A personal business loan is a loan taken out by an individual for business purposes. This type of loan can be a good option for new businesses without a long operating history, as personal business loans are approved based on your personal financial history, rather than your business’s financial qualifications, and they do not require collateral. This makes them easier to qualify for, especially if you have a good personal credit score.
Personal business loans have less expensive interest rates compared to short-term business loans, and they generally offer small loan amounts, which could be ideal for getting a new business off the ground.
The danger of a personal business loan is that your personal assets and credit history would be at risk if you are unable to repay the loan. In addition, mixing your personal and business finances can create legal and bookkeeping challenges, so it’s important to be careful with your records.
Other Funding Options
In addition to loans, you may want to consider these additional funding options:
Grants for Small Businesses
Grants for small businesses are available from governmental organizations, nonprofits, and corporations. Many grants focus on businesses that work in technology, science, or environmental industries, businesses that benefit local communities, and businesses owned by underrepresented people.
Grants typically have specific eligibility requirements, and applications can be competitive and time-consuming. You will likely need to have a strong business plan and may be required to prepare a presentation or statement for your application. In some cases, grants will require businesses to be fully operational before you apply. However, startups are eligible for some grants, and the money they provide can be incredibly helpful, so it’s a wise idea to search through available grants to see if your business qualifies.
Some sources of government grants include:
- America’s Seed Fund
- Small Business Innovation Research (SBIR) and Small Business Technology Transfer (STTR) programs
Crowdfunding enables many people to collectively fund a project that interests them. Crowdfunding websites such as Kickstarter, Indiegogo, and Fundable allow members of the public to pledge money for projects they care about, often in exchange for special benefits. Most successful crowdfunding projects offer a specific end product, such as a technological gadget, game, or toy, or take advantage of an existing fanbase.
Many companies have had success with crowdfunding, but this method of funding has its drawbacks, so it’s important to make sure that you understand crowdfunding before launching a campaign. When you start a crowdfunding campaign, it’s crucial to make sure that you set a realistic funding goal, as many crowdfunding websites only allow you to keep the money if the project achieves its goal. In addition, it’s common for the scope of a project to increase over time, so ensure that your goal can be reached with the planned amount of money.
Because offering rewards for backers is a big part of how crowdfunders make their campaigns appealing to pledgers, it’s easy for companies to promise big, exciting rewards and struggle to deliver them when the time comes. Be sure to offer rewards that you will be able to deliver.
Finding funding for your new startup can be difficult, but there are a variety of ways to obtain the financing that will help your company get up and running. From microloans and grants to business credit cards and equipment financing, you will need to evaluate your options carefully, and many businesses combine several resources to gather the necessary cash. With wise financing choices, you can set your company up for success.