No one said starting and running a business is easy, and the tumultuous economy isn’t making it any simpler. Bootstrapping could have gotten you into entrepreneurship, but your ability to poise your business for sustainable growth might require additional funding.
But, as a relatively new business owner or one who is eager to start, you’re probably wondering what funding options you have. Are questions such as, “Do banks give loans to start a business?” or “How can I get a government loan to start a business” keeping you up at night?
Let’s not let those thoughts linger much longer.
This article explains the various traditional and unconventional startup funding options you can explore, along with key insights into the loan process.
Startup Loans and How They Work
A startup loan is a type of financing option that is available for newbie businesses that have a limited history or credit rating. Startup loans have less stringent requirements and therefore are more accessible to a new venture like yours.
How can these loans help? A startup loan can go a long way for your business. It can go towards purchasing raw materials and equipment, website development, expanding into a new market or even legally establishing yourself.
Questions to Ask Before Researching Startup Loans
Before we jump into looking at the details of various funding options that can kickstart your business, take time to assess your current needs. Here are a few guiding questions that you should answer so you know exactly what your financial goals are.
- How much money do you need? Use a startup cost calculator to get an estimate on the amount of funding required.
- What do you need the money for? Hiring a tax consultant? Equipment?
- Are you seeking a short-term or long-term loan?
- Do you have any personal outstanding loans?
- Do you have any collateral that you can put up for a loan?
- How long will you take to pay back the loan?
Best Small Business Loan Options
The hunt for securing new funding can seem daunting. What is actually available for new businesses that don’t have established lines of credit or history? Don’t panic! We’ve provided a few options you can explore.
SBA Microloans
An SBA microloan is a new and accessible way to find funding. Designed for up-and-coming entrepreneurs, SBA microloans are funded by the Small Business Administration, and they allow aspiring and established business owners to take a loan of up to $50,000 to start or grow their venture. These loans are also perfect for women and minority-owned businesses and those from low-income communities.
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Loan Amount |
Up to $50,000; in 2021, average loan was $16,557 |
|
Term Length |
6 years |
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Interest Rates |
Vary between 8%-13% |
|
Who Can Qualify |
Microloan borrowers must be eligible, for-profit small businesses. The lender might want collateral against nonpayment. |
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What Can Loan be Used For? |
Working capital and acquisition of materials, supplies, furniture, fixtures and equipment Loans cannot be made to acquire land or property or pay existing debts |
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How to Apply? |
Locate a designated intermediary lender in your state |
Term Loans from Online Lenders
Term loans are short or long-term loans given to businesses by a bank, credit union or online entity. A term loan can be used for the following:
- Purchasing equipment or inventory
- Refinancing other business debts
- Hiring and paying staff
- Paying tax obligations
- Financing business expansions
- Purchasing real estate
While traditional bank loans generally offer better interest rates, they are harder to secure, require longer business history, and their lengthy approval times might not be in your best interest if you are raring to go.
If your business is relatively new, getting a loan from an online lender might be a better option. They not only require minimal documentation but offer faster processing and increased flexibility. The interest rates range anywhere from 7 percent to 30 percent; however, this can vary according to the specific lender and your business’s qualifications.
A quick Google search will yield a variety of online term loan lenders, but you can start by looking into these top options:
|
Lender |
Product |
Loan Amount & Interest Rate |
Minimum Credit Score |
Minimum Requirements |
|
Short & long-term loans, lines of credit |
Up to $400,000 Factor rates starting at 1.15% |
500 |
6 months in business $15,000 in annual revenue |
|
|
Short-term loans & lines of credit |
$5,000- $250,000 9%-99% APR |
600 |
1 year in business $100,000 in annual revenue |
Crowdfunding
Over the past few years, crowdfunding has become a popular way of raising funds, especially for physical products or creative works. Why? Crowdfunders aren’t investors as they don’t receive a share of ownership in the business. Also, crowdfunders don’t expect a financial return on their money. What do they want in return? Dibs on your product or getting their name under the credits.
Crowdfunding is a low-risk option for a business owner like yourself, as you retain control of your company. Kickstarter, GoFundMe, SeedInvest and Indiegogo are some of the well-known crowdfunding portals. Each site has its own terms and payment terms, so do read the fine print in detail.
Business Credit Cards
Business credit cards can be a cost-effective, short-term way of financing your startup as long as you aren’t trying to fund large capital investments. You can use your business credit card to fund legal fees, purchase office furniture and raw material or buy a domain name.
Some other benefits of using a business credit card are:
- Quick approval: It’s one of the fastest ways to get funding, especially if you don’t have a well-established credit history.
- Eases online transactions: In our digital world, having a business credit card makes it easier for you to do online business transactions with vendors, suppliers and customers.
- Simplifies bookkeeping: It can be cumbersome to identify which are business expenses or personal expenses if you only have a personal credit card. A business credit card provides you with monthly and annual statements that can help you track and manage expenses.
- Builds credit: Yes, using a business credit card smartly (i.e., paying it off on time and not exceeding the limit) will actually help you build credit. This can come into use if you wish to apply for an alternate method of funding, like a small business loan, in the future.
Do keep in mind that the interest rate on business credit cards is usually much higher than a term loan. We’ve rounded up three of the top business credit cards for startups.
|
Name |
Annual Fee |
APR (Annual Percentage Rate) |
Minimum Credit Score |
Best For |
|
$0 |
13.24%-19.24% Variable APR (0% for first 12 months on purchases) |
690 |
If you’ll be purchasing business materials and telephone or broadband internet |
|
|
$0 |
13.24%-21.24% Variable (0% for first 12 months on purchases) |
640 |
Best for businesses with less than $50,000 in spend annually |
|
|
$150 |
No APR Balance has to be paid every month in full |
600 |
Excellent for small business owners who consistently make large purchases |
Small Business Grants
Depending on your business type, goals and needs, a small business grant might be the way to go. As grants don’t require any repayment of funds, they are an attractive source of funding for newbie entrepreneurs. Small business grants are usually offered by:
- Federal government
- State and local governments
- Private foundations
- Businesses supporting entrepreneurship
Top Places to Look for Grants
|
SBA |
Grant Marketspaces |
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Women-Owned Business |
Other Businesses & Private Foundations 500 Global Flagship Accelerator Program |
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Federal Government Rural Innovation Stronger Economy (RISE) Grants |
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The downside of this method of financing is that it’s extremely competitive. The applications are rigorous and time-consuming, and it can be a while before you hear back. But don’t let that stop you from choosing this avenue, as small business grants, like an entrepreneur grant, can be a supplemental form of funding your business. Yes, you can apply for a grant while you take on a more traditional financing option such as a loan, microloan or line of credit.
Peer-to-Peer Lending
What's this? Is it the same as borrowing money from family? Nope, it isn’t. Peer-to-peer lending, also known as P2P lending, is a relatively new and nontraditional form of funding for newbie and budding entrepreneurs that’s quickly gaining popularity. P2P lending happens over an online marketplace or platform.
On a P2P platform like LendingClub or Upstart, you’ll be matched with lenders, cutting out conventional financial institutions like a credit union or bank. Who are these lenders? P2P lenders aren’t banks and are typically composed of “crowds” of investors that could be individuals and companies.
Personal Loans
If your startup has limited history and credit rating, you can consider taking out a personal loan in lieu of a business loan. Why do we suggest personal loans? They are easier to secure and most even have lower APRs. However, on the flip side, the borrowing amount is also capped.
|
Pros of Personal Loans |
Cons of Personal Loans |
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Quicker approval process |
Cap on funding amount |
|
Less stringent application form |
Increases personal liability |
|
Lower APR |
Potentially led to bookkeeping, tax and/or legal issues down the line |
Private Investors
There are two types of private investors — angel investors and venture capitalists. Both typically ask for a stake in your business in return for a loan. What’s the difference, you may ask? Let’s take a closer look.
|
|
Angel Investor |
Venture Capitalists |
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Who? |
Typically an individual with a high net worth |
A group of investors or a company |
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Where does the money come from? |
Invest own money |
Invest money of others through an established fund |
|
Best for |
Startups |
Startups and businesses looking to expand Product-oriented companies |
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How to connect? |
Local community Join industry groups on LinkedIn |
National Venture Capital Association
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Common Startup Business Loan Requirements
Once you are ready to apply for your choice of funding, it's about making sure you have all the appropriate supporting documents. While the loan requirements can vary per lender, here are some common business loan checks you should be aware of.
Business and Personal Credit Scores
Even if you’re a newbie business owner or a sole proprietor, most lenders will require your personal credit score. If you have a partnership, then the personal credit score of both partners will be needed. What constitutes a good or bad personal credit score varies according to the credit scoring model a lender uses and their own guidelines. FICO, which ranges from 300 to 850, is one of the most widely used models.
Just like how you establish personal credit, you can work towards setting up your business credit. Dun & Bradstreet is the most commonly used business credit reporting agency. Even if you’re new to entrepreneurship, you can build business credit by registering with major credit bureaus like Dun & Bradstreet, Equifax or Experian.
Business Plan
Having a business plan shows the lender that you’re serious about your business. Showing that you thought out how you’ll spend and make money can help your business stand out from others looking for a loan. Include market information, financial projections and details on your business. If you’re unsure of how to write a business plan, Incfile’s "10 Keys to a Successful Business Plan" can help.
Bank and Financial Statements
Prepare your business’s bank statements. If you haven't set up a separate bank account for your business, get on that now, as it’ll be easier for the lender to assess your venture’s financial health.
In some cases, the lender might also seek your business’s receipts, credit card sales statements or unpaid invoice records since your startup’s financial history is limited.
If you're looking to set up a business account, it would be worthwhile to check out these five national banks that can be accessed from anywhere across the country.
State Filing Documents
If you have any state filings, like incorporation papers, a Certificate of Good Standing and business licenses and registration, get copies of those ready. Don’t be surprised if you are asked to provide lease agreements, franchise agreements or other contracts either.
Tax Returns
Many lenders will seek your business’s tax returns. But what should you do if you have only been operational for 6 months? Your personal tax returns might be requested. Make sure your and any partner’s personal taxes are organized and ready.
Online Profile
The world is digital, so you can expect the small business lender to do some due diligence on your business’s online profile. We recommend doing the following checks in anticipation of any verification:
- Is your website and/or Google My Business up to date?
- Double-check your presence on any social media sites like Facebook, Instagram and LinkedIn.
- Review any Yelp or Google reviews your business may have received.
By knowing what to expect from lenders, you’ll greatly increase your chances of obtaining your desired loan.
How to Find the Best Loan Option for You
We’ve provided an overview of startup loan options, but not all will be right for you. Use these tips to compare each source and find the best fit for your needs.
- What are the minimal requirements? Does the lender require your business to be in existence for a certain amount of years? Or do they stipulate an annual revenue requirement? Compare the minimal time and revenue requirements between funding options.
- How will funds be transferred? How do you want your funds — as a lump-sum amount or monthly payment? Find a loan provider that meets your funding needs.
- Are there any additional fees? Getting a loan can be complicated and there’s a lot of fine print. Read the loan documents properly and understand if there are any additional fees or payments required. Check payment terms, penalties for late payment and origination fees.
- What is the lender/loan’s customer support like? Another factor to consider while evaluating lenders is their customer support. What if you, unfortunately, run into repayment issues? What support options are available? Read customer reviews before signing the loan paperwork.
Find Funding That's Right for You
We’ve said this countless times, starting a business (or growing an existing business) is exciting, but it can also be challenging, especially if you’ve got limited personal savings. But all the startup funds don’t have to come from you. Startup loans from investors, peers or even banks can go a long way in turning your business into a reality and take the financial strain off your shoulders.
Swara Ahluwalia
Swara Ahluwalia is a freelance content writer with experience in the technical, B2B and SaaS domain. She also has curated content for various lifestyle brands. In her downtime, you will most likely find Swara training for her next marathon or spending time with her two daughters.
