Small business startup loans can make all the difference when it comes to putting your ideas to action. Early businesses have a number of expenses they need to cover if they’re going to get off the ground and start securing customers.
Despite how critical small business startup loans are, they can be difficult to obtain. For the most part, traditional lenders like banks and credit unions are unwilling to lend to newer businesses without a proven track record. Despite these hurdles, there are ways to secure startup loans.
Here’s your guide to small business startup loans, including the best options for early-stage financing.
What is a start up business loan?
A startup business loan is financing designed to cover the initial costs of a new business. This can include anything from opening a retail location or purchasing inventory to launching an ad campaign or designing a website.
A startup loan is designed to help you finance whatever you’d need to launch your business. Also, a startup loan is different from a regular business loan, because it’s issued to a new company without a proven track record.
Since your business won’t have an extensive history, profit statements, or even a credit score, you may find it more difficult to obtain a startup loan for a small business. Fortunately, it’s not impossible.
Requirements for small business loans
You’ll find different requirements at different lenders. However, in general, you should expect to prepare the following if you’re hoping to secure a small business loan for a startup.
- Business forecast with details on future cash flow and costs
- Any applicable licenses and registrations for doing business in your state
- Estimate for the costs of the materials or service you are looking to finance
- Analysis and forecasts of your market and industry
- For example, is it projected to grow in the coming years?
- Analysis of your competitors and where your business will fit into the market
- Estimates for how much it will cost to run your business
- An idea of how much you can expect to bring in during the coming quarters
10 options for small business start up loans
Small business startup loans can be difficult to acquire, especially for businesses without a proven track record. The good news is that it’s not impossible! Here are the most common options for people who are hoping to get their hands on a startup business loan.
Small Business Administration (SBA) loans are government-backed loans featuring low-interest rates, high funding amounts, favorable terms, and inherent flexibility. Most SBA loans are intended for established businesses, but you can find many options for small business startup loans as well.
Despite their benefits, SBA loans can sometimes be difficult to qualify for. You can apply for SBA loans through participating lenders.
Personal business loans
Many entrepreneurs turn to personal loans when they can’t get approved for a business loan. Personal loans can be more accessible, especially if you have a steady income stream and good credit.
The downside to personal loans is that you’ll be assuming all the risk. If your business plans turn sour, you’ll be personally responsible to repay the funds to the lender.
Microloans can be a great option as a startup loan for a small business, especially because they’re more accessible than traditional loans. The downside is that funding amounts with these loans typically do not exceed $50,000. This may or may not be enough capital for your new business, depending on what your plans are.
Banks are notoriously hesitant to approve younger businesses without a proven track record. If you are able to secure a bank loan, you’ll likely have to back it up with a personal guarantee or some type of collateral. Nevertheless, bank loans are highly coveted, especially because they have low interest rates and favorable terms.
Equipment financing is designed to help you cover the costs of various types of equipment you need to conduct your business operations. This can include vehicles, machinery, hardware, software, manufacturing tools, and more.
The great thing about equipment financing is that it’s typically secured by the underlying equipment you are buying. This can help lower interest rates and make funding more accessible, especially to startups. Just keep in mind that if you don’t make your payments, your lender will be able to seize the equipment.
Grants can be a great starting point for new businesses, especially because they’re essentially free money that doesn’t need to be paid back. You can find grants available through various institutions.
From entrepreneurial competitions and government agencies to business development organizations, and more, grants can be accessed in a myriad of ways. The downside to grants is that they’re typically low in funding amounts and hard to qualify for.
Crowdfunding is a fairly new, legal way for businesses to raise much-needed capital from a wide range of people. Kickstarter and SeedInvest are top crowdfunding sites where startups and young businesses can raise capital fairly quickly.
Investors are typically willing to purchase shares based on an idea or proof of concept alone. While crowdfunding can be an accessible way to access capital, it does require you to relinquish shares in your company, which can create ownership issues down the line.
Invoice financing is a way to exchange your unpaid invoices for cash. It’s fairly accessible to startups and new businesses.
All you really need are outstanding invoices and customers with decent credit to qualify. The downside is that you won’t be able to recuperate the entire amount of your unpaid invoices, since you’ll need to pay a fee to the lender.
Many entrepreneurs rely on their personal finances to power through the early stages of their new business. This can include your savings, home equity, personal credit cards, or even help from family. While using your own finances can be a fast option that won’t result in interest rates or fees, you could risk your personal savings or even retirement down the line.
Business credit cards
Business credit cards aren’t technically a loan, but they can help you with start-up costs nonetheless. Business credit cards are more accessible than startup loans and can be an easy way to cover your initial expenses. Unfortunately, business credit cards tend to have high interest rates and can rack up debt levels quickly if you’re not careful.
Tips for choosing the best loan for your start up
Still don’t know which type of startup business loan is best for your needs? Here’s how to narrow down to a decision.
Determine how much financing you need
List the various expenses you will need to meet in order to get your new business up and running. You may be surprised that you can start conducting operations with much less than you initially thought. This can be helpful because in general, it’s easier to secure small business startup loans with lower funding amounts.
Some lenders may be unwilling to work with you if you have no business credit history. Unfortunately, there are other lenders that can take advantage of this situation.
Stay away from lenders who offer no credit check or guaranteed approval options. You may be better off using your own savings or a credit card.
Compare loan options
Taking the time to get multiple loan offers from different lenders is critical to ensure you’re getting the best deal. You can use an online financing marketplace or work with several lenders at once to explore different loan options and compare to find the best fit.
Pay attention to loan terms
Remember to pay close attention to loan terms and conditions, fees, etc. You never want to sign anything unless you’ve read through all the fine print and thoroughly understand what you’re agreeing to. When in doubt, ask your lender about anything you’re unsure of.
Where to find small business startup loans
Small business startup loans aren’t always the easiest to obtain. Many lenders are hesitant to work with newer businesses.
They’ll want to make sure your business is stable enough with a solid proof of concept before agreeing to finance. Many entrepreneurs end up pulling together multiple different kinds of financing solutions in order to cover their initial costs.
For example, even if you are able to obtain a small business startup loan, you may also have to dip into your personal savings or apply for a grant before you really get the amount you need. After all, becoming an entrepreneur requires a level of resourcefulness.
Can you get a loan to start a business with no money?
You can get a loan to start a business without any money, but it is difficult. You may be able to get a certain type of SBA loan, equipment loan, personal loan, or another funding solution.
How can I get a loan for a business I just started?
Consult with banks, online lenders, or local lenders. Online financing marketplaces can also be a useful resource for finding startup loans.
Can SBA loans be used for startups?
SBA loans can be used for startups! Although there’s no guarantee you’ll qualify for SBA financing as a startup, SBA loans can be used to cover the majority of startup costs required to launch your business.