Startup Business Loans

startup business loans

It takes money to make money. To get a new business up and running, you’ll need to pay for things like inventory, equipment, furniture, marketing expenses, and, of course, a location. Existing businesses are able to pay for those sorts of things out of their profits, but a brand new business might not have that ability. 

Some business owners are able to start their business in a garage or their apartment, reinvesting their initial profits into their new business. Others are able to lean on their own personal savings, or financial assistance from family and friends. But many business owners head to the bank or credit union hoping for a loan to get their business up and running, only to get immediately turned down simply because their business is “too new.” If this was your experience, you may be wondering where you can get some capital to turn your idea into a registered, growing business.

Startup Business Loan Options

Many traditional lenders are only interested in providing loans to established businesses, yet many funding options are still available to startups. If you know which options are fit for your operation, you’re much more likely to obtain early-stage financing.

Equity Financing

Equity financing is a way to fund your business without taking on debt. With equity financing, you raise money by seeking funding from investors who then become partial owners in your business. The level of ownership they receive e in your business is proportionate to the size of their upfront investment, relative to your current valuation. 

In many cases, business owners seek equity funding from their friends or family, but business owners also commonly seek investments from so-called “angel investors”: people who have experience running similar businesses or working in their industry that can provide significant capital and guidance for an operation. 

While venture capitalists, angel investors, and other shareholding investors provide funding to startup businesses, they also receive a percentage of ownership of the company in return for their investment. While equity investors may protect you from taking on debt, they also have more say in how the business is run than lenders offering debt financing. The larger the stake they have in your company, the more control your investors have. Because of this, you should consider how much outside influence you are open to before accepting an offer for equity financing, and make sure that you trust your new business partners before moving forward.

Microloans & SBA Microloan program

One problem many business owners encounter when they’re applying for a business loan is that they don’t need a large enough sum of capital for lenders to be interested in earning interest payments on them. To help fill this gap, some lenders and other organizations have started offering microloans, which are loans for relatively small amounts of money. Microlenders tend to be friendlier toward startups than regular lending programs.

Although the Small Business Administration tries to encourage lenders to take a chance on small businesses by agreeing to guarantee a percentage of loans made to approved businesses, most types of SBA loans aren’t very accessible to startups. However, the SBA does offer a microloan program, which specifically seeks to support young business ventures and startups.

female business owner applying for loan online

Equipment Financing

Since startups don’t typically have major assets and therefore have little to offer as collateral, it can be hard for them to be approved for an unsecured business loan. An equipment loan can help you to purchase anything from computers to coffee machines to tractors, and the equipment that you purchase with the equipment loan will be used as collateral if you do not pay back the loan. 

This is a good option for startups because it can help you expand your physical capital without using personal assets as collateral, and because the funding is secured you won’t need as strong of a credit profile or credit history to qualify.

Business Credit Cards

While it may be difficult to obtain a business line of credit for startup funding, business credit cards are a great option for entrepreneurs because they are relatively easy to apply for, have less stringent qualifying criteria, and are more flexible than other forms of debt financing. You also only pay back what you spend, and if you pay off your full balance each month, there is no interest.

However, if you don’t pay off your credit card balance, the interest rate is typically higher than other loan options and may cost you a significant chunk of cash over time. Limit your credit card spending to amounts you are quite certain you can pay back quickly, and don’t use a business credit card as a primary source for large scale financing.

Other Startup Funding Sources

While business loans, equipment financing, business credit cards, and equity financing are popular options among businesses just starting out, there are other options for entrepreneurs to finance startup costs.

Personal Finances & Personal Loans

Rather than turning to outside sources of funding, some entrepreneurs tap into their own personal resources to fund their businesses. Some people will use money from their 401(k), take out a home equity loan, or use their own credit cards to help their businesses. 

In some cases, people ask their friends or family for a loan, rather than asking them to become an investor as they would through formal equity financing. However, these methods involve a much higher risk of personal loss on your part since they put your home, retirement savings, and personal relationships in jeopardy if your business doesn’t succeed.

Small business owners can also take out a personal loan to fund the start of their business, but it is important to remember that if your business doesn’t have the cash flow you anticipated, that loan is still yours to pay back and will have an impact on your personal assets and credit score.

Returning Profits to the Business

One of the best ways to establish cash flow without going into debt is to first produce a limited array of your products and then return all the profits from their sale into more production for your business. That way, you can establish proof of concept without taking on additional debt. Once you begin to get large purchase offers, you can feel confident about taking out a loan and knowing that you will be able to pay back your lender.

If your business idea requires a large amount of research and development, this path may not be best for you. But if possible, this is the best way to set your business up for future success because you retain full ownership of the business in its early stages and avoid interest payments and giving up control of your business.

Business Grants

There are business grants available for startups, especially grants specifically for female entrepreneurs and minority-owned businesses. Grants are a great way to fund your business, but because everyone wants grant capital, grants tend to be very competitive. However, if you are offering a product or service with significant social impact, or you belong to a group that is underrepresented in business, grants may be a great way to fund your new business. Small business grants are available through local, state, and federal government programs, as well as independent organizations.

Crowdfunding

You have a lot of faith in your business plan and other people might, too. In recent years, many entrepreneurs have started taking their cases to crowdfunding platforms like Kickstarter, GoFundMe, and Circle Up to raise the money they need to get their businesses up and running. Crowdfunding works best if you have a gadget or product that might appeal to large and diverse groups of people.

How to Get a Startup Business Loan

Before applying for any business loan, ensure that you have researched the lender and loan terms. Some lenders will specifically target startups or businesses with “bad credit” because these small business owners tend to have a harder time qualifying for business funding from reputable financial institutions. Check that the lender is registered to originate loans in your state, which is required by law to help you avoid predatory lenders. Once you have researched the lenders, compare the available loan options, terms, funding amounts, monthly payments and interest rates.

Once you feel comfortable with a lender or alternative financing option, you should begin the application process. What you’ll need to provide with your application will depend on the type of loan you’re interested in and the entity you apply with. Since you are looking to get a business started, lenders are going to be very focused on your personal credit history and your prior experience working in your industry. They will also naturally want to see a detailed business plan and will want to know how, exactly, this loan would help your business grow.

Small Business Loans for Successful Startups

You may still consider your business a startup, but if you have been in business for months or years and are bringing in thousands in revenue each month, you may qualify for traditional loans or alternative loan options, like a working capital loan or merchant cash advance. Small business owners may consider themselves a startup for years, but lenders base their definition of a startup primarily on financial statements and time in business. If you are most intrigued by a traditional business loan, you can always ask your bank or apply for a business loan online. Starting your own business can lead to some large financial hurdles, but securing the right funding can help your business grow and thrive.