Startup business loans help new companies get off the ground without having to qualify for traditional business loans. Startup owners can rely on term loans, lines of credit, asset-based financing and business credit cards to cover operating costs. Whereas, funds from friends, family and crowdfunding campaigns can help startups with insufficient credit history access more flexible funding.
Best Startup Business Loans
- OnDeck – Best for Short-term
- Lendio – Best for Lender Comparison
- American Express® Business Line of Credit – Best for Lines of Credit
- BlueVine – Best for Flexible Lines of Credit
- Fundbox – Best for Quick Approvals
- Biz2Credit – Best for Loan Option
Tips for Comparing Startup Business Loans
Weigh these tips when comparing startup business loans:
- Consider time in business and annual revenue requirements. Because startup businesses don’t have long business histories, it’s crucial to find lenders that deem your business eligible. Lenders set minimum time in business and annual revenue requirements. When comparing lenders, be sure to find lenders that have a minimum time in business and annual revenue requirements that your startup meets.
- Determine how you want to receive your funds. It’s likely you’ll receive business financing through one of two ways: as a lump-sum payment or on an as-needed basis. If you want to receive your funds up front, choose a traditional term loan. However, if you want to use funds only as you need them, a business line of credit might be a better option.
- Consider the repayment terms and flexibility. Each business financing lender has its own repayment structures. While some types of financing require monthly payments, others may require daily or weekly payments. Compare different lenders’ repayment terms when choosing your preferred lender and business loan.
- Look out for additional fees. Some lenders charge no origination fees, late payment fees, prepayment penalties or any other common loan costs. However, it might not always be the case. Be sure to confirm a lender’s fee structure when shopping for the best terms. Factor in additional fees into your decision-making process.
- Evaluate the lender’s customer support options. If you’ve found a lender that’s prepared to offer the money you need at acceptable terms, consider the lender’s support options before signing the loan agreement. Customer support can make a huge difference down the line if you encounter issues with repayment. Research the lender’s customer service resources and read reviews to make sure it’s a good fit.
What Is a Startup Business Loan?
A startup business loan is a type of financing that’s accessible to businesses with limited—or no—business or credit history. While the most common startup loans are term loans or U.S. Small Business Administration (SBA) loans, startups may also opt for business credit cards or asset-based financing. Startup founders also can opt for less traditional financing tools like crowdfunding to get the working capital they need to start and grow their businesses.
How Does a Startup Business Loan Work?
Startup business loans refer to various forms of financing available to businesses without an established track record or credit history. For that reason, different types of startup loans have different qualification requirements and application processes. Available loan amounts and borrowing terms also vary by lender and loan type. In general, though, startup business loans have less stringent qualifications than traditional business loans, making them more accessible to new businesses.
Pros and Cons of Startup Business Loans
Startup business loans can give your venture the funding it needs to become successful, but that doesn’t come without a cost. Before taking on a loan, be sure to understand the pros and cons of borrowing.
Pros
- Funding for your startup. A startup business loan can give your business the money it needs to get off the ground. This can include buying equipment, hiring employees or covering other business-related expenses.
- Grow your business. The influx of cash from a business loan can help your startup grow, allowing you to funnel money toward expenses that need to be covered.
- Build business credit. Receiving and regularly paying off a business loan can help build your business credit. This can help you qualify for loans in the future and lend more credibility to your venture.
Cons
- High costs. Many startup business loans can come with high interest rates and fees as the loan itself is often viewed as risky by the lender. This can eat away at your bottom line and can make repaying the loan difficult.
- May require collateral. If your business is just starting out, you may only be able to qualify for a loan backed by collateral or by a personal guarantee. If you default on a loan backed by collateral, the lender can take possession of that asset. With a personal guarantee, the lender can pursue you personally to repay the loan.
- Can be difficult to attain. Having a limited time in business and revenue stream can make qualifying for a loan difficult. Consider a lender’s minimum requirements as you shop around for offers.
10 Types of Startup Business Loans
Getting a small business loan can be challenging if your company doesn’t have an established history of success. However, there are several types of startup loans that are suited to a range of needs and qualifications.
1. Online Term Loans
Term loans are typically available through traditional banks and online lenders; however, banks may require more qualification requirements than online lenders. Term loans from online lenders generally have maximum limits between $250,000 and $500,000, but newly established startups likely won’t qualify for loan amounts that high. What’s more, online lenders usually require startups to be operational for at least six months to one year before they can qualify.
Online term loans can be an excellent way for startups with at least six months under their belt to secure business financing to help grow their company. If your startup has not been in operation for this amount of time, consider the other seven startup business loans below.
Related: Best Small Business Loans Of October 2023
2. SBA Microloans
The SBA Microloan program offers eligible business owners access to startup loans up to $50,000. Terms extend up to six years and interest rates typically are between 8% and 13%, though this number varies by lender.
Loans are issued through nonprofit lenders and other financial institutions and backed by the SBA, so they’re generally more accessible to startups with limited financial records and credit history. And, while not helpful to all businesses, SBA microlenders are often more committed to funding startups in disadvantaged areas and those owned by women and minorities.
3. Asset-based Financing
Asset-based financing is a type of lender financing that’s secured by a business’ valuable assets, including inventory, machinery and equipment, accounts receivable and real estate. Secured financing often comes with more flexible lending standards because it poses less risk to the lender. This makes it an excellent option for startups that can’t meet traditional business loan qualifications.
One of the most common types of asset-based lending, invoice factoring, involves selling outstanding invoices to a third party in exchange for a lump sum of cash—usually between 80% and 90% of the total invoice amount. This can provide startups with working capital quickly and without having to demonstrate a strong business credit score or meet other stringent borrowing requirements.
4. Personal Loans for Business
Startup founders may also benefit from taking out a personal loan rather than a traditional business loan. Notably, personal loans are easier for a new business owner to qualify for than a business loan—especially for startups with limited or nonexistent business history.
What’s more, the application and approval process may be less rigorous with some lenders than for a business loan. Startup owners may also be able to access lower annual percentage rates (APRs) than available with some business loans, though available borrowing limits are usually lower.
Borrowers who use personal loans to fund their startups are personally liable for repaying the debt. Still, most lenders look at an applicant’s personal credit score when evaluating a startup business loan application anyway, so startup founders are likely to be personally liable for a startup loan as well.
Keep in mind, however, that using personal loan funds for business operations also involves commingling personal and business assets, which may cause bookkeeping, tax and/or legal issues down the line. What’s more, some personal loan lenders prohibit the use of funds for business purposes, so be sure to confirm with your desired lender before applying.
Related: Best Personal Loans
5. Business Credit Cards
Like personal credit cards, business credit cards offer revolving access to funds that can be used for everything from office furniture and supplies to legal fees, equipment and larger purchases.
The application and approval process is faster compared to traditional loans, and startup owners are more likely to get approved based merely on their personal credit scores. What’s more, business credit cards are unsecured so new business owners won’t have to come up with valuable collateral.
Business credit cards can be used on an as-needed basis, and cardholders only pay interest on any unpaid balances at the end of the billing cycle—typically every 30 days. This makes it a good option for month-to-month operating costs and other expenses that can be paid off each month to avoid interest. Some cards also offer introductory 0% APRs that let borrowers make interest-free purchases for six months to two years.
6. Friends & Family
It can be difficult to obtain business financing as a startup with limited credit history and financial records. Business owners who are unable to qualify for a traditional business loan or another method like a business credit card—or who only qualify for a small startup business loan—may want to borrow from friends or family.
Before agreeing to borrow money, startup owners should confirm they are comfortable entering into what is essentially a business relationship with them. This involves reviewing the business plan with the lending party, discussing their role (or lack of role) in the business and memorializing the terms of the loan in writing. Ensuring all parties agree to the loan amount, repayment terms, interest rate and other relevant factors can prevent conflict down the line.
7. Crowdfunding
If traditional lending tools aren’t an option and borrowing directly from friends and family feels too personal, crowdfunding may be a suitable alternative. Likewise, prospective borrowers who are unable to qualify for a business loan as a startup can use a crowdfunding platform like Kickstarter or Indiegogo to access cash and cover operating expenses.
To get started, choose an online fundraising platform, create an account and decide how much money you’re trying to raise. After setting up a crowdfunding campaign, users can donate varying sums of cash that will become available as soon as the campaign ends.
Not only does this form of business funding not require qualifying through a financial institution, but business owners also don’t have to give donors startup equity in exchange for funds. Likewise, the startup isn’t charged interest or other lender fees
Because of the nature of crowdfunding, this strategy is best suited to startup owners who don’t need to raise a large amount of money and businesses with creative or otherwise enticing offerings. It’s not necessary to provide a thank you gift, but campaigns may be more successful if startups entice donors with an exclusive product, service or commemorative gift.
8. Small Business Grants
A small business grant is money given to startups and other businesses to help them get off the ground and grow. Grants are offered by a range of entities, including state and local governments, the federal government and corporate organizations. Unlike other startup financing methods like loans and credit cards, small business grants don’t require repayment, and business owners aren’t charged fees or interest.
That said, this form of financing is extremely competitive and applications are often rigorous and time-consuming. Many grants also focus on specific types of businesses, including those owned by women, minorities, veterans and immigrants. So, it may be difficult to identify an appropriate open grant, prepare an application and await the award in the time available.
9. Business Lines of Credit
A business line of credit is a type of revolving debt that you can borrow money from as needed up to a certain predetermined limit. This financing option works similar to a credit card and is good for ongoing expenses, such as paying employees or covering gaps in cash flow.
Many lenders require at least two years’ time in business in order to get approved for a business line of credit. Some lenders may be willing to offer lines of credit to businesses that have been in operation for as little as six months.
10. Invoice factoring
With invoice factoring, you sell your outstanding invoices to a lender. The lender pays you for a portion of the outstanding invoices—typically 60% to 95% of the invoice amount—and then collects payments from your customers.
This can be a good solution for businesses that primarily work with established clients rather than retail customers. Invoice factoring companies base your approval on your client’s credit scores and repayment history, not your own, making them a good choice for startups. Keep in mind, this can be a costly way to get funding.
What Do I Need for a Startup Business Loan?
In general, lenders look at a startup owner’s personal and business credit scores when evaluating a loan application. Because startups generally have limited financial records and credit history, it can be more difficult to qualify for a business startup loan. In this case, the lender will rely primarily—or exclusively—on the borrower’s personal creditworthiness.
To qualify for a startup business loan, compile these documents before submitting an application:
- Personal credit scores and reports. When finalizing your startup business loan application, a lender will conduct a hard credit inquiry—which can temporarily drop your score by up to five points—to confirm your creditworthiness. Request copies of your credit reports and check your credit score before applying for a loan to better understand your approval odds and the potential interest rate you’ll qualify for.
- Tax returns. Where possible, be prepared to provide business tax returns from the previous two years. Also compile copies of your personal tax returns and IRS documents for the same period of time. Personal returns will be especially important if your startup is brand new and lacks past returns, and may be necessary for all of the business’ owners and registered agents.
- Additional financial records. In addition to tax returns, the lender may require a startup’s bank statements, accounts receivable, credit card sales and unpaid invoices as part of the application process. Lenders often need records going back at least four months, which may be feasible even for a startup.
- Business plan. In the absence of lengthy financial records, an up-to-date business plan demonstrates to lenders that your business is capable of repaying its debts. This document should also include a business forecast that describes likely future revenue and expenses.
- Business licenses, registrations and legal documents. If applicable, you may need to provide copies of licenses and registration necessary to operate in your state or local jurisdiction. Lenders may also require copies of incorporation documents, business leases, franchise agreements and other contracts.
- Banking information. If you’re approved for a startup business loan, the lender needs banking information so it can deposit the funds. This information is typically provided during the application process.
How To Get a Startup Business Loan
The process of getting a startup business loan varies by financial institution and financing type, but most banks and online lenders impose similar requirements. Even so, you may face some additional challenges as a startup with limited financial records and credit history. Follow these steps to get a business loan as a startup:
- Evaluate what kind of loan you need. Available loan amounts and repayment terms vary by loan type and lender, so first consider how much you need to borrow and what type of financing you prefer. If you’re a brand new startup, consider whether alternative types of startup financing may be appropriate, or if you’re likely to qualify for a business loan based on your personal credit.
- Check your personal and business credit scores. Before you apply for a startup business loan, check all your credit scores. This can help you gauge your approval odds for traditional financing. If necessary, take time to improve your credit score before applying for a startup loan. Likewise, if your startup has been in business for at least a year, it may have a credit score through Experian, Equifax or Dun & Bradstreet (D&B). But it usually takes up to three years for a business to establish credit.
- Prepare your startup for due diligence. The loan underwriting process typically involves extensive due diligence to evaluate the business’ creditworthiness. This generally includes a review of the applicant’s business plan, personal and business bank statements and other financial documents. It may also be necessary to provide copies of applicable business licenses and legal documents, a description of how you will use the funds and details about available collateral. As a startup founder, it’s even more important to have a robust business plan that demonstrates the business’ likelihood of success.
- Compare lenders to find the best deal. In general, the most competitive interest rates and terms are reserved for the most creditworthy borrowers. Depending on your personal credit score and how long your startup has been operational, it may be difficult to qualify for the lowest rates. However, shopping around and comparing multiple lenders will help you lock in the best rates available for your business.
- Submit an application. After identifying your preferred lender, review the application process and compile the necessary documentation. Business loan application and underwriting processes vary by lender, but applications can generally be completed online, via telephone or at a branch. Once you submit an application, you may be contacted by a lender representative regarding additional information or documentation, such as business projections or proof of collateral.
- Consider alternatives. If you’re not approved for traditional financing like a loan or credit card, evaluate whether there are any feasible alternatives. If you have a friend or family member who has expressed interest in supporting the new business, consider borrowing from them. Alternatively, using a platform like Kickstarter may be the most convenient way to attract new customers and investors.
