Getting a small business loan can be difficult if your company does not have a solid history of success. However, there are several types of startup loans that suit a range of needs and qualifications.
Online Term Loans
Term loans are usually available through traditional banks and online lenders; However, banks may have more qualification requirements than online lenders. Term loans from online lenders generally have caps between $250,000 and $500,000, but it’s possible that newly established startups will not qualify for loan amounts of this high. Furthermore, online lenders typically require startups to be up and running for at least six months to one year before they can qualify.
Online term loans can be an excellent way for startups that have at least six months under their belt to secure business funding to help grow their company. If your startup hasn’t been running for this period of time, consider the seven other startup business loans below.
SBA Small Loans
The SBA Microloan Program provides eligible business owners with access to startup loans of up to $50,000. Terms span up to six years and interest rates are usually between 8% and 13%, although this number varies by lender.
Loans are issued through nonprofit lenders and other financial institutions and backed by the SBA, so they are generally available to startup companies with limited financial histories and credit history. And while SBA microlenders aren’t beneficial for all businesses, they are often more committed to financing start-ups in disadvantaged areas and those owned by women and minorities.
Asset-based financing is a type of lender financing that is secured by a company’s valuable assets, including inventory, plant and equipment, accounts receivable, and real estate. Secured financing often comes with more flexible lending criteria because it poses less risk to the lender. This makes it an excellent choice for startups that cannot meet the qualifications of traditional business loans.
One of the most common types of asset-based lending, bill collection, involves selling outstanding bills to a third party for a lump sum cash—typically 80% to 90% of the total bill amount. This can provide startups with working capital quickly and without the need to demonstrate a strong business credit score or meet other stringent borrowing requirements.
Business Personal Loans
Startup founders may also benefit from taking out a personal loan instead of a traditional business loan. It should be noted that personal loans are easier for a new business owner to qualify for than a business loan – especially for start-ups with limited or non-existent business history.
Moreover, the application and approval process may be less strict with some lenders than with a business loan. Startup owners may also be able to access lower annual percentage rates (APRs) than what is available with some business loans, although the borrowing limits available are usually lower.
Borrowers who use personal loans to finance their startups are personally liable to pay off the debt. However, 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 the startup loan as well.
However, keep in mind that using personal loan money for business operations also involves combining personal and business assets, which may cause bookkeeping, tax and/or legal issues in the future. Furthermore, some personal loan lenders prohibit using the funds for commercial purposes, so be sure to confirm with the lender you want before applying.
Related: Best Personal Loans 2021
Business credit cards
Like personal credit cards, business credit cards provide revolving access to money that can be used for everything from office furniture and supplies to legal fees, equipment, and large purchases.
The application and approval process is faster compared to traditional loans, and startup owners are more likely to be approved based solely on their personal credit scores. Furthermore, business credit cards are unsecured, so new business owners won’t have to come up with valuable collateral.
Business credit cards can be used as needed, and cardholders only pay interest on any unpaid balances at the end of the billing cycle—usually every 30 days. This makes it a good choice for monthly operating costs and other expenses that can be repaid each month to avoid interest. Some cards also offer 0% introductory annual interest rates that allow borrowers to make interest-free purchases for six months to two years.
It can be difficult to obtain commercial financing as a startup with limited credit history and financial records. Business owners who are unable to qualify for a traditional business loan or other method such as a business credit card — or who only qualify for a startup small business loan — may want to borrow from friends or family.
Before agreeing to borrow money, startup owners should confirm their satisfaction with entering into a business relationship with them. This includes reviewing the business plan with the lending party, discussing their role (or lack thereof) in the business and stating the terms of the loan in writing. Ensuring that all parties agree on the loan amount, repayment terms, interest rate and other relevant factors can prevent future conflict.
If traditional lending tools are not an option and borrowing directly from friends and family seems too personal, crowdfunding may be a suitable alternative. Likewise, potential borrowers who are unable to qualify for a business loan as a startup can use a crowdfunding platform such as 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 amounts of cash that will be available once the campaign ends.
Not only does this type of business financing require qualification through a financial institution, but business owners also don’t have to give donors equity to the startup in exchange for the money. Likewise, no interest or other lender fees are charged on the startup
Due to the nature of crowdfunding, this strategy is best suited for startup owners who do not need to raise a large amount of money and companies through creative or tempting offers. A thank you gift isn’t necessary, but campaigns may be more successful if startups entice donors with an exclusive product, service, or souvenir.
Small Business Grants
Small Business Grant is money given to startups and other companies to help them take off and grow. Grants are provided by a range of entities, including state and local governments, the federal government, and corporate foundations. Unlike other startup financing methods such as loans and credit cards, small business grants do not require repayment, and business owners do not charge fees or interest.
However, this form of financing is very 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. Therefore, it can be difficult to select the appropriate open scholarship, prepare an application and wait for the award in the time available.