Getting a small business loan can be difficult if your business doesn’t have a track record of success. However, there are several types of start-up loans suitable for a range of needs and qualifications.
Online term loans
Term loans are usually available from traditional banks and online lenders; however, banks may have more qualification requirements than online lenders. Term loans from online lenders typically have maximum limits between $250,000 and $500,000, but newly founded startups likely won’t qualify for such large loan amounts. Additionally, online lenders typically require startups to be up and running for at least six months to a year before they can qualify.
Online term loans can be a great way for startups with at least six months under their belt to secure commercial funding to help grow their business. If your startup hasn’t been in business for that amount of time, consider the other seven startup business loans below.
The SBA Microloan program offers eligible business owners access to start-up loans of up to $50,000. Terms extend up to six years and interest rates are usually between 8% and 13%, although this number varies by lender.
The loans are issued by nonprofit lenders and other financial institutions and backed by the SBA, so they are generally more accessible to startups with limited financial records and credit history. And, while not helpful to all businesses, SBA microlenders are often more engaged in financing startups in disadvantaged areas and those owned by women and minorities.
Asset-based financing is a type of financing by a lender that is secured by a company’s 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 a great option for startups that can’t meet traditional business lending criteria.
One of the most common types of asset-backed lending, invoice factoring, involves selling unpaid invoices to a third party in exchange for a lump sum of cash, usually between 80% and 90% of the total amount. the invoice’s. This can provide startups with working capital quickly and without having to demonstrate a strong credit rating or meet other stringent borrowing requirements.
Personal loans for businesses
Startup founders may also qualify for a personal loan rather than a traditional business loan. Notably, personal loans are easier to obtain for a new business owner than a business loan, especially for startups with limited or no business history.
Also, the application and approval process may be less rigorous with some lenders than for a commercial loan. Startup owners may also be able to access lower annual percentage rates (APR) than available with some business loans, although the borrowing limits available are generally lower.
Borrowers who use personal loans to finance their startups are personally liable for debt repayment. Yet most lenders look at an applicant’s personal credit score anyway when evaluating a business startup loan application, so startup founders are likely to be personally liable. a start-up loan as well.
Keep in mind, however, that using personal loan funds for business operations also involves the mixing of personal and business assets, which can lead to accounting, tax, and/or legal issues down the line. account. Additionally, some personal lenders prohibit the use of funds for business purposes, so be sure to confirm with your desired lender before applying.
Related: Best Personal Loans
Business credit cards
Like personal credit cards, business credit cards offer revolving access to funds that can be used for everything from furniture and office supplies to legal fees, equipment and larger purchases.
The application and approval process is faster than traditional loans, and startup owners are more likely to be approved based simply on their personal credit scores. Additionally, business credit cards are unsecured, so new business owners won’t have to provide valuable collateral.
Business credit cards can be used as needed, and cardholders only pay interest on outstanding balances at the end of the billing cycle, typically every 30 days. This makes it a good option for monthly operating costs and other expenses that can be paid off each month to avoid interest. Some cards also offer 0% introductory APRs that allow borrowers to make purchases interest-free for six months to two years.
family of friends
It can be difficult to obtain financing for a start-up business with a limited credit history and financial records. Business owners who can’t qualify for a traditional business loan or another method like a business credit card — or who are only eligible for a small business start-up loan — may want to borrow from friends or to the family.
Before agreeing to borrow money, startup owners must confirm that 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 thereof) in the business, and writing down the terms of the loan. Ensuring that all parties agree to the loan amount, repayment terms, interest rate, and other relevant factors can prevent disputes down the line.
If traditional lending tools aren’t an option and borrowing directly from friends and family seems too personal, crowdfunding may be a suitable alternative. Similarly, potential 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 different amounts of money which will be available as soon as the campaign ends.
Not only does this form of business financing not require qualification through a financial institution, but business owners also do not have to give donors seed money in exchange for funds. Likewise, startup is not charged interest or other lender fees
Due to the nature of crowdfunding, this strategy is best suited for startup owners who don’t need to raise a large amount of money and companies with creative or attractive offerings. Giving a thank-you gift isn’t necessary, but campaigns can be more successful if startups entice donors with an exclusive product, service, or memorial gift.
Small Business Grants
A small business grant is money given to startups and other businesses to help them get started and grow. Grants are offered by a range of entities, including state and local governments, the federal government, and businesses. Unlike other start-up funding methods like loans and credit cards, small business grants don’t require repayment, and business owners don’t pay fees or interest.
That said, this form of funding 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. Thus, it can be difficult to identify a suitable open grant, prepare an application and wait for the award in the time available.