Small Business Startup Loans

Learn everything about Small Business Startup Loans and find the right one to grow your business!
Denise Elizabeth
Denise Elizabeth
Senior Financial Editor & Writer
Last Updated: March 10, 2021
Date Published: February 24, 2021

Most new businesses need some sort of startup funding whether it is provided by the owner, partners or through financing via a startup loan.

Small Business Startup Loans are a great way to purchase working capital items like equipment, machinery, supplies, inventory, furniture, or even to just keep as a backup for unforeseen needs.

Other options for new business owners include business credit cards, lines of credit, a startup business loan, or crowdfunding campaigns.

According to a 2020 Federal Reserve Report , new employer small businesses are the primary source of U.S. job growth, but are much more likely than larger firms to face financial challenges like access to capital.

For this reason, many small businesses turn to startup loans to help them successfully get their feet on the ground.

If you have already started looking at your small business loan options, you may have noticed that there are so many options, it can be overwhelming.

You may have also noticed that lower interest rate loans require strong credit scores and/or a solid revenue history, which you may not have yet.

Bank loans are harder to get because they have stricter small business and startup business lending standards to help minimize their risk.

What banks offer is usually for more established business with some sort of track record, which can be disheartening for a small business owner.

To help you narrow down your options and get you started, we are going to share ways to get business financing, even if you are really new and don’t have a huge business track record.

If you have a solid business plan in an industry the bank serves, you may be able to secure equipment financing or other types of business funding.

Let’s look at some financing option!

Small Business Startup Loans

Small Business Startup Loan Options

Equipment Financing

If you have specific capital needs, like the purchase of equipment to run your business, you may have better luck getting a specific equipment financing loan.

These loans are specifically designed to pay for the purchase of equipment and machinery and can only be used for this specific reason only.

This is a great startup financing option because equipment is expensive to purchase.

Equipment financing is similar in structure to conventional loans with monthly repayment terms over a set period of time.

Lending standards for equipment financing loans are a little less strict because lenders can use your equipment as collateral in case you default on the loan.

This is also called a secured loan.

Secured business loans mean that the lender have collateral in case you default on the loan.

An unsecured business loan doesn’t have collateral but they have higher rates and some require a personal guarantee.

Learn more about secured business loans and an unsecured loan in our article here.

In other words, if you default on your loan the lender can repossess your equipment.

You can also consider leasing your equipment if loans are not an option. You can lease anything from large machinery to computers.

Business Credit Cards

Credit cards are a great way to pay for purchases, especially if you are able to earn flyer miles or cash back offers.

Credit cards can also be a great type of “loan” for start up companies.

The traditional lender such as a bank or credit unions should offer credit cards.

Credit cards tend to be easier to qualify for because issuers will generally look at your personal credit history as well as your combined personal and business income.

If you are unable to secure a loan, credit cards are an awesome alternative and many business credit cards offer some really great rewards and cash back programs, as well as sign-up bonuses.

In a recent Federal Reserve Small Business Credit survey, 53% of small businesses reported using credit cards to help fund their operations.

TIP: Choose a credit card that offers a 0% introductory rate offer.

This allows you to make your initial purchases and it gives you time to pay them off (usually 6 months to a year), interest free!

Credit cards are a great small business financing option, as long as you pay them off on time!

SBA 7(a) Loans

There are several different types of SBA loans, and among the most popular is the 7(a) program which offers loans up to $5 million.

If you’re wondering if you can get an SBA loan to start a business, keep in mind that in the 2020 fiscal year , 17% of the money lent to small businesses through the 7(a) loan program went to start up businesses.

For the most part, the Small Business Administration (SBA) doesn’t make loans-it guarantees them.

An SBA lender is approved by the SBA to make loans under SBA programs – the become an SBA lender or lending partner.

Getting an SBA loan is a slow process and it is also not a very easy one.

There are several requirements or qualifications that give you a better chance at securing an SBA loan.

For example, the following qualifications increase your chance of being approved:

  • Acceptable credit score
  • Experience in your industry
  • Purchase of an existing business or franchise
  • Real estate or equipment purchase

As mentioned before, there are many types of SBA loans and you can learn more about them here .

Loans to look into include SBA express loan, SBA startup loan, and microloan (we will talk about next).

SBA Microloans

Another small business loan option are SBA Microloans.

The total maximum loan amount for Microloans is $50,000 but the average loan is closer to $14,000.

An SBA microloan is a term loan, with a maximum term of 72 months; the average is about 40 months.

Funds may be used for working capital or the purchase of inventory or supplies, machinery or equipment, or fixtures and furniture.

Other Microlenders

Microlenders are usually non-profit organizations that offer small businesses the opportunity to secure financing in smaller amounts.

Two other Mocrolender options worth looking into are Accion and Kiva:

  • Accion – Loan amounts range from $300 – $250,000.
  • Kiva – Small business owners can crowdfund business loans from philanthropic-minded individuals up to $15,000. These loans carry a 0% APR and are provided to struggling entrepreneurs who have proven their character, invited their own network of lenders, were unable to access other financial means, and have a business that has a perceived positive social impact.

Invoice Financing

Invoice financing or invoice factoring provides businesses with working capital to improve immediate cash flow, pay employees and suppliers, and reinvest in operations and growth earlier than they could otherwise if they had to wait until their customers paid their invoices in full.

This is a speedy option-you can get your financing in as little as a day-that requires little paperwork.

Just keep in mind that this can get pretty expensive.

You can also do a merchant cash advance where the merchant provider automatically deducts a percentage of your credit or debit card sales until the agreed-upon amount has been repaid in full.

Crowdfunding

Crowdfunding is a great way for entrepreneurs to raise money for their project or venture.

The three main types of crowdfunding for startups are”

  • Rewards – Kickstarter or Indiegogo
  • Debt – Kiva
  • Equity – Wefunder

A business startup loan through crowdfunding will require the business owner to share their business goals and objectives with a large group of people in hopes that multiple people (the crowd) will help fund their request.

These campaigns take lots of marketing effort, but the end reward, should you raise your funds, is startup funding and validation of your business idea by many potential future customers for your business.

It’s worth noting that equity crowdfunding may be a more accessible funding option than angel funding or venture capital for businesses looking to raise up to $5 million.

Personal Funding

Funding your own business with a personal loan is an option, but there is also risk that comes with it.

You’ll need to do a solid job of calculating all of your costs, so that you don’t run out of money before the business can support itself.

Even if you use personal funds to start, we advise you to start taking steps to establish business credit right away.

That way you can start to leverage business credit and access more capital in the future.

The business should be able to stand on its own without commingling personal assets and credit.

There are a few personal funding options you can consider:

  • Open a personal credit card rather than a business credit card. You may be able to get a higher limit this way. Just be sure to not get behind on payments or you can really hurt your personal credit score.
  • If you have a savings account or equity in your home, you can consider pulling from those sources. Borrowing against your home equity is a cheap option but very risky if your business doesn’t do as well as planned.
  • 401k/IRA Savings plans are another source of personal funding. You may be able to withdraw funds from your retirement plans, borrow against a 401(k) or use a ROBS plan to shift retirement funds to your business.

Friends and Family Funding

Many businesses have been funded with the help of family members.

Tread carefully, and don’t apply pressure, but if they’re willing, family can be a good, positive backing for your new venture.

Many people choose not to mix family and business, but if you have a great working relationship with family, this might be a good option.

Equity Financing

Equity financing is the process of raising capital through the sale of shares.

Companies raise money because they might have a short-term need to pay bills or they might have a long-term goal and require funds to invest in their growth.

By selling shares, they sell ownership in their company in return for cash, like stock financing.

PROS of Small Business Loans

  • Can help your business grow faster in the early stages
  • A startup business loan can help you acquire equipment, inventory, and other resources needed
  • A startup business loan is essential for businesses that require a lot of capital up front

CONS of Small Business Loans

  • Small business loans can be expensive (interest, etc)
  • There is always risk if the business fails and the business owner becomes personally liable for the debt

Small Business Loan Preparation

Before you apply for any small business loans, you will want to have some of your ducks in a row.

The first thing you will want to do is find out what your personal and business credit score is.

This will measure your creditworthiness and the creditworthiness of your business and if you have a great credit score, it will increase lender confidence.

Once you know your credit scores, you can decide if you need to improve them or if they are already good enough to apply.

You will also want to have a solid business plan in place.

Some important questions that a lender will ask are:

  • How risky is the type of business you’re starting?
  • What is your experience or expertise?
  • What is your credit history?
  • How quickly will the business become profitable?
  • If there is cash flow, what does the cash flow look like?
  • If the business were to fail, is there equipment or assets that can be liquidated?

A well-designed business plan should be able to answer most, if not all, of these questions.

You will also want to look at your budget and what you can afford for monthly payments.

Requirements for a Small Business Loan

  • Updated business plan with details on your growth and marketing strategies
  • Personal credit reports and scores from all three major credit bureaus – credit history.
  • Business forecast with details on future cash flow and costs.
  • Tax returns and supporting IRS documents for both your business (if available) and personal tax accounts (including personal documents for all owners or registered agents of the business).
  • Any applicable licenses and registrations for doing business in your state.
  • All financial documents that would be deemed relevant (including bank statements, credit card sales, unpaid invoices, and accounts receivable due to you, if available).
  • Any legal contracts that would be relevant (franchise, incorporation, leasing).

If you are a startup business, you may not have business credit reports or business tax returns.

In this case you will want to provide all of your personal information and personal tax returns.

Bad Credit Small Business Loan

Without at least two years time in business and strong revenues, lenders will have to rely on your credit scores to help determine their level of risk.

A business owner with bad credit will find it tough to qualify for almost any loan.

However, many of the microloan and crowdfunding options are worth exploring, as they may be available to business owners with poor credit or no credit.

Some offer bad credit business loan and are worth looking into.

Conclusion

As you can see, there are several different  Small Business Startup Loans for small businesses looking to borrow money to get their business running.

Startup business financing does exist, you just have to look for it.

Whatever option you choose, be sure to do your research and be prepared when you’re looking to borrow.

Be realistic with your business and financial abilities.

The last thing you want to do is get in over your head and end up with a mountain of debt.

Securing your loan can be an uphill process but with the right business and preparedness, it can be an amazing resource for your business in its early stages.

If loans are not your thing, you can consider looking into a PPP loan if you need relief or a business grant.