Here are some common types of startup business loans.
Line of credit
A business line of credit allows you to withdraw money as needed up to a predetermined limit instead of borrowing a lump sum. Like a credit card, a line of credit is revolving, meaning you can borrow, repay, then borrow again. And you only pay interest on the withdrawn amount.
Some lenders may offer lines of credit to businesses that have only been operating for two to six months. However, they typically check the business owner’s personal credit score, with many lenders requiring a minimum credit score between 600 and 640.
SBA 7(a) loans
The SBA 7(a) loan program offers small business loans up to $5 million with repayment terms of up to 25 years. You can use the funds to purchase equipment or real estate, provide working capital and more.
SBA 7(a) loans aren’t offered directly by the SBA, but by SBA-approved lenders, including banks, credit unions and community development organizations. And while the SBA doesn’t set a minimum credit score, the lenders offering SBA loans may set their own minimums. You have a better chance of approval if you have a personal FICO Score of 680 or higher.
Microloans
Microloans are business loans for relatively small amounts — usually less than $50,000. They may be backed by the SBA or offered by nonprofit organizations specializing in helping small businesses get funding.
These lenders tend to take a more holistic approach to underwriting loan applications, taking into account your business plan, geographic area, industry and management team’s past success and credit.
Short-term loans
Short-term business loans have shorter repayment terms — usually three to 24 months. These loans can help fill a short-term purpose, such as covering a temporary cash shortage or seasonal income gap. Depending on the lender, you can borrow anywhere from $5,000 to $1 million or more.
Be sure to pay attention to the interest rate. Rates on short-term loans tend to be higher than longer-term loans, often ranging from 7% to 50% or higher, depending on the loan.
Equipment financing
Equipment financing helps business owners purchase machinery or equipment for running their businesses. These loans use the equipment as collateral, making them more readily available than unsecured business loans.
Many online lenders require a minimum credit score in the 600s for an equipment loan. You may also need to be in business for at least six months and meet minimum annual revenue requirements.
Merchant cash advance
A merchant cash advance (MCA) isn’t technically a loan. Instead, a merchant cash advance company typically partners with your credit card processor. Then, the MCA company gives you a lump sum of cash and collects repayment by taking a percentage of your daily credit card and debit card sales.
You can usually obtain a merchant cash advance easily if your business’s daily debit and credit card sales volume is substantial. However, this type of funding can be expensive — with some advances charging APRs in the triple digits.
Invoice factoring
Invoice factoring involves selling a percentage of an invoice’s face value to a factoring company. The factoring company gives you 70% to 90% of the invoice’s face value, then collects the outstanding balance from your customers. Once the customer pays, the factoring company pays you the remainder of the invoice minus a predetermined fee.
Invoice factoring allows your business to get cash immediately rather than wait for customers. However, it’s not available to all businesses: Most factoring companies will only buy invoices issued to other businesses, so you might not qualify for invoice factoring if you run a business-to-customer (B2C) business.
Business credit cards
A business credit card is similar to a personal credit card, except for business use. Just about any business can apply for a business credit card. Issuers will check your personal credit score, so you may have to start with a low credit limit if you don’t have a strong personal credit score.
Because businesses tend to spend more than individuals, business credit cards often offer perks, points and other rewards. However, some business credit cards will also charge an annual fee. If you’re considering a business credit card with a yearly fee, make sure it offers enough value in rewards to offset the cost.
Personal loans and financing
Using personal money to start your business can help you get the funds you need when business loans aren’t available. Here are a few options to consider:
- Personal savings. Bootstrapping your startup can set your business up for later success since lenders prefer working with business owners with some skin in the game. However, you might not have enough personal savings to fully fund your needs or grow your business as quickly as you’d like.
- Personal loan. Personal loans can be easier to get than business loans because most personal loan lenders look only at your personal credit score. However, personal loans tend to provide lower amounts than business loans, and the interest rates tend to be higher.
- 401(k) loan. If your 401(k) plan allows loans, you’re almost guaranteed to get approved — and you won’t even need a credit check since you’re essentially borrowing money from yourself. However, 401(k) loans are risky: If you leave your employer, you may have to repay the money immediately.
- Home equity loan or HELOC. Home equity loans and home equity lines of credit (HELOC) are often some of the lowest-cost borrowing options in terms of interest rates because your home secures them. However, home equity loans and HELOCs can have substantial closing costs. You also risk losing your home if you can’t afford to repay the loan or line of credit.
Friends and family
If you have friends or family members willing to give you a loan, this can be one of the easiest ways to get money to start your business. However, you’re limited by their available cash. Plus, you risk damaging the relationship if you can’t repay the loan.
Crowdsourcing
Crowdfunding is another way to raise money from friends, family and the general public. Kickstarter and GoFundMe are well-known crowdfunding platforms business owners use to raise startup capital.
Crowdfunding is a low-risk venture because people donate to your business — not invest or lend. However, donors typically expect some benefit in return for their contribution. For example, they may want your product or service, formal recognition or another kind of reward if your business succeeds.
Business startup grants
Federal, state or local governments, corporations or foundations usually offer various small business grants. The biggest perk of a grant is that you don’t need to repay it. However, there can be a lot of competition for small business startup grants — you could spend a lot of time applying for grants and receive little or no funding in return.