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How to Get a Startup Business Loan: Find Funding for Your New Business

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A startup business loan is financing meant to be accessible to new businesses with limited or no credit history. This guide covers how to use startup business loans, apply for these loans and funding options.

How startup business loans can help

A startup business loan is designed to help a new business that might not have business credit or access to other types of loans get funding to cover their startup costs and expand the business.

These loans can help small business owners cover a wide range of expenses, such as:

  • Buying furniture, computers and other equipment
  • Purchasing or leasing office space
  • Paying utilities and other overhead expenses
  • Purchasing inventory
  • Hiring employees

Essentially, you can use a startup business loan for just about any ordinary and necessary expenses for launching and growing your business.

What to look for in a startup business loan

Startup business loans may be available from banks, online lenders and other financing companies. Here are a few things to look for when trying to figure out what’s the right loan option for you:

  • Length of repayment time. Loan repayment terms can range from just a few months to 25 years for loans backed by the U.S. Small Business Administration (SBA).
  • Interest rate. Interest rates vary by lender and loan type. You should always shop around to find the lowest rate on a loan that fits your needs.
  • Repayment schedule. Most loans require you to make monthly payments of principal and interest over the loan term. However, some loans may allow you to make interest-only payments during the startup phase, and then make principal plus interest payments later. Others might call for interest-only payments for the life of the loan with a balloon payment at the end of the loan term.
  • Collateral required. Collateral is anything of value that you put up as security for a loan — such as real estate, inventory, equipment, accounts receivable or other assets. The lender can take your collateral if you fail to repay the loan as agreed. Many lenders require collateral on small business loans, but you may be able to qualify for a startup loan with no collateral.

Startup business loans: 12 options for new businesses

Although some lenders offer loans to startup businesses, not all do so. Some will require you to be in business for a few years, meet minimum annual revenue requirements or pay a large down payment. You may ultimately need to consider one of the following alternative financing options.

1. 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 — this means that as you pay off the amount you draw down, you can borrow those funds again. Because you only pay interest on the amount you’ve withdrawn, you won’t have to pay interest on funds you might not need right away.

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 500 to 600.

2. SBA 7(a) loans

The SBA 7(a) loan program makes available small business loans up to $5 million and repayment terms of up to 25 years. Funds can be used to purchase equipment or real estate, provide working capital and more.

SBA 7(s) 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 itself, the lenders that offer 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.

3. 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.

4. Short-term loans

Short-term business loans have repayment terms of just a little while — usually three to 18 months. These loans are a good option for when you need funds quickly to fill a short-term purpose, such as covering a temporary cash shortage or seasonal income gap. Depending on the lender, you may be able to borrow anywhere from $5,000 to $500,000.

The big thing to look out for with short-term loans is the interest rate. Rates on short-term loans tend to be higher than for longer-term loans, often ranging from 7% to 50% or higher, depending on the loan.

5. Equipment financing

Equipment financing helps business owners purchase machinery or equipment essential for running their businesses. These loans use the equipment as collateral, so they’re generally more readily available than unsecured business loans.

Many online lenders require a minimum credit score in the 600s for an equipment loan. They may also require you to be in business for at least six months and meet minimum annual revenue requirements.

6. Merchant cash advance

A merchant cash advance (MCA) isn’t technically a loan. Instead, a merchant cash advance company will typically partner 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.

Merchant cash advances can usually be easily obtained if your business’s volume of daily debit and credit card sales is substantial. However, they can also be expensive — it’s not unusual to see APRs in the triple digits.

7. 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 right away rather than waiting 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.

8. 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 an annual fee, make sure it offers enough value in rewards to offset the cost.

9. 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 — it can improve your chances of getting a business loan down the road, as lenders prefer to work with business owners who have 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 be offered in 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 pay back the money right away.
  • 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 they’re secured by your home. However, home equity loans and HELOCs can have substantial closing costs. Plus, you also risk losing your home if you can’t afford to repay the loan or line of credit.

10. Friends and family

If you have friends or family members that have available funds and are 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, if you can’t repay the loan, you risk damaging the relationship.

11. Crowdsourcing

Crowdfunding is another way to raise money from friends, family and the general public. Kickstarter and GoFundMe are two well-known crowdfunding platforms business owners use to raise startup capital.

Crowdfunding is low risk because people are donating to your business — they’re not investors or lenders. However, donors typically expect some benefit in return for their contribution. For example, they may want your product or service as soon as it’s available, formal recognition or another kind of reward.

12. Grants

Small business grants are usually offered by federal, state or local governments, corporations or foundations. The biggest perk of a grant is that you won’t need to pay it back. However, there can be a lot of competition for small business grants — you could end up spending a lot of time applying for grants and receive little or no funding in return.

Pros and cons of startup business loans

If you’re considering applying for a business loan, here are a few potential benefits and drawbacks to keep in mind.

ProsCons

  Taking on some form of debt allows you to preserve your personal savings

  You may get immediate access to the funding you need to start or grow your business

  You don’t need to sell part of your business to investors, so you retain complete control

  Most lenders require some time in business, making startup loans elusive for brand new startups

  Repaying business debt may be difficult if you don’t yet have stable revenue

  Loans available to new businesses may come with higher interest rates and fees

How to get a startup business loan in 6 steps

  1. Write a business plan. Many business startup loan lenders will ask to see a business plan as part of the approval process.
  2. Decide what type of financing you want to apply for. There are many types of business loans and other funding options. Only you can decide what’s right for your startup business.
  3. Check your personal and business credit scores. Poor credit is one of the main reasons business loan applications get rejected. If you don’t have business credit yet, lenders will look at your personal credit score — so be sure to check your credit and take steps to improve your score before applying.
  4. Compare lenders. Getting a loan offer can be exciting, but you should still shop around to find the right loan with the best rates and fees.
  5. Gather required documents. Requirements vary by lender, but most want to see three years of business and/or personal tax returns, copies of business licenses and registrations, financial statements and business and personal bank statements.
  6. Submit. You may be able to apply online for a business startup loan and submit all required documentation via an online portal or email.

Frequently asked questions

What is the average size startup business loan?

Small business loan sizes can vary widely depending on the type of lender you’re working with. However, amongst alternative lenders (i.e., non-bank lenders), the average loan amount is $50,000 to $80,000.

Can I get a startup business loan with bad credit?

Lenders usually check an applicant’s personal credit score when deciding whether to approve a startup loan. While it’s possible to get a business loan with bad credit, your options may be limited and you may have to put up collateral or pay a higher interest rate.

Is it hard to get a loan for my business I just started?

Getting a loan for a brand new business is more challenging than getting funding for an established company. Some lenders have minimum annual revenue requirements or may require you to be in business for at least two years.

However, some lenders offer loans targeted to startups, so don’t be discouraged if you don’t get approved on your first try.

Do banks give loans to startups?

Banks may be willing to lend to startups that demonstrate the ability to repay debt. Having excellent credit, offering high-value collateral and having at least two months of cash reserves on hand can increase your chances of approval.

How do I qualify for a startup business loan?

Every lender has different loan requirements, so shop around for one that fits your needs before applying. Check out their websites or call to learn about their minimum credit scores, minimum time in business, annual revenue and other guidelines.

How much down payment do I need for a startup business loan?

You’ll typically need to put some money down to qualify for a startup business loan. Some lenders will require down payments of up to 25%.

 

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