If you have a business idea you’d like to bring to life, you’ll need funding. But where should you turn if you can’t cover startup costs out of pocket? If you don’t already have an established business, you may not be eligible for a traditional business loan. In that case, consider these other options.
Startup business loan options
As a budding business owner, there are a few ways to go about funding a startup.
Personal loans
Personal loans are installment loans that allow individuals to borrow a lump sum and repay it, plus interest and fees, over a set term that can last from a few months to over 10 years, depending on the lender and loan purpose.
They’re offered by a wide variety of banks, credit unions, and alternative lenders across the U.S. Personal loans can be a very good option if you can’t qualify for other types of business funding.
While many lenders don’t offer personal loans for business purposes, these Credible partner lenders do. You may need to start your application on the lender’s website to qualify for a business loan.
It’s also worth noting that approval will be based on your personal information (credit profile and income) and you’ll be responsible for the loan even if the business fails.
Learn More: What Are the Requirements for a Personal Loan?
SBA loans
If your business is 100% new, a Small Business Administration (SBA) microloan is likely your best bet since it’s designed to help businesses start and expand. If you already have an operating business, you may also be eligible for other SBA loan types:
- Microloan program: Loans up to $50,000 are available for a wide range of startup business needs, such as working capital, machinery, equipment, supplies, fixtures, inventory, or furniture. New businesses not yet in operation may be eligible for this type of loan.
- 7(a) loan program: Loans up to $5 million are available for real estate needs, working capital, debt refinancing, machinery, equipment, furniture, fixtures, changes of ownership, and supplies. To be eligible for a 7(a) loan, you must have an operating business.
- 504 loan program: Loans up to $5.5 million are available for new facilities, land, existing buildings, machinery, equipment, and more. They may not be used for working capital, inventory, debt consolidation or refinancing, speculation, or investment in rental real estate. To qualify for a 504 loan, you must have an operating business.
While the SBA sets the rules and backs the loans, borrowers apply for and get the funds through a network of approved lenders.
Business credit cards
Business credit cards are credit cards designed for business owners that can be used to finance business expenses. Like personal credit cards, they come with a credit line, a monthly minimum payment, an annual percentage rate (APR), and, often, rewards and benefits. To qualify, you’ll need to be a sole proprietor with income if you don’t have a business with an EIN (employer identification number). You may need to provide a personal guarantee or a security deposit due to your lack of business credit history.
Equipment financing
Equipment financing involves taking out a loan to purchase equipment for your business, with the equipment as collateral on the loan. Many banks, credit unions, alternative lenders, and equipment dealers offer equipment loans. And they can be easier to qualify for than an unsecured loan since the collateral reduces the lender’s risk.
Borrowing money from friends and family
Sometimes the best place to turn for funding is to those who know and believe in you. Many startup founders ask their inner circle of friends and family members for loans before looking to institutions. Friends and family often don't base their lending decisions on your credit or income, and offer more favorable terms than you could get elsewhere.
Business grants
Business grants are amounts of money awarded to business owners that don’t have to be paid back. They’re often given by the government or private organizations in an effort to move initiatives forward or support underserved populations.
You can find grant opportunities on grants.gov, by visiting your local Small Business Development Center, or by performing a search online. While an ideal funding source, they can be hard to get due to high levels of competition and program restrictions.
Crowdfunding
Crowdfunding involves asking the public to fund your business. Sites like Kickstarter allow you to create a campaign page where you explain what you’re trying to do and the amount of money you need. You then promote your campaign and try to get people to contribute. Companies often offer something in exchange for donations, such as a product if the campaign is successful.
Angel investors
Angel investors are individuals that invest money in startup businesses in exchange for equity. You can find them via search engines, on professional networking sites like LinkedIn, and on platforms like the Angel Invest Network.
Venture capital
Another route similar to getting funds from angel investors is seeking funds from venture capital (VC) firms. VCs also offer you money in exchange for equity. However, instead of a single investor giving you the money, it’s a firm that manages funds from a collection of investors known as limited partners. You can find VCs online in directories, on social media, or by performing a search on Google.
Pros and cons of startup business loans
Like any financial decision, getting a startup business loan has advantages and disadvantages. Note that pros and cons may differ, depending on what type of startup business loan you get.
Pros
- Low interest rates
- Varied loan amounts
- Some loan types have fast funding
Cons
- Eligibility requirements
- Application requirements
- Debt obligation
Pros
- Low interest rates: Lower interest rates typically reduce the cost of borrowing, and business loans tend to have lower interest rates than other types of financing - in some cases, much lower. According to Federal Reserve data, the average interest rate on new, fixed-rate business loans is around 7.8% and the average interest rate on two-year personal loans is 12.32%. By contrast, the average interest rate on credit cards is 21.47%.
- Varied loan amounts: Online lenders Upgrade and Upstart offer personal loans for business between $1,000 and $50,000. PNC Bank secured business loans start at $100,001, and TD Bank offers business loans of up to $1 million. SBA loan amounts can range from $500 to $5.5 million, depending on the loan program.
- Some loan types have fast funding: Many personal loan lenders can process applications and send funds within days or the same day you apply. Some banks and credit unions also offer same-day funding for current customers. Fast funding, however, is not typically an attribute of SBA loans.
Cons
- Eligibility requirements: Some business loans have requirements that might be challenging for a startup. For example, some lenders may require (or prefer) that your business has been in operation for at least two years. Startups that don't meet a lender's minimum requirement might not be approved or may have to submit business projections and other documentation to be considered.
- Application requirements: A business loan application requires a lot more documentation than applying for a personal loan. Depending on the lender, you may have to submit a profit and loss statement, a balance sheet, articles of incorporation, bank statements from you and others with an ownership interest in your company, and other documents.
- Debt obligation: Any type of loan involves taking on debt that must be repaid according to the terms of the loan agreement. If you're uncertain about your startup's immediate prospects, be cautious about committing to a long-term loan.
How to qualify for a startup business loan
If you want to qualify for a startup business loan, the next steps will depend on the type of funding you decide to pursue.
For example, if you’d like to get an SBA loan, the SBA requires that you run (or are opening) a for-profit business located in the U.S. and that you’ve exhausted all other traditional financing options. While good credit is preferable, you may be able to get a startup business loan with bad credit. The SBA’s lending partners may also require minimum credit scores, business plans with projections, collateral, and more.
On the other hand, personal loan approval is based solely on personal factors, including your credit, employment status, income, and identity.
To find out if you qualify for a particular type of startup loan, find potential lenders that fit your needs and check their eligibility requirements.
Related: What Is Debt-to-Income Ratio?
How to get a business loan with bad credit
If you’re seeking a business loan but have bad credit, you may run into some difficulties. Why? Because when businesses don’t have established credit or income, lenders often look to the founders for reassurance. If your personal credit isn’t in good shape, they are more likely to deny your application.
However, there are a few potential options. Your friends and family members likely won’t check your credit or finances before lending to you. Instead, they’ll base the decision on their history with you. Further, certain personal loan lenders are willing to lend to individuals that have less-than-perfect credit. While you often can’t borrow large amounts or get competitive rates, you may be able to get a loan large enough to get started. Further, certain personal loan lenders are willing to lend to individuals who have less-than-perfect credit. While you often can’t borrow large amounts or get competitive rates, you may be able to get a loan large enough to get started.
How to get a startup business loan
If you want to get a business loan, a good place to start is reviewing all of your options (e.g. SBA loans, business credit cards, personal loans, etc.). Evaluate which might be the best for your particular type of business. From there, research where to get the type of loan you want.
For example, if you want an SBA business loan, you can compare the offerings from multiple SBA lenders to see which looks best for your situation. Consider factors like eligibility requirements, loan amounts, APRs, fees, repayment terms, and customer service ratings.
If you're going to get a personal loan, prequalify with multiple lenders to get a sense of the loan terms you may qualify for and compare rates. Prequalification involves a soft credit check, which means your credit score won’t be impacted. However, when you formally apply for a loan, a hard credit check will be conducted and your score may be dinged a few points for up to a year.
FAQ
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