Deciding to start a new business is easier said than done, especially when it comes to securing funds. Finding funding for a startup venture can be particularly difficult as many traditional loans require businesses to be established for at least one year or more before they will provide your business funding.
While this makes the process harder, it’s not impossible. To help your startup business save time and stress, we’ve assembled a list of the top business loans to help fund your startup.
Table of Contents
What is a Business Loan?
A startup business loan is a financing arrangement that helps your business get upfront working capital to fund your new business. The loan goes towards meeting the initial business needs of your startup. Your business can consider getting an SBA microloan, business credit card, or asset-based financing, among other financing options.
While you can start your business with savings, getting a small business loan can enable you to cater to business operations, develop new products, buy assets and raw materials, promote your business, or even secure a business premise. Therefore shelving your business’ savings for other uses.
Securing a small business loan is one of the most challenging issues for many startups compared to larger firms, as many lenders find startups riskier to fund than established ventures.
It’s important to understand that several low-cost options aren’t available for startups. However, your business can reassess them after it’s been established for a few years, building a solid credit background or achieving a reliable revenue generation capability.
How Does a Startup Business Loan Work?
A startup business loan is ideal for businesses less than 24 months old.
Some startup loans will be more helpful in meeting business objectives than others. For example, equipment financing loans can help your business buy a business vehicle, copier, scanner, or kitchen oven, among other equipment.
Luckily, there’s an array of startup loans on the market. Your business needs to browse for one that suits it best. Your business should look for lenders that understand the uniqueness of your startup, support your efforts, and have an excellent reputation.
The amount of funding your business will receive depends on your business’ professional profile and its financial strengths. Your business needs to have a realistic business plan, a breakdown of financial projections, as well as other indicators of reliability.
Different Types of Startup Business Loans
SBA Microloan
The U.S. Small Business Administration’s (SBA) microloan program seeks to specifically empower women, veterans, low-income earners, and minorities. The SBA partners with a group of designated intermediary lenders to provide new and existing startup businesses with up to $50,000 of working capital to grow their company.
Along with providing funding, the lenders also offer business-based training, technical assistance, and business management advice to help assist in the ongoing success of newly established and growing businesses.
Asset-Based Financing
Asset-based financing provides your business with working capital to buy business assets such as machinery, equipment, and vehicles. Also, the loans help your business release value from your business’ assets because you’re using them as collateral.
Line of Credit
A business line of credit gives business owners access to a predetermined amount of working capital. Startups can borrow money when they need it and pay back only what is drawn on the line of credit.
A substantial advantage of a business line of credit is that the business only has to pay fees on the amount drawn, regardless of the total credit limit.
Business Credit Card
While this is not a loan, your business can get upfront capital from a business credit card. The issuer may check your credit scores and your business and personal income.
Business credit cards are a great way to keep your personal and business expense separate from each other. When used responsibly, business credit cards can help provide short-term startup financing to get your startup off the ground and build business credit.
The Requirements
The below shows the typical types of requirements for each product. This is not an exhaustive list, and the requirements may vary from lender to lender.
SBA Microloan
- Repayment ability
- A for-profit business
- A credit score of above 575
- A personal guarantee as personal assets
Asset-Based Financing
- A credit score of over 600
- $100k in business revenue
- Over 11 months in business
- Required collateral: account receivables, inventory, etc.
Line of Credit
- Credit history
- Annual revenue
- Time in business
- Business debt-to-income ratio
Business Credit Card
- Federal tax ID
- Total annual income
- Personal credit history
- Legal or business entity structure
- Annual revenue and monthly expenditure breakdown
Qualifying Information to Apply for a Startup Business Loan
Gathering specific information about your startup is essential when choosing a financing option. Many funders will want to know about your business’ growth and direction.
Make sure to have the following information on hand:
- Tax returns
- Business plan
- Annual revenue
- Time in business
- Business licenses
- Articles of incorporation
- Last 3months of business bank statements
Commonly Asked Questions
Where can I source a startup loan for my business?
Your business can get loans from banks, investors, alternative lenders, and credit unions.
What are the requirements?
Each loan has unique requirements that include but is not limited to collateral, excellent character, good credit scores, and the potential ability to repay the financing.
What if I do not have any collateral and my credit scores are low?
Your business may still be able to get a startup loan. Some financial institutions offer loans without asking for collateral or considering low credit scores.
Which is the most challenging loan to obtain?
SBA loans have a lengthy process and are the most difficult to qualify for.
What options do I have if my business doesn’t meet the requirements for a startup loan?
If your business doesn’t qualify for a startup loan, it can consider other options, such as applying for a grant or another type of non-loan product, like invoice factoring or a merchant cash advance.
Summary
Your startup has multiple options to choose from when applying for a business loan. Remember to consider all your options and assess which is the most appropriate for your business. Knowing your business financing needs and goals will help you choose the right type of funding.
If you keep this advice in mind, your business will be sure to find the best funding for your startup in no time.
