It can be challenging to resist the urge to launch a new company, but a great concept alone won’t guarantee success. To turn your idea into a successful business, you frequently need to invest a significant amount of time and money, both internally and externally.
If you don’t have good personal credit or business experience in the field, you might find it harder to obtain a startup business loan for a new venture than for an established one. But many new entrepreneurs have found success with various forms of funding and financing.
What is a startup business loan?
Startup business loans are any type of loan used to start a new business; they are not a particular kind of loan. You might require this cash to support the creation of a good or service, pay employees, lease property or equipment, or purchase stock. Funding for companies that have already begun operations but are still in the very beginning stages can also be included in startup loans.
There are nine different kinds of startup business loans and funding options.
Since lenders know they are providing funding to support a new idea, startup loans typically don’t require strong business credit or high revenue. Your eligibility and the terms of the loan, however, may be impacted by your personal credit and professional experience. You can also support your business with various forms of financing. Here are nine typical choices.
1. self-financing
Many brand-new small business owners borrow money from friends and family or deplete their savings to fund their enterprises. You might be able to do this by borrowing money from a 401(k) or other retirement accounts, using business credit cards, a second mortgage, or an unsecured loan.
If you’re having trouble getting a business loan or prefer to fully own your company to sell a portion to an investor, these options may be beneficial. However, you might also be jeopardizing your savings and personal property.
2. Loans from family or friends
You might also try to solicit donations from friends and family. You could offer to repay them in the form of a share in your company, or you could let them purchase a portion of your company and stand to gain if it is successful.
You might not need a credit check from your friends and family, and they might give you better terms than you would get from other lenders. However, take into account what might occur to your personal relationships if your business fails and you are unable to pay back the loan.
3. SBA loans
Most SBA loans aren’t provided directly by the US Small Business Administration (SBA) but are partially guaranteed by participating lenders. Depending on your business and how you plan to use the money, you can apply for various SBA loans. Even if you don’t have excellent credit, the guarantee may make it simpler to get a sizable loan on favorable terms, despite the time-consuming application and approval processes.
One of the most well-known programs is the SBA 7(a) loan program, which provides funding of up to $5 million. In 2021, startups received about 17% of SBA 7(a) loans.
If you’re buying real estate or equipment, the SBA 504 loan program might be a good choice, but only 10% of those loans went to startups.
In 2021, 45% of loans made through the Community Advantage loan program—which is for companies operating in underserved markets—went to new businesses.
Although the SBA doesn’t disclose what percentage of those loans went to startups, the SBA microloan program offers up to $50,000 to start or grow a business.
You can find participating lenders and compare loan offers based on your unique needs using the SBA’s lender matching tool.
4. Small-town business funding
Additionally, you could look for conventional business loans from nearby nonprofits, community banks, and credit unions. Based on your personal experience, you might discover that smaller lenders are more willing to work with you than big banks or online lenders, even though the rates, terms, and requirements can differ depending on the lender. Some lenders might also take part in regional or national loan guarantee programs that are comparable to those run by the SBA.
5. Crowdsourcing
You can organize a campaign and collect donations from acquaintances and total strangers using online crowdfunding platforms. Crowdfunding can take four different forms: debt, equity, donations, and rewards.
In contrast to borrowing money in the form of a loan or bond, which must be repaid with interest, equity involves raising money in exchange for a portion of your business. Startups don’t frequently use donor crowdfunding, like GoFundMe campaigns, because there is little to no return. However, you might take into account a campaign with rewards and provide donors with one of your company’s goods or services in exchange for their donations.
6. Awards
Small business owners have access to corporate, local, state, and federal grants, which are fantastic options because you don’t have to pay back the money. However, there might be a competitive application process, and your company will need to support the grantor’s objectives.
A good place to look for federal small business grants is Grants.gov. You can also look for a nearby Small Business Development Center, which can offer specialized guidance for locating funding, grants, and successful business operations.
7. Asset-based lending
When starting a business, you can also use assets as collateral for a loan. These might include loans for commercial real estate, equipment financing, and loans for vehicles used for business. Leasing equipment can occasionally make more sense than buying it. An operating lease gives you the option to buy the equipment outright or return it at the end of the lease term. The more typical capital lease is comparable to a rent-to-own arrangement.
8. Business credit lines
You may be able to continue to access funding for your startup with a business line of credit. You won’t get the entire loan amount up front, in contrast to a loan. As an alternative, you take money out of your line of credit, which has a limit on how much you can borrow. Additionally, because you only pay interest on the amount you borrow, you’ll have more freedom than you would with a term loan.
9. Online payday advances
Online business loans are frequently term loans, meaning you receive the full amount of the loan when you accept it and then make regular payments throughout a set time until the loan is repaid.
Online lenders might use contemporary methods (like connecting to and analyzing your bank account) to determine who qualifies, and they might also have easier requirements and a quicker application process than traditional lenders.
Lines of credit are available to startups that have only been in operation for six or three months from online lenders like BlueVine and Fundbox. Through Shopify Capital, small businesses can obtain financing without having their personal credit checked.
How to obtain a loan for a new business
Plan your business.
Analyze your credit score personally.
Compare various financing options.
Request funding.
Depending on the options you select, you might need or want to raise money in multiple rounds to get your idea off the ground. However, the fundamental steps begin with creating your pitch, going over your qualifications, and determining what you can currently qualify for.
Plan your business. Lenders want evidence that you’ve considered the difficulties and possibilities associated with your new venture. Include any pertinent details about your background operating a business or working in the sector.
Analyze your credit score personally. Whether you qualify for financing and the rates and terms you receive may depend on your personal credit. You can access a lot of free financial accounts and apps to check your credit scores. Check your situation to see what you can do to raise your credit score.
Compare various financing options. When reviewing your options and zeroing in on your top picks, keep in mind how much money you need, when you need it, and how much you can afford to repay.
Request funding. Apply with several lenders or organizations after reviewing the eligibility requirements and application process. To choose the one that will work best for you, compare the offers you receive.
FAQs about startup loans
How can I secure a loan to launch my own company?
For a new business, there are numerous ways to obtain a startup business loan. Think about borrowing money from friends and family, using a personal loan, credit cards, crowdfunding, or obtaining a loan from a financial institution.
Can I get a loan for my business with no down payment?
Unless you’re applying for an asset-backed loan, like a business auto loan or equipment financing, you typically don’t need to put any money down to get a business loan. Some lenders, however, might want proof that you’ve put time or money into your business idea.
How can I get money for a new company?
You can fund a startup with your own cash or assets, by soliciting donations from friends and family, taking out personal loans from people, or applying for a business loan or line of credit. At different stages, many businesses will also use a variety of financing methods.
What credit score is required for a loan for a new business?
Having a personal credit score that is at least in the high 600s (the maximum is 850) can be helpful. However, the credit score you need for a startup business loan can vary depending on the type of loan and the lender. Some financing options, like crowdfunding, don’t demand good credit, though.