Small Business Loans for Startups

Q: Is it harder to get a business loan for a startup?

Yes, especially regarding traditional lenders, who want to see a minimum of one year in business and preferably three.

Q: Can you get a business loan if you just started your business?

It’s not common but it is possible if you have a strong business plan and are willing to accept a high interest rate.

Q: Do banks often lend to startups?

No, banks prefer to see several years in business before they will approve a loan.

A startup business loan can help you access capital to launch or grow your business.

How much do you want to borrow?

It's fast and free, and it won't affect your credit. *

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What Is a Small Business Loan for a Startup?

There are few, if any, small business loans that say they are specifically for startups. The reality is when people pursue a loan for early stage financing, they apply for regular small business loans.A traditional loan provides you with a lump sum of funds at the beginning of the loan term. After receiving it, your business makes loan payments, which could be daily, weekly, or monthly, depending on the agreement with your lender, to pay back the loan with interest. Typically, you can use traditional loan funds for just about anything related to your business, including inventory, payroll, or other operating expenses. Some types of specialty loans, however, limit your spending. Equipment financing, for instance, must go towards some type of equipment, although that includes a wide range of categories from heavy machinery to office equipment. One of the major benefits of a small business startup loan is that the extra financing can potentially fuel growth more quickly than just bootstrapping each stage of progress. Additionally, a startup loan can help you maintain ownership and control over your company rather than seeking outside investments. And while many lenders do like to see that you have some skin in the game and have invested in your business, startup financing can help you limit your personal risk and liability by using external funds. Recommended: Mistake-Proof Your Business Idea

How Can You Get a Business Loan for a Startup?

Many lenders want to see proof that you have been in business for at least a year, and preferably three, which may present a challenge. Many entrepreneurs may benefit more directly from pre-seed funding when their business is being launched.Be prepared to have your business plan ready, whether you’re pre-revenue or have already launched. Not all lenders require a business plan as part of the loan application, but it’s still helpful to make sure you’re prepared to spend the funds you are applying for in a smart way. Also think about the money you want to borrow in depth. Calculate exactly how much money you actually want to borrow. Figure out if you need capital for one-time costs or ongoing expenses. Additionally, expect to prepare any financial statements, including:

Bank statements (both personal and business)
Tax returns (both personal and business)
Legal business documents, like your business license and articles of incorporation
Financial statements

What Are the Requirements for a Small Business Startup Loan?

All lenders have their own eligibility requirements. Here are some factors that most lenders look at when evaluating small business loan applications.

Credit Scores

Lenders typically look at both business and personal credit scores. And you may not have a business credit score if your startup is less than a year old. Your personal credit score should be at least 650 in order to help you qualify for business financing—and some lenders may require a higher number.

Business Age

Many lenders require that your business be open for at least one to two years before they will consider extending any credit to you. As a startup, you may need to bootstrap your expenses in the beginning, and then use a loan to scale your growth once you’re more established.

Revenue and Cash Flow

Lenders want to know that you’ll be able to repay the business loan, so they’ll typically look at your revenue and cash flow as part of the application. There may be a minimum monthly or annual revenue requirement depending on the lender.

Where Can You Get a Startup Business Loan?

There are many different types of lenders to approach. Some might be willing to work with startups looking for financing.

Online Lenders: Typically they will approve quickly if they decide to approve. However, being online means no physical branches and in-person representatives.
Traditional banks: Wider variety of financing options and possibly physical locations near you, but may be less likely to loan to someone whose business has limited track record.
Credit Unions: Competitive interest rates with a focus on local businesses, but will require membership.

Small Business Startup Loan Type Options

When you’re looking for the best small business loans for startups, you have a wide range of financing beyond loans available to think about. Grants for small businesses are an excellent option, as are business credit cards. Here are some specific business financing options to consider.

Business Line of Credit

A business line of credit (LOC) gives you on-demand financing to help cover operational expenses or financial emergencies. A startup may qualify for a short-term LOC. You may also need to secure the financing with collateral, such as real estate or other company assets.

Equipment Financing

Equipment financing is a loan you use to purchase business equipment. It is typically secured by the assets you purchase with the funds. You may also need to offer a personal guarantee, which puts your own assets at risk if you default on the loan. In addition to heavy equipment, an equipment loan can be used for things like office furniture and technology.

SBA 7(a) Loans

While SBA 7(a) loans go up to $5 million, you’ll likely qualify for much less as a startup. You also need to make a down payment of at least 15%. Loan terms range between 10 and 25 years, and interest rates are competitive.

SBA Microloans

A microloan lets you borrow up to $50,000 for as long as six years. It’s designed for newly established businesses, making it a good option for startups. Both collateral and a personal guarantee are required.

Invoice Financing

If your startup already has incoming revenue in the form of invoices, you may look into invoice factoring to help with your cash flow. The lender pays a percentage of your outstanding invoices. Once your customer pays the invoice, you get the remainder, minus the factoring fee. It can be quite expensive, and you typically pay more the longer an invoice goes unpaid.

Loans for Startups with Bad Credit

Start up business loans for bad credit can help you finance your startup costs regardless of your personal history. You can also expect to pay very high interest rates and be required to use some type of collateral to secure the loan if you can get it.

Small Business Crowdfunding

Crowdfunding your business can help you raise capital for the earliest stages of your startup. The most common option is reward-based crowdfunding, which allows you to exchange tier-based rewards for different donation levels. It also helps you build excitement around your product or service.

Pros and Cons of Small Business Loans for Startups

There are both benefits and drawbacks to using a small business loan for your startup. Here’s a brief overview of each.

Pros

Faster Growth: One of the biggest advantages of using a small business loan to launch your startup is that you can grow much faster with that injection of capital. Ordering inventory in larger quantities, for instance, can save you money and help you jump on new opportunities.
Working Capital: A loan can give your startup funds to work with before you start making enough money to support the business.
Company Control: You also get to retain ownership in your company rather than opening up the doors to equity investors.

Cons

Costly: Qualifying for a small business loan as a startup can be tough, not to mention expensive.
Puts You in Debt: Getting a loan means that your startup already has an ongoing financial obligation.
Risk of Losing Collateral: You also usually need to provide a personal guarantee and/or collateral, which brings in some personal risk.

Additional resources

15 Types of Business Loans to Consider

Need money for your business? Learn about the different types of small business loans to get the right funding for your needs. Compare your options today.

7 Step Guide to Getting a Small Business Loan

There are many steps to getting a small business loan, including choosing the right type of loan, meeting the lender's requirements, and finding the best deal.

What Are Common Small Business Loan Terms?

Learn the basics of small business loan terms, SBA loan maturity lengths, and typical business loan terms so you can find the right financing for your needs.

Guide to How Big of a Business Loan You Can Get

Business loan amounts can range from $1,000 to $5 million. Learn how much of a loan your business can get and how to qualify for the best rates.

6 Popular No Credit Check Business Loans

Finding a no credit check small business loan may sound too good to be true but these 6 lenders are making it happen. Learn more, and find a loan.

Startup Business Loans (Bad Credit and No Collateral)

An unsecured business startup loan allows small business owners to obtain financing with no collateral and bad credit, but there are risks. Learn what you can do do here.

Guide to Small Business Grants and Where to Find Them

Need funding for your business? Grants offer financial assistance for new businesses. Find small business grants for your company's needs today.

Guide to SBA Loans and How to Apply to Them

The Small Business Administration (SBA) partially guarantees SBA loans, so they often have better terms. Learn how to apply for an SBA loan and more.

How Much Money Do You Need to Start a Business?

How much does it cost to start a business? Learn more about how to estimate your business start up costs and set your business up for financial success.

FAQ

Is it harder to get a business loan for a startup?

Can you get a business loan if you just started your business?

Do banks often lend to startups?