Getting a small business loan can be difficult if your business does not have a proven track record of success. However, there are several types of start-up loans that are suitable for a range of needs and qualifications.
Online term loans
Term loans are generally available from traditional banks and online lenders; however, banks may require more qualification requirements than online lenders. Term loans from online lenders typically have maximum limits of between $ 250,000 and $ 500,000, but newly formed startups are unlikely to qualify for such large loan amounts. Additionally, online lenders typically require startups to be up and running for at least six months to a year before they can qualify.
Online term loans can be a great way for startups with at least six months under their belt to secure business financing to help grow their business. If your startup hasn’t been operating during this time, consider the other seven startup business loans below.
The SBA Microcredit Program provides eligible business owners with access to start-up loans of up to $ 50,000. Terms extend for up to six years and interest rates are typically between 8% and 13%, although this number varies by lender.
Loans are issued by nonprofit lenders and other financial institutions and backed by the SBA, so they are generally more accessible to startups with limited financial records and credit histories. And, while not useful for all businesses, SBA microlenders are often more engaged in funding startups in disadvantaged areas and those owned by women and minorities.
Asset-based financing is a type of financing by a lender secured by the valuable assets of a business, including inventory, machinery and equipment, accounts receivable, and real estate. Secured financing often comes with more flexible lending standards because it poses less risk to the lender. This makes it a great option for startups that cannot meet the criteria for traditional business loans.
Invoice factoring, one of the most common types of asset lending, involves selling unpaid invoices to a third party in exchange for a lump sum in cash, typically between 80% and 90% of the total amount of the loan. invoice. This can provide startups with working capital quickly and without having to demonstrate a strong corporate credit rating or meet other stringent borrowing requirements.
Personal loans for businesses
Start-up creators can also benefit from a personal loan rather than a traditional business loan. Notably, personal loans are easier to obtain for a new business owner than a business loan, especially for startups with little or no business history.
Additionally, the application and approval process may be less rigorous with some lenders than with a business loan. Startup owners may also have access to lower annual percentage rates (APRs) than those available with some business loans, although the borrowing limits available are generally lower.
Borrowers who use personal loans to fund their startups are personally responsible for debt repayment. Still, most lenders look at an applicant’s personal credit score anyway when assessing a loan application for a start-up business, so start-up founders are also likely to be personally responsible for it. a start-up loan.
Keep in mind, however, that using personal loan funds for business operations also involves the mixing of personal and business assets, which can lead to accounting, tax, and / or legal issues down the road. Additionally, some personal lenders prohibit the use of funds for business purposes, so be sure to confirm with your desired lender before applying.
Related: Best personal loans 2021
Business credit cards
Like personal credit cards, business credit cards provide revolving access to funds that can be used for everything from furniture and office supplies to legal fees, equipment, and larger purchases.
The application and approval process is faster than traditional loans, and startup owners are more likely to be approved based solely on their personal credit scores. Plus, business credit cards aren’t guaranteed, so new business owners won’t have to provide valuable collateral.
Business credit cards can be used as needed, and cardholders only pay interest on unpaid balances at the end of the billing cycle, typically every 30 days. This makes it a good option for monthly operating costs and other expenses that can be reimbursed each month to avoid interest. Some cards also offer introductory 0% APRs that allow borrowers to make interest-free purchases for six months to two years.
Family of friends
It can be difficult to obtain financing for a start-up business with a limited credit history and financial records. Business owners who are unable to take advantage of a traditional business loan or other method such as a business credit card, or who only qualify for a small business start-up loan, may want to borrow from friends or family.
Before agreeing to borrow money, startup owners need to confirm that they are comfortable entering what is essentially a business relationship with them. This involves reviewing the business plan with the lending party, discussing their role (or lack thereof) in the business, and memorizing the loan terms in writing. Making sure all parties agree to the loan amount, repayment terms, interest rate, and other relevant factors can prevent conflict down the line.
If traditional lending tools aren’t an option, and borrowing directly from friends and family seems too personal to you, crowdfunding may be a suitable alternative. Likewise, potential borrowers who cannot qualify for a business loan as a startup can use a crowdfunding platform like Kickstarter or Indiegogo to access cash and cover operating expenses.
To get started, choose an online fundraising platform, create an account, and decide how much money you’re trying to raise. After setting up a crowdfunding campaign, users can donate different amounts of money that will become available after the campaign ends.
Not only does this form of business finance not require qualification through a financial institution, business owners also do not have to give seed money to donors in exchange for funds. Likewise, the startup is not charged interest or other lender fees.
Due to the nature of crowdfunding, this strategy is best suited for startup owners who don’t need to raise a large amount of money and for companies with creative or compelling offers. There is no need to offer a thank you gift, but campaigns can be more successful if startups entice donors with an exclusive product, service, or commemorative gift.
Small business grants
A small business grant is money given to startups and other businesses to help them get started and grow. Grants are offered by a range of entities, including state and local governments, the federal government, and businesses. Unlike other methods of start-up financing like loans and credit cards, small business grants do not require repayment, and business owners do not pay fees or interest.
However, this form of funding is extremely competitive and applications are often rigorous and time consuming. Many grants also focus on specific types of businesses, including those owned by women, minorities, veterans, and immigrants. Thus, it can be difficult to identify a suitable open grant, prepare an application and wait for the award in the time available.