Need a startup business loan? Learn how and where to apply to get your business plan going.
You can get funding for a startup in different ways, and picking the right kind of loan to get your business going can be a daunting process. This guide gives you insight into your options, helping you to pick the best one for your requirements.
Seek Business Capital – Startup Specialists
Startups and newer businesses could qualify for loans and credit cards with a custom financing package.
- Personalized service to find the right funding solutions
- Considers your business potential, not just current finances
- Requirements: 680+ personal credit score, no bankruptcies in last 4 years
Can I get a business loan as a startup?
You can, though it can be difficult. That’s because your business hasn’t generated much revenue yet. Most lenders have minimum monthly revenue requirements as well as business age requirements. But some business lenders specialize in loans for new businesses or low revenue.
Compare startup loans
How does a startup loan work?
Startup loans work like almost any other business loan. Your business borrows money, then repays it plus interest and fees over a set period of time.
Generally, what sets startup loans apart is the eligibility criteria and application process. Since your business isn’t off the ground yet, your lender doesn’t have much to go by other than your personal credit and business plan. Both of these need to be strong to qualify for most startup loans.
While applying for a business startup loan does not take much time, it can take up to a month or more for the lender to process your application and disburse approved funds.
How 5 startup loan providers stack up
Not all startup loans are right for all businesses. Here’s a closer look at how startup financing works with different types of providers.
Seek Business Capital
- Best for: Helping you finding the right loan
Seek Business Capital is a loan connection service that specializes in finding financing for startups. It can help your business compare lenders and package your application to up your chances of getting a competitive deal. Its partners offer financing from $5,000 to $150,000 at rates that vary by lender.
However, Seek Business Capital charges a one-time fee of 9.99% if you go through with it. You must have a personal credit score of 680 or higher and no bankruptcies in the past four years to be eligible for a loan.
Diamond Business Loans
- Best for: Startups in high-risk industries
This California-based business lender is not shy about working with industries other lenders might turn away — including cannabis. Its also has some of the most competitive rates you’ll find for new businesses, ranging from 5.9%–19.99%.
Loan amounts run $25,000 to $150,000 with terms up to 5 years. To qualify you must have a credit score of 680 or higher and no late payments or bankruptcies on your credit report.
National Business Capital
- Best for: Fast-growing businesses
National Business Capital is a loan connection service that works with providers that offer startup business credit cards to small businesses with a 0% APR promotional period. This option could be cheaper than a business loan if your business is able to pay off the balance earlier.
But watch out — credit card APRs are typically higher than term loans after the 0% period is up. Entrepreneurs can typically qualify if they have a credit score of 680 or higher.
- Best for: Established businesses still in the startup phase
While this loan connection service doesn’t provide funding to start a business, it can work with businesses as young as three months old — still in their startup phase. Its partner lenders offer a wide variety of financing products, from unsecured term loans to merchant cash advances.
Loan amounts range from $5,000 to $500,000 with loan terms as long as 3 years. Your business must be at least three months old and make at least $10,000 in monthly revenue to be eligible.
- Best for: Sole proprietorships
LoanMe also doesn’t provide funding before your business opens its doors, but it can provide financing for businesses as young as two months old. It also provides financing for business owners flying solo — something that can be hard to come across, especially if you’re just starting out.
Loans run from $3,500 to $250,000 and can be on the expensive side, with APRs ranging from 25.64%–168.67%. To qualify your business must be a for-profit, at least two months old and you must have a credit score of at least 500, a business bank account and be over 21 years old.
11 ways to finance a startup
Taking out a business loan isn’t the only to cover the costs of your new business. In fact, it might not even be the best option to cover all of your business costs. Before you take out a loan, you might want to consider all of your choices to find the right combination of funding.
1. Unsecured business loans
An unsecured business loan is a business loan that doesn’t require any collateral. These can be hard to come by if you haven’t opened your business’s door — you’ll have to find a provider that’s willing to work with startups. It can also be expensive, since lenders tend to see startups as a risk.
You won’t risk losing any of your business’s assets if it folds and can’t pay back the loan. But you could still lose some of your personal assets if it requires a personal guarantee.
2. Secured business loans
A secured business loan is a loan backed by some of your business or personal assets as collateral. They can be easier to come by as a startup, since the collateral offsets the risk for the lender. They also tend to have more favorable rates and terms than an unsecured business loan. But you could lose whichever items you choose to back your loan with if you can’t make repayments.
3. SBA loans
These government-backed loans come with some of the most competitive rates and terms out there. While not all programs are available to startups, your business might be able to qualify for a microloan through one of its programs. These typically run up to $350,000 and have rates that end well below where many other business loans start.
They’re not always easy to get — only 54% of SBA loan applicants got approved in 2016, according to a Federal Reserve survey. And be prepared to potentially spend at least a month working on the application.
This small-dollar financing option is available to all types of businesses, often including startups. These small-dollar loans are designed to help you cover the little things when you’re just getting on your feet like buying office supplies or stocking up on your first set of inventory. These loans typically start around $500 and come with shorter terms than your typical unsecured loan. But they can have higher rates.
5. Personal loans
If you have strong personal credit and a steady source money coming in, a personal loan could actually be a better deal than a business loan when you want to start a business. Your lack of experience won’t hurt your application and many states don’t allow lenders to charge more than 36% APR.
However, personal loans rarely go above $100,000 or come with terms longer than seven years. In other words, it might not be able to cover all of your startup costs.
6. Equity investments
One of the more common ways to fund a startup is to take on investors in exchange for equity, or partial ownership of the company. Typically, small businesses can get an equity investment through a venture capital firm or an angel investor.
There’s no limit to how much money you can raise through this method — aside to how much your investors think your startup is worth. And while you won’t have to pay back any of the money you receive from an investor, though you could lose partial control of your company.
Entrepreneurs that have an easily-pitchable idea might want to also look into equity or rewards-based crowdfunding. With equity crowdfunding, your company starts an online campaign to gets funding from multiple investors in exchange for partial ownership. With rewards-based crowdfunding, your business offers prizes in exchange for donations. Like a personal loan, crowdfunding might not cover all of your startup costs, but could be great for funding a project.
8. Business grants
Startups with a mission — especially nonprofits — might want to look into business grants to get off the ground. Like an investment, you don’t have to repay a grant. However, they can be highly competitive and require a lot of work. They also typically don’t get much higher than around $15,000, so your business might not be able to cover all of its startup costs on its own.
9. Credit cards
A credit card can be a great way to cover smaller expenses and manage your company’s spending, since multiple employees can have cards from the same account. Many business credit cards have a 0% APR promotional period and are startup-friendly, making it a viable option for businesses that expect to be able to pay off what they spend within the first year.
10. Rollover for business startups (ROBs)
ROBs involves borrowing from your retirement plan to invest in your startup. It’s involves taking advantage of a tax loophole that allows your business to access these funds without paying a penalty if it’s the right type of corporation.
You need to have at least $50,000 in your retirement account to qualify and could face heavy fines, so many business owners opt to hire a third party to handle the complicated details. But if it works, you won’t have to pay any interest, early withdrawal fees or lose equity in your company.
11. Friend and family loans
Borrowing from your friends and family is sometimes the easiest way to get a good deal on startup funding — there’s a chance you might . Want to make it official? Use a service like LoanWell to whip together a legally binding contract with interest fees and late penalties.
Do banks lend to startups?
Generally, no. Not unless you’re taking out a personal loan, that is. That’s because banks tend to have stricter eligibility requirements than other types of businesses lenders. In fact, many won’t work with businesses less than two years old.
However, you might be able to get startup funding through a local bank that’s classified as a community development financial institution (CDFI). These nonprofit lenders have the mission of supporting the local economy in your area and might be willing to overlook your business’s lack of experience.
How do I find the right loan for my startup?
The best way to find a match for your new business is to shop around. Consider the following features when you’re comparing business startup loans and figure out which is the most important to your business:
- Interest rate. Even a seemingly small difference in percentage can have a big effect on how much you end up paying as interest, especially if you borrow a large sum over a considerable period of time.
- Eligibility criteria. Not all providers of business loans for startups have the same eligibility requirements. Make sure that you have the credit score and required collateral to qualify.
- Turnaround time. Startup loans typically take longer to process than consumer loans, with some lenders taking up to a month or even more. If you need money in a hurry, consider other forms of credit, such as a personal loan.
- Collateral. Many startup loans require you to provide some form of collateral. This can be through equity in your home or in the equipment or vehicles you own as part of your business. You can even get a business loan to purchase new equipment where the equipment itself acts as collateral.
- Loan amounts. You’ll need to have a clear idea of your startup costs before you apply for a loan to avoid borrowing too much or too little.
Do I qualify for a business startup loan?
Eligibility requirements tend to vary from lender to lender. However, most focus on the entrepreneur’s history of paying off personal debt. Typically, you must have:
- Good credit. Many business startup loan providers ask for a 680 credit score or higher.
- No recent bankruptcies. In addition to looking at your credit score, startup lenders typically also look at your credit report. Bankruptcies stay on your report for seven years.
- No recent delinquencies. If you’ve been late paying off debt, that could also hurt your chances of getting a startup loan.
- A strong business plan. Since your business doesn’t have a track record to back itself up, your business plan is often the only place where you get to make a case for yourself.
How to estimate the cost of starting a new business
You won’t know how much you need to borrow until you calculate how much it’s going to cost to start your business and figure out how much you’ve already got covered. Here’s how to do it in four steps.
Step 1: Calculate startup expenses
These are one-time costs for things that you will not own long-term that come with starting a new business before the official launch. Expenses are tax-deductible and include:
- Legal fees. Licensing, trademarking and the cost of setting up your business legal structure all fall under this umbrella.
- Insurance. For real estate, inventory, equipment, vehicles or anything else that you need to cover before launch day.
- Rent. Include first month’s rent plus the security deposit when tallying this cost.
- Brand design. How much did you pay that graphic designer to come up with a logo for your new business? Did you have anyone design your website?
- Payroll expenses. Did anyone do work for your business before opening? That’s a startup expense. Common startup payroll expenses include graphic design. Don’t forget to include consultant fees.
- Website domain fees. Getting a domain that makes sense for your business isn’t always cheap but it could be vital to attracting customers
- Office supplies and computers. These sound like assets, but you can deduct around $100,000 for office equipment if you’re a startup.
- Training. Take any classes or workshops on how to start a business? That counts.
Step 2: Add startup assets
Assets are things that you will have for a long time, like chairs, equipment and even intellectual property. These are not tax-deductible and include:
- Inventory. Nonperishable inventory can typically count as an asset —
though not always.
- Office furniture. Chairs, desks, inspirational signs count as assets.
- Signs. Awnings and in-store signs alike count as an asset.
- Improvements. Renting an office you plan to fix up? Those costs might seem like expenses but are counted as a business assets.
- Equipment. Need any machinery for your business besides computers?
- Land. Add how much you paid for your land when you bought it, not its current value.
Step 3: Estimate recurring costs
What’s the bare minimum you’re going to need to keep your business afloat each month? You might need help paying for these in the first few months, including:
- Rent. How much do you pay in rent for your office, storefront or any other real estate.
- Utilities. Electricity, water, internet and any other monthly bills involved with keeping your business spaces and running.
- Payroll. The combined monthly salaries of all employees, plus estimated salaries for any freelancers.
- Inventory. How much money does it cost to purchase, process, store, distribute (or do anything else to) your inventory?
- Marketing. Include all advertising expenses with the exception of staff.
Step 4: Add all three totals together.
This is the approximate cost of get your startup off the ground. You probably won’t need a loan to cover all of these expenses. Subtract anything you’ve already got covered — like office supplies you brought from home — to calculate how much financing you need.
How to apply for a startup loan
Once you know how much you need to borrow and have shopped around for lenders, you’re ready to apply. To speed up the application process, ask your lender what documents and information you’ll need before you apply. Many ask to see financial projections, a business plan and your credit report.
Next, follow your lender’s instructions to complete the application. Many allow you to apply online, though for business startup loans you might need to speak with a loan specialist first to make sure your business is a good fit.
Startup loans can take longer to process than other types of business financing because lenders consider it to be more of a risk. They also aren’t able to rely on the data they might otherwise use to evaluate your business’s creditworthiness like time in business and revenue, which can slow down the time it takes to underwrite your application.
Benefits and drawbacks of startup loans
- Hold on to equity. When you get the right kind of startup loan you don’t have to give up equity in your business. After you repay the loan completely, you retain complete ownership of your company.
- Establish business credit. By getting a business loan and repaying it in a timely manner you build a positive credit history for your business, which will improve your ability to get future credit at more advantageous rates.
- Traditional loans available. As long as you have good creditworthiness you will have various traditional business loan options to choose from. Traditional loans can be appealing because they tend to offer competitive interest rates.
- Can take a long time to process. The time that startup loans take to process can vary from lender to lender, from two weeks to two months. Generally, business loan underwriting takes more time to process compared to consumer loans.
- Need good credit. You will generally require good credit to apply for a startup loan. The main exception is if you’re securing the loan using suitable collateral.
- Can be expensive. Even if you have excellent credit, lending to a startup can be risky for a lender. And generally, the riskier the business, the more expensive the loan.
Taking out a loan to start a business isn’t always a bad idea, but it can be risky and expensive. Steer clear of startup loans until you have a well-thought-out business plan in place. Even the best ideas require careful implementation.
If you, at any point, feel that you may have trouble repaying the loan on time, seriously reconsider taking it in the first place. To learn more about how business financing works, check out our comprehensive guide.