If you’re starting a business, you might wonder where you can get funding for your startup. Many options are available to get the capital you need, including business loans for startups, friends, and family, term loans, and investor financing. This article will cover finding the right loan for your needs and the standard criteria lenders use when evaluating applications for startup business loans.
Friends and Family
Friends and family are excellent funding sources for startups, and you will likely be able to get the money you need from them. In addition, if other funding sources, such as business loans for startups, are unavailable, they might offer help. Finally, they are the most forgiving source of financing for startups because they aren’t expecting a return on investment immediately as banks or venture capitalists would.
Merchant Cash Advances
A merchant cash advance is business financing that provides you with cash immediately for your business’s future credit card sales. Keep in mind that:
- You must pay back the cash advance with interest. You will charge the amount you borrow at an annual percentage rate (APR), which could range from 15% to 20%.
- If you default on a payment, the amount owed will compound rapidly with additional fees and interest charges.
Invoice financing is an asset-based loan that allows business owners to leverage their unpaid invoices as collateral for short-term loans. Using this can be ideal for businesses with a steady revenue stream because it’s not dependent on credit scores or personal income. What makes invoice financing particularly appealing is the fact that you can use it to cover several expenses:
- Working capital
- Pay off, vendors and suppliers.
You will receive payment directly from the financial institution holding your invoices until they become payable by customers, usually within 30 days after receipt.
Personal loans are unsecured loans that you can use to fund a startup business. You can use these private loans for a variety of purposes. In addition, unsecured personal loans have lower interest rates than secured personal business loans, making them a good option for startups.
The Small Business Administration (SBA) offers a type of loan designed to support small businesses and help them grow. Known as an SBA loan, this financing option is backed by the government and provides small business owners with a reliable funding source.
To determine eligibility for an SBA loan, the SBA has established specific criteria that a business must meet. These criteria typically include factors such as the size of the company, its financial status, and its ownership structure.
If your business meets these requirements, you can take advantage of the many benefits offered by an SBA loan, including favorable interest rates, longer repayment terms, and more flexible underwriting standards.
Suppose you want to expand your operations, purchase equipment, or refinance existing debt. In that case, an SBA loan can provide the funding you need to succeed.
This credit differs from traditional business loans for startups because it does not require monthly payments or interest. Instead, you make payments on the amount you decide to borrow, using funds from the account as needed.
The most significant benefit of business credit is that it’s flexible: you can withdraw money when necessary and pay back as little or as much as possible each time.
For example, if your mortgage payment is due next week, your business needs to do better to cover it now. Your business credit line would allow you to access those funds before the due date without accruing interest charges if paid on time.
Business Term Loan
A business term loan is for long-term business needs. For example, you can use it to purchase equipment, build a new office, or hire new employees. Term loans typically have fixed interest rates and are repaid over 5-7 years. Furthermore, term loans generally are not secured and, as a result, tend to come with higher interest rates compared to other types of small business loans.
Microloans are small, unsecured loans, usually between $1,000 and $50,000. Unlike traditional bank loans, microloans can be approved quickly and without much paperwork. They’re also generally easier to get than larger business loans because they don’t require collateral or extensive credit history.
The benefits of microloans include:
- You don’t need collateral to apply for one; you need an idea or business plan.
- You can get the money fast—often within a week or two (depending on your lender).
Online Business Loans
Online loans are an excellent option because they are much easier, faster, and cheaper. Traditional business loans for startups are usually more complex and involve a lot of red tape to get approved.
Online business loans also have some significant advantages over conventional bank loans:
- They provide more flexibility regarding the interest rate, duration, repayment schedule, and collateral requirements.
- All paperwork is optional beyond submitting your application online.
Grants are money that is awarded to individuals and businesses with financial needs. These are not loans, and they do not need to be repaid.
Instead, the government or private organizations can award grants to help you pay for specific expenses or projects, such as:
- Educational costs
- Business startup costs
- Equipment purchases
To apply for a grant, determine the type you qualify for based on your business needs. Next, you will have to apply with complete details about why the funding is necessary, how much money you need, and how you will use it.
Credit cards are another way to get the funds you need to run your startup. Plus, they often offer small rewards that you can use toward business expenses. If you have some capital and want to use your credit card as alternative financing, applying for business credit will be best.
Crowdfunding represents an alternative method for generating funds for your startup by tapping into a large community of individuals. It’s different from traditional fundraising because people can contribute small amounts of money to help fund your project.
Crowdfunding can raise money for various purposes, including launching new products or services, capital expenditures like building a new office space, and paying down debt.
When launching a crowdfunding campaign, it’s essential to think about how much you need and how you plan on using it. Finding the right amount will keep your campaign interesting for potential investors and make it easier for them to spread the word about what you’re trying to accomplish.
When you’re a startup, it may be challenging to get an asset-based loan. But if you have assets, you can use them as collateral.
Asset-based lending is when a lender uses your business assets as collateral for the loan and then charges interest. In other words, if you borrow $50,000 from this type of lender and provide them with some collateral, they’ll give you a more significant amount to use as capital for your business.
The benefits are obvious: You get extra money without paying interest. But there are downsides, too: If something goes wrong with your business, these creditors will be able to keep your collateral as payment.
How to Qualify for Startup Business Loans
To qualify for startup business loans, you must have a business credit score of at least 600. Your business credit report will be reviewed by lenders, who will look at your personal history as well as the financial information of your company.
Furthermore, to be eligible for business loans, it is necessary to demonstrate that there are sufficient funds in the bank to handle expenses and repay debt in case of unexpected events.
How to Get a Startup Business Loan
- Find a lender
- Apply for the loan
- Meet the lender’s qualifications
- Understand your loan agreement
What If You’re Denied a Startup Business Loan?
If you are denied a business loan, don’t give up. Instead, try again with another lender and find out what went wrong first. Then, improve your circumstances and reapply—the second time may be the charm.
If you still need help getting approved for a startup business loan, consider trying another lender or applying for a personal loan instead. It can take multiple tries before you succeed.
Knowing your business and how much business financing you’ll need before starting the process is essential, with many options available. This way, you can find the best fit for your startup’s needs. If you need more than these options, look into other funding sources such as grants or crowdfunding platforms like Kickstarter or IndieGoGo.