Every small business needs some capital to get started. Loans for startup businesses come in all shapes and sizes, but they’re all a resource worth considering to launch and grow your business.
These days, small business start up loans don’t look like they used to. Sure, you’ve got the good old-fashioned bank loan, but new options like incubators, grants and crowdfunding can provide small business funding.
So, what’s right for your startup? Should you even consider getting a loan at this point in time? And what if you don’t have a credit background for your business?
This post will help you learn more about the loans to start business that can help your small business grow in 2024 and beyond. We’ll also dive into how to choose the best loan for your unique business needs.
Ready to fuel your rocket ship? Let’s get started on finding the perfect funding to launch your dream.
Is it possible to get a loan for a start up business?
Absolutely, it is possible to get a start up business loan! While it might seem daunting, there are numerous options available with varying requirements—from traditional bank loans to innovative funding sources like incubators and crowdfunding.
We’ll dive into the nitty-gritty details below, starting with the types of small business start up loans available, to how you can make it possible for your small business to secure the perfect loan.
Types of loans for startup businesses:
Not every startup founder needs to follow the same route for securing funds. And each new business startup loan is different. No matter the stage you’re at, how many employees you have, or how long you’ve been around, there’s probably a loan out there to help you and your business grow.
1. SBA Loans.
Need small business funding? You could look into government small business loans. For example, The U.S. Small Business Administration (SBA) helps small businesses get loans ranging from $500 to $5.5 million.SBA loan requirements are tailor-made for small business owners and administered by various nonprofit community lenders.
Qualifying for them is quite simple, but the funding might not be enough for every borrower. In the 2023 fiscal year, for example, the average SBA microloan was just $15,643. So think of these as a small loan for business startup costs.
If you’re looking for more, another type of SBA loan is called the SBA 7(a) loan. This one is better suited to businesses that are able to provide collateral, like real estate, that the lender is able to sell if you were to default.
Wondering how to apply for a small business loan backed by the SBA? To apply for an SBA business loan, you’ll need to provide information about what you need, create an account and start communicating with potential lenders, then get approved.
Applying is a lengthy process and qualifications are strict, so start early and have all your ducks in a row if you want Small Business Administration loans.
2. Self financing.
While not always the safest option, some small business owners decide to take out personal loans or use their own savings to finance their business or startup. This could look like a second mortgage, borrowing against a retirement account like a 401(k), or getting an unsecured loan.
Self financing can be an easier approach and take less time than an external loan for small business—especially if you’re having trouble getting a business loan or don’t want to share a piece of the pie with an investor. But remember: you’re putting your savings and personal assets on the line.
3. Grants.
What if you take the loan out of your small business start up loans? Grants have their name for a reason: you don’t have to pay back the money you’re granted. That said, whether you’re exploring corporate, local, state, or federal small business grants, you’ll want to make sure that your business aligns with what the grantor is hoping to achieve.
Get ready to compete: most grants have many applicants—and they’re all hoping to fund their dreams, like you.
So where do you find grant opportunities? Check out Grants.gov. You can learn the ins-and-outs of applying for federal grant opportunities, and even get writing tips for your applications.
4. Friends or family.
Have a friend or family member who’s offered to chip in? Your close circle may seem like a source for easy startup business loans, but consider the risks before you accept.
For example, if a family member says they’ve got a chunk of change to lend you, ask yourself: What are the terms of repayment? What if they want a portion of the business? What is their motivation for helping you fund your small business?
It may be uncomfortable to question family, but start up business funding is no joke. You don’t want to lose family over your dream, or compromise your dream for personal connections.
After all, you know what they say: this isn’t personal—it’s business.
5. Crowdfunding.
The beauty of crowdsourcing for your financial needs is that there’s something for everyone. If you can dream it, it’s probably been funded—just browse any crowdfunding platform.
A great source of startup business financing is crowdfunding platforms like Kickstarter and Indiegogo, which can help you turn an idea into a campaign, securing you funds from people all over the world. When they give you money to back your product, they typically get a reward—like the product when it launches, for example—or even equity in the business.
The process might take longer, but who knows: depending on publicity and the market, you might get exactly what you need faster than through traditional means. A strong marketing angle and well-planned campaign might even net you more than you expected!
6. Business line of credit.
Business lines of credit are a different type of startup business loan. You don’t receive the total amount upfront. Instead, you draw money from it as needed, which gives you a lot more flexibility.
This setup allows you to manage your cash flow more effectively, as you only pay interest on the amount you borrow, which might only be a portion of your total line of credit.
Think of it like a credit card for your business, but with typically lower interest rates and higher credit limits. It’s an excellent option for startups needing to cover short-term expenses or unexpected costs without the pressure of a fixed monthly payment.
Plus, as you repay the borrowed amount, your credit line is replenished, making it a revolving source of funds that can be used repeatedly.
However, securing a business line of credit often requires a good credit score and a solid business plan. Lenders want to see that you have a reliable way to repay the borrowed funds, so having your financial records in order is crucial.
7. Asset-based lending.
Loans for starting a business can be secured in many ways. Asset-based loans are secured by collateral like inventory, equipment, real estate, or other property owned by the borrower.
Also called asset-based financing, this type of start up lending can especially serve a small business that doesn’t have enough cash flow to cover a business loan, or business credit to get approved. Instead, the business offers assets as collateral.
Growth tip: Need some guidance on how to grow your funds? Consider joining a startup incubator. These handy-dandy communities act as a springboard for businesses like yours, providing you with the tips, tools, and people you need to help you thrive as a founder.
Which loan is best for a startup business?
Choosing the best small business loans doesn’t have to be a headache. Here’s a step-by-step guide to help you find the perfect small business start up loans for your needs.
1. Assess your business needs.
Loans for business startups can cover many expenses, so ask yourself: Why do you need the loan? Are you covering startup costs, managing cash flow, buying equipment, or expanding? Pinpointing your needs will help you figure out the type of new business loans that fit best.
2. Evaluate your financial situation.
Check your credit score, financial records, and revenue. Got a decent personal or business credit score? Are your financial documents in order? Knowing your financial status will help you figure out what business funding for startups you might qualify for, whether it’s an SBA loan, a business line of credit, or another type of small business startup loan.
3. Figure out your loan repayment ability.
Each small business start up loan has different repayment requirements. How much can you realistically repay each month? Look at your cash flow and ensure you can handle the monthly payments without stressing your finances. This will help you avoid loans that could strain your business.
4. Research loan options.
The best business loans may not be obvious. Explore your small business start up loan options like SBA loans, business lines of credit, term loans, equipment financing, and grants. Each has its own perks and business loan requirements.
For instance, SBA loans are great for startups needing favorable terms but require good credit and lots of paperwork. Business lines of credit offer flexibility but might need a solid credit history.
5. Compare interest rates and terms.
A loan for business startup can vary in interest rates and loan terms. Compare them across lenders to find the best deal. Lower interest rates mean less cost over time, while longer terms can reduce monthly payments but might increase overall costs.
6. Seek professional advice.
If you’re unsure about which loan is best for your startup, talk to a financial advisor or business mentor. They can offer valuable insights and help you make a smart choice.
7. Prepare your application.
Once you’ve chosen your best startup business funding option, you’ll want to make sure you’re eligible for applying.
To see if you’re qualified, you’ll review eligibility and application requirements, and potentially, follow a few more steps. Make sure you:
- Boost your personal credit score if it’s not up to speed.
- Improve your debt-to-income ratio by staying on top of bills and having a solid business budget in place.
- Assess your collateral, just in case you need to put it up to show lenders you’re credible and reliable.
- Flex your cash flow, so lenders can see that—if it’s already running—your business is dependable.
Then, start gathering all necessary documents. This includes your business plan, financial records, credit score, and other required info. Being prepared speeds up the process.
8. Apply for the loan.
Submit your application to the lender of your chosen small business start up loan. Stay in touch and be ready to provide more information if needed.
Is your small business ready to take on a loan?
Got the itch to deliver a pitch? Then you might need to take on a small business start up loan to move your idea from the whiteboard to the boardroom.
Here are four things to ask yourself to find the answer.
Do you have a credit score?
We mentioned earlier that your business might not actually have one established just yet—and that’s okay. In that case, lenders might look at your personal FICO Score. This score determines your creditworthiness by assessing five areas: your payment history, your current level of debt, types of credit you’ve used, the length of your credit history, and any new credit accounts you may have.
A score in the 600s and up is ideal for qualifying for small business start up loans, but some lenders accept scores as low as 500.
Are your financial records in order?
Next up are your tax returns and financial records. To get small business financing, you’ll need to meet what’s called a lender’s annual revenue requirements. Essentially, this number is how much your business makes in a fiscal year. Lenders typically want to see a range between $36,000 to $100,000 or higher.
If you’re not hitting those numbers, don’t worry: you’ve got options other than small business start up loans.
Some businesses haven’t actually gone into business yet. And if that’s the case for your startup, a small business grant from your government or even your local community might suit you more.
How long have you been in business?
Just because you’re a startup doesn’t mean you just started up. In fact, to qualify for financing, most small business start up loan lenders require that you’ve been in business for a minimum of six months.
But as you know, not every lender is the same, and not every type of small business start up loan has the same requirements.
For example, some institutions and lenders don’t have a minimum, or if they do, it’s a little less than the six-month mark. To make sure you meet the qualifications before you spend your time filling out a lengthy application, make sure you complete your research beforehand.
Do you have a business plan?
Your business plan is your company’s roadmap for growth—which is exactly why lenders want to see it when you apply for a small business start up loan. It identifies your company’s overall goals, mission, and plans for the future, and shows that you’ve put thought into what you’re building.
Your business plan also shows lenders that you’re thinking ahead. It adds credibility to your idea, and highlights the strategy behind your decisions. It indicates how you’ll evaluate the outcomes, and how you plan to overcome obstacles, including financial ones.
Ultimately, your business plan is proof that you’re serious about success, and that’s what a lender wants to see before they invest in you and your business.
Grow your business post-funding.
We’ve covered how to get a startup business loan. Now that you’ve got your funds, are you ready to take your business to the next level? Homebase can help.
Homebase is an all-in-one app that helps you schedule and pay your employees, and much more. After putting in so much work to secure funding and loans for your small business, your next step is helping it grow: and that’s where we come in.
Smart businesses use Homebase for everything from HR compliance, to messaging teams about shift swaps, to tracking employee breaks.
Homebase can help you take control of your day-to-day operations. Get started for free.
FAQ about small business start up loans
Is it difficult to get a small business startup loan?
Getting a small business start up loan can be challenging, but it’s definitely possible if you prepare well. Lenders typically look for a solid business plan, good credit score, and detailed financial records.
What credit score is needed for a small business start up loan?
Most lenders prefer a credit score in the 600s and up for small business start up loans. However, some lenders might accept scores as low as 500. Having a good personal credit score is crucial, especially if your business doesn’t have its own credit history yet.
How to get startup business loans in California?
To get startup business loans in California, start by researching lenders that offer small business loans for startups in the state. Prepare a strong business plan, ensure your financial records are in order, and check your credit score.
California offers various loan programs and grants specifically for startups, so explore options like state-funded grants and SBA loans.
Apply with all required documents and stay proactive throughout the application process to secure the funding you need.
Can government small business loans be used by startup businesses?
Yes, government loans can be used by startup businesses. Before applying, make sure you meet the criteria and that your plans match that of the lender and their expectations.
Because some government loans are small, you’ll also want to ensure that if you aren’t able to get the full amount you need, you have other options for funding.
What’s the difference between a startup loan and a grant?
Both startup loans and grants are a great solution for founders to scale up their business, but they do have their differences—mainly, how, or if, you pay the funds back.
A loan is borrowed money, and is commonly paid back with interest. A grant is money that doesn’t need to be paid back, but how you spend the money might be up to your lender.
No matter which route you take for financing, remember to always look at the terms and conditions of your loan or grant.
Can I get a business loan with no money down?
Yes, you can get a loan without having to put money down. This is typically not a requirement. However, some lenders may want to see how invested you are in your business, whether that’s through your own money you’ve put in, or your time. When you consider how to get a small business loan, consider how much you’re willing to put down.
Remember: This is not legal advice. If you have questions about your particular situation, please consult a lawyer, CPA, or other appropriate professional advisor or agency.
