Update March 29, 2021: Small-business owners now have until May 31, 2021, to apply for a first- or second-draw loan through the Paycheck Protection Program. Lenders will have until June 30 to process outstanding PPP applications. For the latest information, read our PPP page.
Money is a big worry when you’re starting a small business.
The growth of alternative lending gives established companies a wide range of small business loan options. But entrepreneurs might find it hard to get a startup loan. After all, who wants to lend thousands of dollars to a small business that doesn’t even have revenue yet?
“Nobody does a good job of providing financing to startup businesses because it’s the highest risk out there,” says Charles Green, founder of the Small Business Finance Institute. “You may have big ideas and plans in place, but you haven’t launched yet.”
Keep in mind that since you don’t have a business started up yet or you’re just starting out, you likely have to borrow money based on your personal finances. But few lenders offer startup loans for bad credit borrowers (a FICO score below 630).
To raise your credit score fast, check your credit reports for mistakes that could be weighing down your score and dispute them with the credit bureaus, maintain a low balance on your credit cards and stay on top of all of your bills.
1. SBA loans, and microloans from nonprofits
The U.S. Small Business Administration has a microloan program that offers up to $50,000 for small businesses and some not-for-profit child care centers. The average SBA microloan is about $13,000. Here's a list of providers.
The downside of the microloan is the “micro” part: Funding may not be sufficient for all borrowers.
The SBA’s flagship 7(a) loan program also offers financing that borrowers can use to start businesses. But 7(a) SBA loans are tough to get. They typically go to established businesses that can provide collateral — a physical asset, such as real estate or equipment, that the lender can sell if you default. The qualifications are strict, and even if you qualify, the process can take several months.
Microlenders and nonprofit lenders can be a less difficult route, especially if you have shaky finances. Many focus on minority or traditionally disadvantaged small-business owners, as well as small businesses in communities that are struggling economically.
Generally, you’ll get solid loan terms from these lenders, making it possible for you to grow your business and establish better credit. That can help you qualify for other types of financing down the road.
2. Friends and family
Perhaps the most common way of financing a new small business is to borrow money from friends or family. Of course, if your credit is bad — and your family and friends know it — you’ll have to persuade them that you’ll be able to pay them back.
In these situations, the potential cost of failure isn't just financial; it's personal.
“Business is personal, regardless of what people say,” says David Nilssen, CEO of Guidant Financial, a small-business financing company. “For most people, it’d be difficult to separate the two.”
Trim your list of friends and family to those who understand your plans, and do your best to make certain they're comfortable with the risks involved.
» MORE: Debt vs. equity financing: Which is right for you?
3. Credit cards
Many small-business owners use credit cards for funding. If your credit isn’t stellar, you might be limited to secured credit cards, which typically have higher fees than regular credit cards.
It’s important to remember, however, that credit cards are an expensive way of financing a small business, particularly if you have bad credit. That’s because card issuers determine annual percentage rates based largely on your personal credit scores. And research has shown that small businesses that rely heavily on credit card financing typically fail.
4. Personal business loans
Many new small-business owners access financing through personal loans, often via a growing number of online lenders. But like credit cards, personal loans can have high APRs of up to 36%, especially for bad credit borrowers.
Personal business loans can be a good option for borrowers with excellent personal credit and strong income.
Nilssen says small-business owners should consider personal loans "an option of last resort."
"Where they can work," he says, "is when a business just needs a small amount of money for things like … early-stage production or buying equipment."
Crowdfunding has become a popular way for small businesses to raise money, thanks to such sites as Kickstarter and Indiegogo, which let you solicit funds through online campaigns. Instead of paying back your donors, you give them gifts, which is why this system is also called rewards crowdfunding.
New avenues also are opening up for equity crowdfunding, in which you tap a public pool of investors who agree to finance your small business in exchange for equity ownership. This became an even broader option recently with new securities regulations that allow small-business owners to reach out to mom-and-pop investors, not just accredited investors.
Crowdfunding is good for the entrepreneur “who has a product and wants to test the market and validate the opportunity,” Nilssen says. “No credit necessary.”
Small-business grants from private foundations and government agencies are another way to raise startup funds for your small business. They’re not always easy to get, but free capital might be worth the hard work for some new businesses.
For example, if you served in the U.S. military, you can access . There are also small-business grants for women.
Frequently asked questions
Other startup business loan options
A rollover as business startups (ROBS) financing transaction lets you roll over eligible retirement accounts to invest in a startup or an existing business. It's an option for entrepreneurs who have built up a significant amount of retirement savings and want to tap into the funds, without paying income taxes or early withdrawal penalties.
However, a ROBS is a risky way to finance a startup. It carries high fees, and you jeopardize your retirement if your business fails.
Startup business loans: Compare your options
Good option if:
Microloans and nonprofits
You need a small startup loan.
Family and friends
You have friends and relations who are comfortable with the risk.
You can keep card use to a minimum.
Personal business loans
You have a personal credit score of 600+.
You're looking to test the market.
You're willing to put in hard work for free capital.
Rollover as Business Startups
You're willing to risk your retirement funds.
Find and compare small-business loans
NerdWallet’s interactive small-business loans tool allows you to find financing that meets your individual goals. Sort by the age of your business, your credit score and the amount of money you need. Lenders were chosen based on factors including trustworthiness and user experience.