Entrepreneurs often have a hard time securing a startup business loan. A new business venture is just too risky for most traditional banks. But there are lenders willing to offer small-business loans to a fledgling startup, including alternative lenders and microlenders, as well as other funding options for scrappy entrepreneurs.
Keep in mind: If you’re just starting out, you’ll likely need to borrow money based on your personal finances. But few lenders offer startup business loans for bad-credit borrowers (a FICO score below 630). Be wary of any lender that offers startup loans with no credit check or guaranteed approval. It could be an expensive option — or a scam.
To build 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's microloan program offers loans of up to $50,000 for small businesses looking to start or expand. The average SBA microloan is about $13,000.
SBA microloans are administered by nonprofit community lenders and are typically easier to qualify for than larger-dollar loans. The downside: 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 SBA 7(a) 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, applying for a small-business loan 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 underserved 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.
3. Credit cards
Many entrepreneurs rely business credit cards for startups as funding. You can use this option as short-term financing for business purchases you know you can pay off quickly.
Let the balance linger and interest charges will pile up, quickly turning your credit card into a very expensive small-business loan.
The annual percentage rates on your business credit card is based largely on your personal credit scores. If you have poor personal credit, you’ll have a higher interest rate.
It’s worth noting: Research shows that small businesses that rely heavily on credit card financing typically fail.
4. Personal business loans
New small-business owners can also access financing through personal loans, such as those offered by online lenders. Personal business loans can be a good option for borrowers with excellent personal credit and strong income.
But as with credit cards, personal loans can have high APRs (up to 36%), especially for bad-credit borrowers.
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-based crowdfunding.
New avenues are also 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.
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.