7 Startup Business Loan Options for Entrepreneurs

Although some lenders offer business loans for startups, you may need alternative solutions to finance a new business.

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Many small-business lenders require at least a year in business to qualify for financing. But if you’re in the market for a startup business loan, alternative financing options may be available to help get you going, as well as a few types of small-business loans.

Here are seven startup financing options for small businesses to consider.

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1. SBA loans

The U.S. Small Business Administration's microloan program is startup-friendly, offering 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 SBAs flagship 7(a) loan program also offers financing that borrowers can use to start businesses. But SBA 7(a) loans are tougher to get. The loans typically go to established businesses that can provide collateral, a physical asset, such as real estate or equipment, that a lender can sell if you default. The qualifications are strict, and even if you qualify, applying for an SBA loan can take several months.

2. Microloans

Microloans are also available outside of the SBA program, and microlenders and nonprofit lenders can be a less difficult route to access startup business loans, especially if you have shaky finances. Many of these lenders focus on minority or traditionally underserved small-business owners, as well as small businesses in communities that are struggling economically.

Because these startup loans often come from mission-based organizations, the terms will likely be better than you would receive from a private lender, 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.

3. Personal business loans

New small-business owners can also access financing through personal business loans, such as those offered by online lenders. Personal loans are based on your personal credit history, which makes them a competitive option if your startup is too new to qualify for other business loans.

Personal loans can have high APRs (up to 36%), especially for bad-credit borrowers. That means this type of startup business loan is best for borrowers with excellent personal credit and strong income.

4. Grants

Small-business grants from private foundations and government agencies are another way to raise startup funds for your small business. These aren’t loans, which can make them tough 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 small-business grants for veterans. There are also small-business grants for women.

5. 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 convince 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.

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.

6. Credit cards

Many entrepreneurs rely on business credit cards for startups as funding. You can use this option as short-term financing for business purchases that you can pay off quickly.

Let the balance linger and interest charges will pile up, quickly turning your credit card into an expensive small-business loan.

The annual percentage rates on your business credit card are based largely on your personal credit scores. If you have poor personal credit, you’ll have a higher interest rate.

7. Crowdfunding

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.

Avenues are also available for equity crowdfunding, in which you tap a public pool of investors who agree to finance your small business in exchange for equity ownership. You can even reach out to mom-and-pop investors with this type of crowdfunding, and not just accredited investors.

Crowdfunding is a great funding option for business owners who want to test out their product or service with a customer base and gauge the response without having to take on debt.

What to watch out for when shopping for startup business loans

Some lenders may be less willing to work with startups because they don’t have the business history to demonstrate their financial ability to repay a loan. If you have less than a year in business or need capital to start a business, you’ll likely have to borrow money based on your personal finances.

Few lenders offer startup business loans for bad-credit borrowers (a FICO score below 630), so 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 bills.

Find and compare small-business loans

Compare loan options with NerdWallet’s list of small-business loans that are best for business owners. All of our recommendations are based on the lender’s market scope and track record and on the needs of business owners, as well as rates and other factors, so you can make the right financing decision.