What is a startup business loan?
A startup business loan is a type of financing specifically designed for startup businesses. Many traditional lenders won’t fund startups because new businesses are considered to be more risky than businesses that have been in operation for a couple years.
Without an established track record, lenders have no proof that the business will succeed and be able to repay the loan. Startup loans may have higher rates, require stronger credit and request high-value collateral.
How do lenders define a startup?
In general, a startup business is a company that’s in its early stages of development and is focused on growth. This definition can include both businesses that haven’t started operating yet, as well as those that have been operating for several years. In the lending space, however, a startup typically refers to a business that’s been in operation for less than two years.
Types of startup business loans
Here are some of the most common types of startup 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 in the fiscal year 2023 was $15,644.
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 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.
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 weak 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 in the future.
Another source of startup funding is a loan from a community development financial institution (CDFI). These banks, credit unions, loan funds and other capital lenders provide financial products and services to local residents and businesses in low-income communities. CDFI loans typically offer competitive interest rates and more flexible qualification requirements than traditional commercial bank loans.
CDFI lenders can be found in all U.S. states, the District of Columbia, Guam and Puerto Rico.
Online business loans
Some online lenders offer business loans for startups with one year or less in operation. You'll typically need at least six months in business to qualify. Depending on the lender, you may be able to access different types of financing, such as short-term loans and startup business lines of credit. Compared to more-established businesses, however, you'll generally receive smaller loan amounts, shorter terms and higher interest rates.
When securing equipment is necessary for your startup business, an equipment loan can help you finance the purchase. Unlike some other loans, you typically won’t need to put up additional collateral because the equipment you purchase typically serves that purpose.
Interest rates and repayment terms of equipment loans vary depending on the lender, your business qualifications, the value of the equipment and its useful life.
Invoice factoring is a type of business financing that involves selling your unpaid invoices for cash. A third party factoring company purchases your outstanding invoices at a discount. While you won’t be taking on additional debt with invoice factoring and it can be faster and easier than a traditional bank loan, there are associated fees and costs.
Personal business loans
New small-business owners can also access financing through personal business loans, such as those offered by online or other 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 annual percentage rates (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.
Revenue-based financing is a type of funding that allows you to trade an agreed-upon percentage of your future revenue for upfront cash. Depending on your business model, this type of financing can work well because your monthly payment is dependent on how much you make that month. That means that if you have a bad month with lower revenue, your required debt payment will be lower too. Revenue-based loans are typically best for high-growth startups that don’t have a lot of other monthly expenses.
How to qualify for a startup business loan
Check your personal finances
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, your personal finances will likely weigh heavily into your loan application. A lower debt-to-income ratio and higher personal credit score are ideal to qualify for the best rates. 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 pay all bills on time.
Assess any available collateral
It can also be helpful to offer substantial collateral, even when it’s not required. In general, anything you can use to show your creditworthiness and ability to repay the financing will help you qualify for a startup business loan — as well as help you access more competitive rates and terms.
Demonstrate strong business data if you have it
Putting in the time and effort to create financial projections not only gives a lender an idea of your business’s potential, but it also demonstrates that you are serious about your business. If you’ve already started your business, your lender will most likely request financial statements or bank statements as well.
Consider a cosigner
A cosigner on a business loan acts as a second guarantor and can help improve your chances of approval with a lender. If you know a trustworthy person with good personal credit and assets, it may be worth asking them if they’d consider cosigning your startup loan, if needed.
How to get a startup business loan
The process for getting a startup business loan will vary based on the type of funding you choose, as well as the lender or financial institution. In general, however, you can follow these steps to get a loan for your new business.
1. Determine what kind of financing you need
As a startup, it may be more difficult to get more traditional forms of business funding, so you’ll want to think carefully about what type of financing is right for your needs. You’ll want to consider how much capital you need and how you’re going to use it. You should also keep in mind that the best choice may not always be a loan. Instead, it might be a small-business grant, crowdfunding or another financing option altogether.
2. Evaluate your credentials
Next, you’ll want to review common eligibility criteria, so you have a sense of where you stand before applying. If you’ve already started your company, you’ll want to consider your time in business, credit score and revenue.
On the other hand, if you’re working on launching your business, in addition to your credit score, you’ll want to focus more heavily on your personal finances, industry experience, available collateral and any other information you have that can bolster your financial profile.
3. Research and compare lenders
You should research several lenders in order to find the right fit for your startup business. Ideally, you’ll want a lender who can provide the financing you need, as well as offer competitive rates and terms. You should also be able to meet the lender’s eligibility requirements.
As you compare different options, you should think about factors such as loan types, interest rates, repayment terms, fees, the application process, funding speed and lender reputation.
4. Gather documents and submit your application
Your business loan application process will vary based on the lender and type of loan you choose. Typically, however, you’ll need to provide some, if not all, of the following:
Basic information about you and your business.
Business licenses or formation documents.
Personal and business bank statements.
Personal and business tax returns.
Financial statements, such as balance sheets and profit and loss statements (if your business is already operating).
Cash flow projections.
5. Review your options
You’ll want to compare multiple loan offers to make sure you’re getting the best deal for your new business. Once you’ve made a decision, you should thoroughly review your business loan agreement and ensure that you understand the rates, terms, fees and repayment schedule.
If you have any questions or concerns about the document, you should contact your lender for clarification before signing.
What to do if you can’t get a startup business loan
If you’re having trouble qualifying for a startup business loan, there are a couple steps you can take.
Take time to improve your personal credit
Strong personal credit and finances may factor into your ability to get a startup loan, especially if you are asked to personally guarantee the loan. It reassures a lender that you will still be able to make payments if your business can’t. If you have the time and the ability to do so, paying down debt and improving your personal credit can significantly improve your chances of approval.
Look for alternative options
You may not be getting approved because your lender isn’t accustomed to working with businesses in your industry or in your stage of growth. Make sure you’ve shopped around to see if there’s a better fit for your business. You can also consider alternatives to loans altogether, like grants or crowdfunding.
Alternatives to startup business loans
If you can’t qualify for a startup loan, or are wary of taking on debt to start out, there are other options available to help you start and grow your business.
Startup business grants from private foundations, government agencies or small-business incubator programs are another way to raise funds. These aren’t loans, which can make them tough to get, but free capital might be worth the hard work for some new businesses. Plus, with an incubator or accelerator program, you can advance your business skills and network with other small business owners and stakeholders.
Friends and family
Perhaps the most common way of financing a new small business is to borrow money from friends or family. Of course, like with a lender, you’ll have to convince them that you’ll be able to pay them back. Plus, 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.
Business credit cards
Many entrepreneurs rely on business credit cards as funding. You can use this option as short-term financing for business purchases that you can pay off quickly. Startup business credit cards also typically come with rewards programs that offer cash back, rewards points or travel miles — so you can earn more for your spending.
Carrying a balance allows interest charges to accumulate, however, quickly turning your credit card into an expensive small-business loan.
The APRs 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.
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.
Learn more about getting business loans for startups:
Find the right business loan
The best business loan is generally the one with the lowest rates and most ideal terms. But other factors — like time to fund and your business’s qualifications — can help determine which option you should choose. NerdWallet recommends comparing small-business loans to find the right fit for your business.