Types of startup business loans
Startup business loans can be used to cover working capital expenses such as inventory, payroll, utilities and insurance, or to purchase fixed assets such as furniture, equipment, machinery and real estate. Here are some of the most common types of startup loans.
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 $16,400 in the 2024 fiscal year, so far — with approximately 25% of microloans going to startups (businesses in operation for two years or less).
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. Nearly 60% of 7(a) loans issued so far in the 2024 fiscal year have gone to businesses with more than two years in operation. These loans typically go to established businesses because they have proof of consistent revenue and can provide collateral 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.
» MORE: How to get an SBA startup loan
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 weak finances. Many of these lenders focus on minority or traditionally underserved borrowers, 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.
Online loans
Many online lenders offer business loans for startups with one year or less in operation. You'll typically need a minimum of 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.
CDFI loans
Community development financial institutions (CDFIs) are another provider of startup business loans. These banks, credit unions, 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.
Equipment financing
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 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 financing
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.
Invoice factoring is often faster and easier to access than a traditional bank loan — and it doesn’t require you to take on additional debt. This type of financing can be expensive, however, based on the factoring company’s fees and the time it takes your customers to pay their invoices.
Revenue-based financing
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.
This means that if you have a 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.
Pros and cons of startup business loans
Pros
Provides funds to get a business off the ground or grow a young one.
May build business credit history.
Can be helpful in obtaining future funding.
Cons
Can be challenging to obtain.
Higher interest rates and shorter terms, typically.
Increases business debt and monthly expenses.
May require personal guarantee and/or collateral.
How to get a startup business loan
Without an established history of success, it can be difficult to access a startup business loan. While the process for getting a business loan will vary based on the type of funding you choose, as well as the lender or financial institution, there are some general steps you can take to best prepare yourself.
1. Determine what kind of financing you need
As a startup, it may be more difficult to get more traditional forms of business financing, so you’ll want to think carefully about what option 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 calculate how much debt you can afford, making sure you can cover potential payments without decimating your cash flow.
» MORE: Estimate payments with our business loan calculator
2. Evaluate your credentials
Next, you’ll want to review common business loan requirements, so you have a sense of where you stand before applying. Although requirements for startup business loans vary, it’s helpful to consider the following minimum criteria:
Personal credit score: Although some online lenders offer startup business loans for bad-credit borrowers (those with a personal credit 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. You’ll typically need a personal credit score of 500 or higher; otherwise, you may need to build your credit before applying.
Personal finances. Your personal finances will likely weigh heavily into your startup business loan application. A lower debt-to-income ratio and higher personal credit score are ideal to qualify for the best rates.
Available collateral. It can be helpful to offer substantial collateral on your loan application, 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.
Business data. If you’ve been in business for at least six months, 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 growth and success. If you’ve already started your business, you’ll need to provide financial and 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. However, keep in mind that if you default on the loan, the cosigner’s credit will be adversely affected in addition to your own.
» MORE: What happens if you default on a business loan?
3. Research and compare lenders
You should research several lenders in order to find the right fit for your startup business. As you compare different options, think about factors such as loan types, interest rates, repayment terms, fees, the application process, funding speed and lender reputation.
4. Create a comprehensive business plan with a funding request
A business plan can help you get a loan when it includes a funding request in addition to a market analysis, marketing plan, financial statements and other important information on your business.
A well-thought-out and comprehensive business plan will support your loan application and can help persuade lenders of the potential of your business. The funding request section of your plan can be used to explain how much funding you need, what loan terms you’re looking for and how the money will be used.
5. 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, such as an employer identification number or EIN.
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.
A business plan for funding.
Collateral information.
Your lender will also likely ask you to sign a personal guarantee and/or take out a UCC lien on your assets.
6. 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.
Steps you can take if you are denied a startup business loan
If you’re denied a startup business loan, there are steps you can take that may allow you to still move your business forward.
Ask the lender what influenced the decision. You may be able to address the lender’s concerns and then reapply. For example, if the decision was due to a poor credit score, you may be able to take steps to improve your score. Or, if the lender felt a loan was above its risk tolerance, you might offer collateral or a cosigner to lower the risk for the lender.
Try a different type of loan. If you’ve been denied a bank or SBA loan, you may want to look for loans with more flexible qualification requirements. Consider online loans, microloans or CDFI loans, but be aware that these loans often have higher rates and shorter terms.
Start a scaled-back version of your business. If you can’t get funding to start your business, consider launching a smaller version of your business that you can finance on your own. This may involve offering fewer products, running the operation yourself instead of hiring staff and delaying the lease of a commercial property.
Strengthen your business plan. Financial statements and projections will be of key interest to lenders. Providing projected profit and loss statements, balance sheets and cash flow statements for a minimum of three years can demonstrate how you plan to generate enough profit to repay loans. There are companies that specialize in writing business plans for a fee, or you could take advantage of the free or low-cost services offered by SBA resource partners like your local Small Business Development Center or SCORE office.
Alternatives to startup business loans
A startup loan may not always be the best option to finance your new business. If you’re just trying to get your business off the ground, for example, it may be difficult to qualify for a loan.
If you’re having trouble qualifying, or are wary of taking on debt, consider other startup funding.
Some entrepreneurs use personal funds to start up their businesses — bootstrapping, as it’s often called. This may include dipping into personal savings or retirement accounts to access cash for startup costs. Withdrawals of money from retirement accounts for business uses are commonly called Rollovers as Business Startups (ROBS) transactions. While self-funding can be a quick path to getting funding for your businesses, it could also result in the loss of money you’ve set aside for retirement, if your business fails.
Startup business grants from private foundations, government agencies or small-business incubator programs can provide free access to capital. Grant applications are often competitive and require a significant time investment, but may be worth it if you can get funding. Plus, with an incubator or accelerator program, you can advance your business skills and network with other small-business owners and stakeholders.
Grants may be a particularly good option for startups in specific industries or demographics. Businesses in the tech sector, for example, may be able to qualify for funding through the Small Business Innovation Research or Small Business Technology Transfer programs. If you served in the U.S. military, you can apply for business grants for veterans. There are also business grants for women, grants for minority entrepreneurs and business grants for people who have previously been convicted of a felony.
One of the most common ways of financing a new 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. Also, to avoid misunderstandings, it’s recommended that you put the loan terms in writing so everyone involved has a clear understanding of what’s involved.
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.
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, points or miles — so you can earn more for your spending.
Carrying a balance allows interest charges to accumulate, however, so you’ll want to make sure you can pay off anything you purchase.
It’s also important to keep in mind that business credit card providers will use your personal credit history to evaluate your application and set interest rates. As a result, it may be difficult to qualify with bad credit.
