What Is A Startup Business Loan? (2024)

If you have a recently formed business, a startup business loan may be the best option to find funding for your venture.

Although many lenders have a time in business requirement of six months to two years, there are others that will work with recently formed companies. Keep in mind, these lenders tend to see new businesses as risky, so you may be offered high interest rates or need to sign a personal guarantee to qualify for a loan.

If you find a lender that’s willing to work with you, you could access the financing you need to cover operational costs and grow your business.

What Is a Startup Business Loan?

A startup business loan offers funding for new businesses to help them get off the ground or expand their operations. While some lenders require that you’ve been in business for at least two years to qualify for a loan, the best startup business loans extend financing to businesses that have been around for six months or less.

In 2022, 42% of companies under two years old sought funding from a lender, while another 25% got funding from a government-funded source, according to the Federal Reserve’s Small Business Credit Survey. Among those young businesses, 70% borrowed money to cover operating costs and 67% borrowed to pay for expansion.

The younger your business, though, it’s likely you’ll have fewer options for lenders. You might also end up with lower loan amounts and higher interest rates than a more well-established business owner.

To mitigate risk, the lender may also require a personal guarantee, which means that you’ll be liable to repay the loan with your personal assets if your business can’t pay the debt.

How Does a Startup Business Loan Work?

You can find startup business loans from various lenders, including banks, online lenders and credit unions. Loans from the Small Business Administration (SBA) can be another option; these loans are offered through banks and other lenders.

When you apply for a loan, the lender will require a variety of documentation, such as a business plan, licenses, bank account statements and other details about your company’s operations. In some cases, the lender will consider your business credit score.

Lenders may also consider your personal credit score when evaluating your loan eligibility. Some lenders accept scores as low as 500, but a higher credit score will help you access better interest rates and higher loan amounts.

After receiving your loan, you’ll typically repay it monthly over a set repayment term. Terms may range from one to 10 years or longer. SBA loans offer loan terms as long as 25 years, but loans with those terms must be used for specific expenses.

According to a Forbes Advisor survey, more than half of small business loan borrowers opt for loan terms between one and three years.

Types of Startup Business Loans

There are various types of startup business loans that could provide the financing your business needs.

• Bank and credit union term loans. You can find term loans from banks and credit unions that disburse the entire amount up front and are then repaid in regular installments over a predetermined period. According to the Small Business Credit Survey, 48% of new companies got financing from large banks, 39% got it from small banks, 25% went with non-bank financial companies and 15% borrowed from credit unions.
• Online term loans. You can also find startup loans for small businesses from online lenders. Online lenders often offer a streamlined application process and faster funding times than traditional banks.
• Business lines of credit. A business line of credit offers a revolving line of credit that you can draw on as needed, rather than receiving a lump sum up front. You’ll only pay interest on the amount you borrow.
• SBA loans. SBA loans, available through banks and credit unions, are available as SBA 7(a) loans, microloans and other loans designed for specific purposes.
• Equipment loans. Equipment financing is a secured loan that uses the equipment you plan to buy as collateral. Depending on your credit profile and the lender, you may be able to access lengthy repayment terms and large loan amounts.
• Invoice factoring. This can be an expensive form of financing, but it can give you quick access to capital. With invoice factoring, you sell your unpaid invoices to a third party for a portion of their value. The third-party company will then collect the outstanding payments from customers.

How To Get a Startup Business Loan

The specific steps to get a startup business loan may vary by lender, but you’ll often take these steps.

1. Check your credit. Familiarize yourself with both your personal and business credit scores, as both can impact your ability to qualify for a loan, as well as the interest rates you get. If you don’t need the loan right away, consider taking steps to improve your credit before you apply, including paying down debts or fixing any mistakes on your credit report.
2. Determine your financing needs. Estimate the amount you need to borrow and whether a term loan or line of credit would be a better fit for your business.
3. Research lenders. Consider banks, credit unions and online lenders that lend to startup businesses in your industry and can offer the amount you need. Review lending requirements to see if you’re an eligible candidate for a loan.
4. Gather your documentation. Lenders require plenty of documentation, especially if your business isn’t well established. While the requirements will vary by lender, you may need to provide a business plan, business bank statements, licenses, legal documents and tax returns. If you’re borrowing a secured loan, you’ll also have to provide details on your collateral.
5. Submit a loan application. Once you’ve chosen a business loan that works for you, submit an application and wait to hear back from the lender. If the lender requests any other documentation, a quick response can help get your loan funded sooner.

Survey Methodology

This online survey of 500 Americans who have applied for a business loan was commissioned by Forbes Advisor and conducted by market research company OnePoll, in accordance with the Market Research Society’s code of conduct. Data was collected from July 12–July 20, 2023. The margin of error is +/- 4.4 points with 95% confidence. This survey was overseen by the OnePoll research team, which is a member of the MRS and has corporate membership with the American Association for Public Opinion Research (AAPOR).