Qualifying for a business loan as a startup can be difficult. Entrepreneurs often need to utilize multiple financing sources to get their new startup off the ground. Startup business loans can take many forms, including SBA loans, angel investment, or Rollovers for Business Startups (ROBS), and each is unique in what they offer to startups.
Best Startup Business Loans for Small Businesses
Owners willing to invest retirement funds of $50,000 or more
Businesses with good credit and a solid business plan not needing funds quickly
Minority, women, veteran-owned businesses, and others needing up to $50,000 for startup
Borrowers willing to use their home equity for startup funding
Business owners good at repaying debt and wanting quick access to funds
Business owners with good personal credit needing up to $50,000 in funding
Businesses where major startup costs are purchasing equipment with a long useful life
Borrowers with wealthy friends and family interested in investing in their businesses
Startup businesses with a strong brand or dedicated customer following and little-to-no revenue
Companies requiring funds for rapid growth and willing to take an equity partner
Borrowers ready to scale their businesses immediately and willing to give up ownership
Small businesses willing to meet the requirements of free U.S. government grants
What Financing Do You Qualify For?
What a Startup Business Loan Is
Startup business loans are used by entrepreneurs as financing to open a new business, or to help a new business grow within the first year. Financing for startups does not have the lengthy time in business requirements of other small business financing methods, making it more attainable to new businesses.
How Startup Business Loans Work
Startup loans work in the same manner as other business loans; the primary difference is that the qualification requirements are less restrictive, allowing startups to be eligible. There are various types of startup financing available, and each operates differently. In general, startup loans are given to a business, and the business repays the debt over a specified term.
Some sources of startup financing do not require repayment, but instead offer funding in exchange for equity in the business or a reward of some nature. In the case of government grants, there is no repayment or exchange of equity or rewards; however, grants are often more difficult to obtain.
Choosing the 12 Best Options for Startup Business Loans
In evaluating the best small business startup loans, our goal was to provide you with as many options as possible. No two businesses are alike, and so the best startup business financing option for your business will be the one that best suits your individual situation. Understanding your funding options is a great place to start when investigating new business loans.
Some of the factors to consider when deciding among startup business loan options are:
- Upfront cash required: Your initial outlay of cash is important. If you don’t have much cash, you might want to find an option that doesn’t require a down payment or include upfront expenses.
- Long-term cost: You need to consider not only the interest rate, but also how much the financing will cost you in the long term. A loan that’s paid off quickly with a higher rate may cost less than a loan with a lower rate and a longer term.
- Amount of equity you need to give up: Some startup funding options require you to give up equity in an asset (e.g., your home, your business) as part of the financing agreement.
- Personal guarantees: It’s important to know if you’ll be required to sign a personal guarantee, which is a promise that you’ll pay if your business cannot.
The 12 best startup business loan options are:
1. Rollover for Business Startups (ROBS)
A rollover for business startups (ROBS) may be the best-kept secret in startup financing because it allows you to invest funds from your retirement account into your new business without paying early withdrawal penalties or income taxes. A ROBS is not a loan against your retirement account, and it’s not a way of cashing out your retirement account. There are no loan payments and the business takes on no debt.
The typical costs of a ROBS are:
- Setup fees: $5,000
- Monthly monitoring fees: $140
ROBS Terms & Qualifications
A ROBS is a way to use 401(k) business funding to finance your business. It helps you invest your current deferred retirement account savings into your new company’s 401(k) plan, which uses the money to buy shares in your business. The business can then use those funds for any business-related expenses, which can include startup costs. There are no terms after you get the money because it’s not a loan, but rather an investment in your business.
To qualify for and use a ROBS, you must:
- Contribute $50,000 or more from your retirement savings: For a ROBS to make financial sense, you likely need to have at least $50,000 in a deferred retirement account. Further, you need to be willing to use your ROBS specifically to fund your business.
- Be an employee of the business: You must be a legitimate employee of the business you’re rolling funds into. This makes a ROBS ideal for actively managed businesses, but not necessarily a good option for people pursuing absentee businesses, like some real estate investment companies.
- Structure your business as a C corporation: To set up a ROBS, your company must be structured as a C corporation.
- Be able to fund the setup costs: The setup costs of $5,000 must come from other means outside of your retirement funds, but the monthly costs can be paid for with any business, including the money you roll over.
Who a ROBS Is Right For
A rollover for business startups is flexible and can be used in conjunction with almost all other startup funding options. The funds from a ROBS can be used as a down payment for a startup business loan or an SBA loan. A ROBS works well as a financing option for business owners willing to contribute $50,000 or more from their deferred retirement account.
Where to Find a ROBS
For additional information on Rollover for Business Startups (ROBS) financing, you can get started today by signing up for a free consultation with a ROBS specialist. Our recommended ROBS provider, Guidant, will help you set up your ROBS correctly, and the process typically takes about three weeks.
2. SBA Loans for Startup Businesses
The Small Business Administration (SBA) is primarily known for its startup loan programs. Two SBA programs that are more startup-friendly are the Community Advantage Program and the Microloan Program. Both programs target new or underserved businesses. All SBA loan types can be used for startups, but some are more difficult to qualify for if you don’t have an existing business.
SBA Startup Business Loan Costs
The typical costs associated with SBA startup business loans are:
- SBA loan interest rates: 7% to 11%
- Origination fees: 0.5% to 3.5%
- Packaging fees: $2,000 to $4,000
- SBA guarantee fees: 2% to 3.75%
SBA Startup Business Loan Terms & Qualifications
Qualifying for SBA loans can be difficult. You’ll need to have a credit score of at least 680 and be able to pledge some collateral for the loan. There are a wide variety of SBA loans available, but the two programs most likely to help provide startup business financing are the Community Advantage Program and the SBA Microloan program.
The typical loan terms for the SBA’s Community Advantage Program are:
- Loan amount: Up to $250,000
- Repayment terms: Up to 10 years for inventory, working capital, or equipment; up to 25 years for commercial real estate
SBA loans are not made directly through the SBA, but rather are loans made through an SBA approved lender and backed by a guarantee from the SBA. SBA lenders are typically community development corporations, banks, or nonprofit institutions. Applying for an SBA loan can be a complicated process and we recommend working with an experienced SBA lender.
Who SBA Startup Business Loans Are Right For
Generally, these loans are available to partially self-financed startups (the SBA likes to see that the owner invests at least 30% of their own money in the business) and startups where the owners have prior experience in the industry and in management. The primary benefits of an SBA loan are the low interest rate and long repayment term, making your monthly payments lower than they would be with other loan options.
Technically, SBA 7(a) loans are also available to small business startups. However, they are made by traditional lenders who have restrictive qualifications and underwriting standards. We recommend applying with a local lender who knows you and your community the best.
Where to Find SBA Startup Financing
Startups will generally be required to have a 20% to 30% down payment on SBA loans, which can be pretty high for most borrowers. One way people fund the down payment is by using retirement savings through a ROBS.
3. Microloans From a Nonprofit Lender
For startup business owners who don’t have great credit, sufficient collateral, or a lot of other options, a nonprofit lender can be just the resource you need. These lenders have specific criteria they use when looking for borrowers. You will have to find one that matches who you are or what your business is (such as a lender looking for restaurants).
The typical costs associated with microloans are:
- Annual interest rate: 5% to 20%
Microloan Terms & Qualifications
Accion is a nationwide nonprofit lender that provides microloans for startups. In most states, you can borrow up to $10,000 for a new startup. Kiva is another nonprofit that will also lend up to $10,000 in startup funding.
The typical loan terms for a microloan are:
- Loan amount: Up to $50,000
- Repayment terms: Up to seven years
Microloans are not grants or free money. Accion will only lend to startup business owners who have sufficient cash flow to make loan payments. Accordingly, you should be prepared to show a source of income independent of the business (e.g., a full-time job or spousal income) if your business isn’t generating enough income yet. Having a co-signer with strong income and credit score can also help.
Tip: If your credit score is too low to get traditional business financing (under 640), consider working with a credit repair company to improve your credit score.
Who Microloans Are Right For
Microloans are good for businesses that need small amounts of funding to start their business. This is because with a microloan, you can typically get loans of up to $10,000 to start a new business. Microloans are often targeted at specific underserved demographics, and startup businesses often fall into these categories.
Where to Find a Microloan
Startups without great credit or other financing options may qualify for a microloan from a nonprofit organization. You can borrow up to $50,000 from Accion ($10,000 for a startup), with interest rates as low as 8%. You can apply online to see how much you may qualify for.
4. Home Equity Loan or Line of Credit
If you’re a homeowner with some equity in your home, you may be able to get a low-rate home equity line of credit (HELOC) to fund your startup. A home equity loan (HEL) gives you a lump sum immediately with amortized repayments, while a home equity line of credit is a credit line that can be drawn against as you need funds. With a home equity line of credit, you pay interest only on the balance you currently owe.
Home Equity Loan or Line of Credit Costs
The typical costs associated with a HELOC or HEL are:
- Closing costs: 2% to 5%
- Annual interest rate: 3% to 6%
Home Equity Loan or Line of Credit Terms & Qualifications
A home equity loan provides you with a lump sum, which acts like a second mortgage, and a home equity line of credit works like a credit card or business line of credit. In either case, you’ll need to have some equity in your property. You will be limited on the amount you can borrow, as your lender will want to ensure that an equity cushion remains.
The typical requirements for a home equity loan or line of credit are:
- Equity: At least 20% equity in your home (rule of thumb is between 30% and 40%, minimum)
- Maximum loan-to-value (LTV): 80%, based on the appraised value of your home
Who a Home Equity Loan or Line of Credit Is Right For
Both a home equity loan and line of credit require good credit and sufficient equity (20% to 30% or more) in your primary residence. Utilizing your home equity can provide your startup business with capital at a lower interest rate than many other kinds of startup financing by using your home as collateral.
Home equity loans and home equity lines of credit meet different borrower needs, for example:
Home Equity Loan
A home equity loan might be right for you if you need a large lump sum amount of money for upfront business expenses that are essential to your operations. You’ll immediately begin making payments on the full loan after closing.
Home Equity Line of Credit
If you don’t have an immediate use for all of the funds right away, then a home equity line of credit may save you money through a more affordable interest rate. Similar to a business line of credit, a home equity line of credit allows you to draw funds as you need them and you only have to pay interest on your current balance.
Where to Find a Home Equity Line of Credit
If you’re shopping for a home equity loan or line of credit, you can visit an online marketplace, like LendingTree, and review offers from multiple lenders at once. Save time, shop smart, and find a HELOC that fits your needs.
5. Small Business Credit Cards
Both personal credit cards and business credit cards can be a relatively cost-effective way of financing your startup. Many come with 0% APR introductory periods and valuable cashback or rewards programs. This can result in good savings for your business if you use credit cards regularly, and should be a part of every business’ financial toolkit.
Small Business Credit Card Costs
The typical costs of small business credit cards are:
- Average annual interest rate: 16%
- Annual fee: $50 to $100
Small Business Credit Card Terms & Qualifications
Small business credit cards aren’t an ideal way to fund large capital investments for your business startup, but they can be an essential tool for cash flow management. You can cover expenses with your small business credit card while waiting for payments from your customers, preserving cash and earning rewards at the same time. In fact, 31% of small businesses use credit cards to finance business operations.
Small business credit cards have many benefits for your startup business, including:
- 0% introductory rates.
- You only pay interest on the balance you’re carrying at the end of the billing cycle.
- Cashback and rewards programs let you earn extra money for your business just by charging purchases to your card.
- Employee cards that allow you to restrict what the card can be used for (gas, office supplies, and so on) mean more independence for trusted employees, less busy-work approving purchases for you, and more rewards for your business.
With APRs that typically range from 10% to 30%, credit cards can be a very affordable, short-term solution for small businesses. One downside to credit cards is that they’re particularly sensitive to your credit score, and if your score is damaged, the credit limit can be lowered or closed without warning.
Who Small Business Credit Cards Are Right For
Business credit cards should be a part of every business’ financial toolkit. They’re a great option if you want to manage employee expenses or earn cashback rewards. Business credit cards are also good if your business has little to no revenue or has just started, as qualifying is often based on your personal income and credit score.
Where to Find a Small Business Credit Card
Business credit card providers can extend credit-based, in part, on personal credit and income. This makes business credit cards a great option for startup businesses. If you’re ready to apply for a business credit card, our guide to the top small business credit cards can help you find the best one for you and your business.
6. Personal Loan for Business
A personal loan for business allows you to borrow funds based on your personal credit and income. Personal loans rarely have limitations regarding what the loan funds can be used for, and therefore can be used to finance your business needs. However, because the loan is in your name as an individual, you’re personally responsible for repaying the debt.
Personal Loan Costs
The typical costs involved with a personal loan for business are:
- Origination fee: 1% to 6%
- Interest rate: 5% to 36%
Personal Business Loan Terms & Qualifications
With a personal loan, you can typically receive funding in amounts ranging from $1,000 to $100,000. The exact loan amounts offered will vary by lender, and will be based on your credit, income, and debt-to-income ratio (monthly debt payments divided by monthly income). Standard repayment terms for an unsecured business loan range from one to five years.
The basic terms and qualifications for a personal loan for business are:
- Loan amount: Up to $100,000
- Minimum credit score: 600 (check your score for free)
- Repayment term: One to five years
Keep in mind that while these loans may be for a business purpose, you’re the one who is borrowing and ultimately responsible for the loan. If you don’t repay the loan, your credit rating will be affected and you could lose personal assets. The interest rates can be similar to credit cards, but you’ll be receiving a lump sum payment that you’ll be paying interest on instead of a credit line.
Who Personal Loans for Business Are Right For
These loans are a good fit for startups or businesses without much history—as long as you’re willing to be personally responsible for repayment. Since this is a personal loan, your personal credit is on the line. A personal loan for business is also good if you’re willing to put your personal assets at risk (which is often required with business loans through a personal guarantee anyway).
Where to Find Personal Business Loans
You can prequalify online for up to $40,000 with LendingClub in just a few minutes by filling out their simple online application. Once you’ve filled out an application and been approved, you’ll receive funding in as little as one week.
7. Equipment Financing
Equipment financing can be used to purchase equipment, vehicles, or machinery. This type of startup business funding can be obtained through equipment dealers, banks, and online providers. Equipment financing can help startups finance equipment and preserve their cash for other needs.
Equipment Financing Costs
The APRs for equipment financing can start as low as 5% but vary based on the type of equipment you’re purchasing and where you’re borrowing from. For example, equipment dealers might charge you a higher interest rate than banks, but banks may have additional fees that other lenders don’t have.
Equipment Financing Terms & Qualifications
Equipment financing can be structured as a loan or as an equipment lease. Though both options work similarly, the largest difference pertains to how the ownership of the equipment works at the end of the financing term. The exact terms and qualifications will vary depending on which equipment financing provider you choose to work with.
The three most common methods for equipment financing are:
With an equipment loan, the purchased equipment is owned by you. This type of equipment financing allows you to spread out the payments over one to five years.
Fair Market Value Leases
Fair market value leases are what most people think of when they think about an equipment lease. You make monthly rental payments in exchange for the use of the equipment. At the end of the lease term, you can purchase the equipment at its fair market value, extend the lease, or return the equipment.
$1 Buyout Leases
Under a $1 buyout lease, you make monthly rental payments to use the equipment. At the end of the lease term, you have the option to purchase the equipment for $1. This is a good lease option if you’re fairly certain you will want to purchase the equipment at the end of the lease.
Under an equipment leasing agreement, you typically get:
- Time to use the equipment: Two to five years
- Interest rates: 6% to 16%
If you need help determining which equipment financing option is best for your business, our equipment lease calculator can help you evaluate the costs.
Who Equipment Loans Are Right For
Equipment financing can be a great option for startups where equipment or machinery will play a major role in the early stages of the business, like a trucking company. Financing equipment rather than paying for it all at once helps to keep more cash available for other business expenses.
Since equipment financing is collateralized by the equipment itself, it is typically easier for startups to get approved for than unsecured business loans. Whether you’re looking to buy a skid steer or salon chairs, equipment financing might be a good financing fit for your small business.
Where to Find an Equipment Loan
Smarter Finance USA can finance your equipment up to $100,000 and structure it as either a loan or a lease. To qualify, you’ll need a credit score of at least 650, no bankruptcies, foreclosures, or repossessions, and a down payment of at least 10%.
8. Borrow From Friends & Family
Family members and friends who are supportive of your business idea may be willing to lend you their personal funds as startup money for your business. Usually, loans from friends and family have very favorable rates and repayment terms, but you have to have access to a network of wealthy individuals. Remember, it’s very important to keep business and personal finances separate. This way, you always have a good paper trail.
Friends & Family Loan Costs
In August 2019, the required minimum interest rates were:
- Short-term loans (less than three years): 1.45%
- Long-term loans (up to nine years): 1.77%
These rates come from the IRS Index of Applicable Federal Rates, which updates on a monthly basis. This index provides the minimum interest rates the IRS expects on all loans. Even if your friend does not want to receive a return on their money, it is important for you to pay interest on what you receive or the IRS may see the money as a gift and tax you for it.
Friends & Family Loan Terms & Qualifications
Friends and family can be a great source for startup funding. While they may be willing to donate the money to your startup, you likely won’t want to pay the gift tax on that amount of money. Instead, you can structure it either as a loan or you can sell them shares of your business.
Unless your friends and family are sophisticated investors, taking money as a loan is generally cleaner than selling them a share of the business for three reasons:
- Unwanted business advice: Even small equity owners might believe that they have the right to have a major say in the strategy and operations of the business. You may not want to be constantly getting business advice from your uncle.
- Potentially unrealistic business valuations: The founders of a new business tend to place unrealistic valuations on the business. To avoid giving friends and family a “bad” deal, a loan that pays a good interest rate might be the fairest approach.
- Loan obligations for owners: Owners of a business may be required to be part of the application (and provide personal guarantees) for any future financing.
Who Friends & Family Loans Are Right For
Borrowing from family and friends may be a good option if you have a network of high net worth individuals and are out of other financing options. Be aware, though, that the lack of documentation in these arrangements could lead to reporting and legal problems, and also could complicate your future fundraising efforts if you don’t have formal loan agreements.
Where to Find Family & Friend Loans
If you’re going to borrow from family and friends, make sure you document every cash investment or loan. It’s also critical to keep your personal and business finances separate so you have a good paper trail and can answer any questions about how you used the funds.
Crowdfunding is the act of raising small amounts of money from a large number of people, and is a form of equity financing. Crowdfunding investments are usually handled through an online platform. Entrepreneurs looking to crowdfund capital for their business generally give equity or some type of reward in exchange for the funds.
The costs associated with crowdfunding typically include a flat fee of 5% to 10% of the total money raised, transaction costs for each contribution, and the costs of offered incentives or rewards (e.g., gifts, shares of business).
Crowdfunding Terms & Qualifications
There are many different ways to crowdfund. Some startups just rely on the strength of their business or campaign, believing that their product will inspire contributors. Others offer rewards or incentives to supporters in exchange for their investments, and others offer equity in their business. Crowdfunding campaigns are almost always hosted through a crowdfunding website.
The reward-based crowdfunding strategy is very popular, with one of the most popular platforms being Kickstarter. Reward-based crowdfunding works by offering a product or service as a reward to people who contribute a certain amount of money to your business. The funds raised must be for a specific purpose (like manufacturing a new product) and that purpose must be acknowledged at the beginning of the campaign.
Josephine Caminos Oria, President and Founder of La Dorita Cooks, provided a success story and noted the importance of considering your community when seeking startup funding:
“We used grass-roots fundraising efforts through Kickstarter.com to raise $50,000, of which $32,500 was used to equip our current commercial kitchen. … We always encourage our member startup companies to reach beyond their brick-and-mortar and find a way to make a social impact and give back to their community in order to create creative funding opportunities for their business.”
With equity-based crowdfunding, campaign contributors donate and receive shares of your business in return for their contribution. This method of crowdfunding is much more complicated than other crowdfunding methods. It is recommended that you seek legal guidance when using this form of financing, as there are rules and regulations that you must abide by.
The three types of equity crowdfunding are:
- Equity I: This option must be done privately through accredited investors. Entrepreneurs using this type of crowdfunding get access to the fewest number of potential investors, but also have to deal with the least amount of legal regulations.
- Equity II: This option allows you to publicly advertise your crowdfunding opportunity, but you can still only accept money from accredited investors.
- Equity III: This option allows you to publicly advertise your crowdfunding needs and goals, and you can accept funds from just about anyone. This option is heavily regulated by the SEC to protect the interests of inexperienced investors.
The ability to reach potential crowdfunding investors through an equity crowdfunding campaign requires you to abide by many laws and regulations. These laws are in place to protect the interests of the investors because many of them are likely inexperienced with this type of funding and investment.
Who Crowdfunding Is Right For
Reward-based crowdfunding might be for you if you don’t have any revenue yet or are launching a new product for the first time. It’s also a good option for high-margin products or services. Many entrepreneurs use this type of crowdfunding to initiate presales of new products and to gain exposure.
Equity-based crowdfunding can be good for any business willing to give up equity to receive the capital they need to grow quickly. This form of crowdfunding is more difficult to navigate and it is recommended that you seek legal advice to ensure that you are not violating any SEC rules and regulations.
Where to Find Crowdfunding
There are several crowdfunding platforms available for businesses to present their crowdfunding pitch. Some are rewards-based and others are equity-based. The best crowdfunding site for your campaign will be the one that focuses on the type of crowdfunding you are offering, has a large audience, and affordable fees.
10. Angel Investors
Angel investors are usually wealthy individuals who provide your business funding in exchange for an ownership stake. An angel investor invests as much in you, the business owner, as they do in the business’ products or growth opportunity. Angel investors generally give less money than venture capitalists, but they also are less likely to take an active role in your business.
Angel Investors Financing Cost
Accepting angel investment funding will cost you a percentage of the ownership of your business. The exact percentage will be negotiated between you and the investor. In general, you can expect to give up between 5% and 50% of your equity. Some angel investors will only invest capital if they get a majority ownership stake, but they will still fully expect you to operate the business.
Tips for Raising Money From Angel Investors
The most important thing to keep in mind about raising money from angel investors is that it’s all about networking. You have to get yourself and your business in front of individuals who have the money and interest to invest.
If possible, structure the investment as a convertible note. A convertible note is a loan that pays interest, but converts into stock under certain conditions, like if venture capitalists invest in the company later.
Two benefits of a convertible note include:
- They are simpler and therefore require less in legal fees than a typical equity investment.
- They eliminate the need to decide how much the company is worth with the angel investor (that will be determined by the valuation of the next investment in the company).
Who Angel Investors Are Right For
If you need a lot of capital to grow your business and are willing to give up equity in exchange for funding, then angel investment funding might be for you. Raising capital from angel investors is not as simple as applying for a loan, but can be a viable way to fund your business without taking on debt.
Where to Find Angel Investors
In many cases, angel investors are people you know who are just as much about investing in you as investing in your idea. However, if you do not have friends with deep pockets, you can also advertise your business on angel investing sites such as AngelList.
11. Venture Capital
Venture capitalists are a group of investors who make up a company or investment firm. Venture capital funding is given debt-free in exchange for a percentage of equity in your business. Venture capital investors are likely to take a hands-on role in your business, and often require a seat on your board of directors. A well-prepared business plan with financial projections is a must when pitching to a venture capital firm.
Venture Capital Costs
The primary cost of venture capital funding is the percentage of the ownership of your business given to the investors, which typically is a non-negotiated offer from the venture capital firm. Many firms will want significant ownership of your business. You can expect to give up at least 10% to 30% of your business to non-controlling venture capital investors.
Venture Capital Terms & Qualifications
Venture capitalists are a group of investors who are looking for a very high rate of return on their money, generally around 10 to 15 times their initial investment within a five-year period. Most new businesses cannot guarantee such a high rate of return, which is why they are often not a good match for venture capital funding.
Venture capital firms are comprised of investors who give them money to invest in startup businesses. Because the firm must answer to their own investors, they are more likely to take an active management role in your business. This ensures they can help guide your business on a path to success, maximizing the opportunity for a quick return on their investment.
Who Venture Capital Is Right For
Like angel investing, you need to be ready to give up equity and have the ability to scale your business quickly if you want to find venture capital investors. Venture capitalists are looking for businesses ready to become a large business worth substantially more than they are today, and that stand out in their industry.
Venture Capitalists vs Angel Investors
Venture Capitalists are a group of investors who provide multi-million dollar funding to small businesses through multiple funding rounds. Angel investors are individuals who are generally wealthy and like to invest in early-stage startups, generally contributing between $25,000 and $1 million per investment.
The major differences between venture capitalists and angel investors are:
- Venture capitalists only invest in businesses where their potential gain exceeds 10 times their initial investment. Angel investors are generally not looking for as great of a rate of return on their investment
- Many angel investors like to help advise business operations, but generally do not take control of making decisions. Venture capitalists are more involved in your business operations, and require significant ownership control in return for the investment.
- The average seed round for venture capital exceeds $5 million, while angel investors typically invest less than $1,000,000.
Where to Find Venture Capital
Raising venture capital is a tough endeavor and isn’t right for all companies. While there are websites, like FundingPost, that allow you to present your business to potential investors, often the best way to raise venture capital funding is via mutual introduction. It’s much easier to elicit the attention of investors when you have a mutual connection who can pre-pitch the discussion.
12. Government Grants
While not a loan, a government grant is another funding option you should consider when evaluating your startup funding options. Many small businesses may be eligible for government grants. All federal government grants are posted on the grants.gov website, which allows you to search for grants that align with your business type.
Government Grant Costs
Government grants are free, and you’ll never be solicited by the government to tell you that you’ve qualified for a grant for which you haven’t applied. Don’t be fooled by scams trying to convince you that you need to pay to receive a grant.
Government Grant Terms & Qualifications
The terms and qualifications for government grants are all different. When you review the grants to see if they align with your business, you’ll be able to tell what’s required to get the grant. Some examples might be the type of business ownership (e.g., minority-owned), the population you’re serving (e.g., an underserved area), or the service you provide (e.g., environmental).
Who Government Grants Are Right For
With the variety of government grants available, they can be a great financing opportunity for anyone who meets the requirements of a specific grant. There are set application deadlines for government grants, and you may be required to meet certain objectives (e.g., promise to provide a service for a set amount of time), but grants do not require repayment and are essentially free money for your business.
Where to Find Government Grants
The U.S. government has a site where government grants are listed. On this site, you’ll be provided with all the details about the available grants and what it takes to apply. Grants are offered by various federal agencies, and have defined application periods. It can be worthwhile to search the site to see if there are any active grants that align with your business type and objectives when considering your startup funding options.
5 Tips to Getting a Startup Business Loan
Regardless of what type of startup funding you decide to pursue, there are some steps you can take to increase your chances of getting financing. Taking the time to prepare a business plan, increase your credit score, and save money to invest in your business can improve your chances of being approved. Additionally, it’s important to begin building your customer base and keep your financial projections up to date.
Five tips to help you be successful in procuring startup funding are:
1. Prepare a Solid Business Plan
No matter which option you choose to fund your startup, a solid business plan is a must. Potential lenders and investors are going to want to see that you have a well-developed plan established to operate your business successfully. Additionally, they’ll want to make sure the financial projections are realistic and show the ability of the business to repay the loan.
2. Improve Your Personal Credit Score
A loan for a startup business will likely require you to have a strong personal credit score. The lender won’t be able to use business history or credit to determine the potential success of the business. Instead, they’ll look at your personal credit history and what personal assets you have that can be used as collateral.
3. Save Your Own Capital
When applying for small business financing, most lenders are going to expect you to contribute 10% to 30% of the project costs associated with the loan you are getting. Lenders want to know you have a vested interest in the business and that you’re going to do everything you can to make it successful.
4. Build Your Customer Base
Whether you are seeking funding to get your business started, or already have a startup business, building your customer base can help prove the viability of your business to potential funders. New businesses that can show a growing customer base and rising revenues will be more appealing to lenders than businesses that aren’t gaining any traction or support.
5. Maintain Updated Financial Projections
It can take some time to obtain the financing you need for your new business. Whether your financial projections are part of your business plan, or a separate document provided to potential lenders, it’s important to keep them updated. A lender or investor is going to want to see a clear financial picture based on your most recent business financials.
Startup Business Loans Frequently Asked Questions (FAQs)
A lot of information about startup business loans has been shared in this article, including what financing options are available, who they are right for, and where to find them.
Here are some of the most frequently asked questions about small business startup loans:
How do I get a startup business loan?
A great way to start your search for startup business loans is with our fundable quiz. This quiz will help determine if your business is fundable, the loan amount you might be able to receive, and what funding options are available. If you don’t qualify for a business loan, a personal loan is another alternative.
How do I create the business plan required for SBA startup loans?
Developing a business plan is always a good idea for startup businesses. If you’re seeking an SBA startup loan, a business plan will be required. An SBA business plan is really no different than a standard business plan. Using business plan software can make the process easier, and assistance is available from organizations like SCORE.
Do banks give loans to start a business?
Getting a startup loan from a traditional bank is often difficult, because most banks require that your business has been operational for at least two years. If you want to use a traditional bank, a HELOC is an option if you have good credit and equity. Alternatives to bank financing include crowdfunding and SBA microloans.
Do you need a loan to start a business?
You don’t necessarily need to rely on loans to start a business. In fact, a survey of small business financing found that 31% of small businesses didn’t use any loans to meet their capital needs in a 12-month period. When starting a business, it’s good to use your own resources before getting a startup loan.
Are there free government grants as funding for business startup?
Government grants are free, and you’ll never be solicited by the government to tell you that you’re qualified for a grant for which you haven’t applied. Small businesses might be eligible for government grants. It’s worth checking out if there are any grants that align with your business type when considering your startup funding options.
Bottom Line: Startup Business Loans
Finding financing when you’re starting a business can be difficult, but there are a number of financing options available for small businesses. Your individual business financing needs will determine which option is best for you. If you’re looking to get financing to purchase an existing business or to fund a franchise, startup business loans might not be your only option.