It can be challenging for a startup business to qualify for a loan. Without the lengthy financial and credit history required by many banks, startups often get denied funding by traditional lenders. However, many financing options are available, including rollovers for business startups (ROBS), Small Business Administration (SBA) loans, and lines of credit. Each type of startup financing offers unique advantages and disadvantages for startup owners.
Business owners willing to invest retirement funds of $50,000 or more
Businesses with good credit and a solid business plan that don’t need funds quickly
Home Equity Loan (HEL) or Line of Credit (HELOC)
Borrowers willing to use their home equity for startup funding
Business Credit Cards
Business owners good at repaying debt that want quick access to funds
Business owners with good personal credit needing up to $50,000 in funding
Businesses where a major startup cost is purchasing equipment with a long life
Businesses in small, niche, or underserved industries who may be underserved by traditional lenders
Choosing Among the 7 Best Options for Startup Business Loans
Because no two startups are exactly alike, many different types of financing options are available. Understanding your business’ financial goals can help you select the best option for your needs.
Some of the factors to consider when deciding among startup business loan options are:
- Upfront cash required: If a business does not have much capital available, the business owner should choose a type of funding that doesn’t require a large down payment or include significant upfront costs.
- Long-term cost: The monthly payment involved in financing is not the only expense a business owner should consider. The interest rate and term will determine the total cost of financing. Paying off a loan or line of credit in a shorter period of time can save the business money in the long term.
- Amount of equity you need to give up: Some startup financing might require a business owner to give up a stake in the business or require personal collateral.
- Personal guarantees: If startup financing requires a personal guarantee, the business owner will be personally liable for the debt if the business cannot repay the loan.
A ROBS allows a business owner to invest funds from a personal retirement account in a new business without paying early withdrawal penalties or income taxes. It’s not a business loan or a 401(k) loan, which means there’s no interest or debt to repay.
To qualify for and use a ROBS, you must:
- Contribute $50,000 or more from your retirement savings
- Be an employee of the business
- Structure your business as a C corporation (C-corp)
- Be able to fund the setup costs of $5,000 from outside the deferred retirement account
Setting up a ROBS can be very complicated. For more information on ROBS financing, check out our article on the best rollover for business startup financing providers. We recommend Guidant Financial to assist with the proper setup and execution of a ROBS account. Check out the Guidant Financial website for more information on ROBS or to speak with a ROBS specialist.
2. SBA Loans for Startup Businesses
The SBA assists startup businesses with financing. All SBA loan types can be used for startup financing, although some types are more challenging to qualify for due to the time-in-business requirements.
There are many types of SBA loans; qualification for some of them can be difficult. For example, a business owner will need to have a credit score of at least 680 and potentially pledge collateral for the loan. Two types of SBA loans that can be used for startup financing are the Community Advantage program and the SBA Microloan program.
In addition, both ROBS financing and SBA Loans are excellent options for business owners looking to get a loan to buy a business.
In addition to its excellent ROBS financing program, Guidant Financial can also help businesses that are looking for SBA startup loans. Check out Guidant Financial’s SBA loans webpage for more information on SBA loans and ROBS financing.
3. Home Equity Loan or Line of Credit
If you own a home that has equity available, you could have the option to take out a low-interest-rate home equity line of credit (HELOC) or a home equity loan (HEL).
A home equity loan is a lump sum loan against the equity of a property. It’s also usually a second lien on the property. This type of loan often has fixed payments with repayment complete at maturity.
A HELOC is a revolving line of credit with your home held as collateral against the loan. It’s often a second lien on a property behind the primary mortgage. Money can be drawn and repaid as long as the line of credit remains open. At maturity, the line of credit can be renewed, paid off, or extended.
HHEL or HELOC Costs, Terms & Qualifications
Both types of funding require equity in the property being held as collateral. The typical requirements for a home equity loan or line of credit are:
- Closing costs: 2% to 5%
- Annual interest rate: 3% to 6%
- 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
Where to Find a HELOC
The best place to look for a HELOC would be the local bank where you have your first mortgage. However, if you don’t have a bank of choice, a marketplace like LendingTree is an excellent resource for shopping around with multiple lenders to find the best offers.
4. Small Business Credit Cards
Small business credit cards are suitable for small and medium business (SMB) expenses. It isn’t advisable to put significant capital expenses on a credit card due to the higher interest rate. However, business credit cards can help businesses manage cash flow by allowing them to make purchases as needed and pay them off when funds are received.
Small business credit cards have several benefits for your startup business, including:
- Many have 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 by charging purchases to your card
- Employee cards that allow you to restrict what the card can be used for, such as gas or office supplies, mean more independence for trusted employees, less busywork approving purchases, and more rewards for your business
Because business credit cards have APRs between 10% and 30%, it makes sense to use them for short-term financing. However, if the cardholder’s credit score drops, the limit can be lowered, or the card can be closed. Interest rates on credit cards are typically lower than large unsecured business loans.
While there’s no shortage of business credit cards for startups, we chose the Chase Ink Business CashSM card as best overall for startup businesses, with an introductory 0% APR for 12 months and 5% cashback on the first $25,000 spent. However, different small business credit cards offer additional perks and rewards that might benefit an individual company. Therefore, you should compare the various benefits of each before choosing which one to pursue.
5. Personal Loan for Business
Startup businesses often struggle to qualify for financing due to limited time in business and little revenue. This makes a personal loan for business purposes a viable option for financing a startup. Because qualification is based on your personal credit and income, the qualification challenges presented by a startup business won’t prevent approval. However, if your business cannot repay the loan, you’re personally liable.
Personal Business Loan Costs, Terms & Qualifications
A personal loan can range between $1,000 and $100,000. The amount offered by a lender will depend on your qualifications, including credit score, income, and debt-to-income ratio. Repayment terms usually range between one and five years.
The basic costs, terms, and qualifications for a personal loan are:
- Origination fee: 1% to 6%
- Interest rate: 5% to 36%
- Loan amount: Up to $100,000
- Minimum credit score: 600
- Repayment term: One to five years
A personal loan may require personal collateral to be held to secure the loan. Unsecured loans will have higher interest rates due to the increased risk. Like a business loan, a personal loan involves receiving a lump sum that’s amortized over a period of time.
Where to Find Personal Business Loans
If the bank has a relationship with the business owner, it’ll be more likely to give favorable terms to the borrower. Online marketplaces, such as LendingTree, are also excellent choices for personal loans as the application will be shopped around to find the best available terms.
6. Equipment Financing
If a startup needs equipment rather than cash, equipment financing is a good option. It allows the business to finance the purchase of a new or used piece of equipment needed to generate revenue. Existing equipment can also be refinanced through equipment financing loans.
The two most common methods of equipment financing are:
- Equipment loans: With an equipment loan, the borrower pays the loan back in equal installments, and the borrower gains ownership of the equipment upon satisfaction of the loan. Terms can be as long as five years.
- Equipment leases: There are many types of equipment leases. Leases allow you to pay to use equipment and then choose to purchase the equipment or return it at the end of the lease.
Smarter Finance USA is an excellent choice for startups looking for equipment financing. In addition to being open to working with startups, it offers flexible lending options and competitive rates. Startup businesses that can put at least 5% down on the purchase of their equipment and that have a personal credit score of at least 600 should choose Smarter Finance.
A microloan is provided to businesses in small or niche industries or to groups of people that traditional lenders might underserve. Microloans are often provided by individuals through peer-to-peer financing. Microlenders provide borrowers in specific industries, such as farming, or groups of people banks have traditionally underserved due to race or gender, with much-needed funding.
Kiva is an excellent example of an organization that provides crowdfunded, interest-free microloans for up to $15,000. Check out its website for more information.
Alternatives to Startup Business Loans
In addition to considering a startup business loan, you may want to consider alternative funding methods to get your business started. Alternative methods include borrowing from friends and family, applying for a small business grant, crowdfunding, angel funding, and venture capital.
Tips to Getting a Startup Business Loan
No matter which type of startup financing your business applies for, you can increase the chances of getting a small business loan by following the following five steps.
1. Prepare a Solid Business Plan
Before an investor or lender contributes to a startup, they’ll want to know that a solid, long-term business plan exists. In addition, they’ll want to know that the business can repay the loan based on the business plan and financial projections.
2. Improve Your Personal Credit Score
Since many types of startup financing involve the business owner getting a personal loan, your credit score and financial situation may determine whether the business can procure startup financing. In addition, with limited business revenue and time in business, your credit and income will determine the fate of the loan application.
3. Save Up Personal Capital
Not only will personal income and capital be considered when taking out personal loans for startup funding, but many types of startup funding require down payments. Lenders want business owners to contribute between 10% and 30% to show they have a vested interest in reducing the lender’s risk.
4. Build the Business’s Customer Base
Startup businesses with a growing customer base will show potential lenders that the business is viable and that it’ll have the income to repay the loan. Businesses that don’t have a solid customer base will have difficulty convincing lenders of the company’s long-term viability.
5. Maintain Updated Financial Projections
Because startup businesses have limited revenue, it’s essential to have detailed financial projections and keep them updated as the business grows. This will show lenders the company’s long-term growth potential, which will make them more likely to want to invest.
Obtaining financing for your startup business may be the biggest challenge you face in your company’s infancy. The options listed above give you many ways to obtain financing for your startup, with ROBS financing and SBA loans being two of the best options. Make sure to consult your financial advisor and your legal expert when considering options for startup financing.