Startup business loans have some of the most stringent eligibility criteria, as many lenders prefer to work with lower-risk, established business owners. But that’s not to say it’s impossible, and working with an experienced team of lending professionals makes the process easier than ever. Even if you have a poor credit history, there are options available to finance your entrepreneurial ambitions.
Continue reading to discover the various options available to new small business owners looking to secure funding.
Post Pandemic: Is It Viable to Start a Business?
The coronavirus pandemic has caused chaos over the past couple of years, leaving many people feeling uncertain about the future. Job loss, industrial upheaval and digital transformation might feel confusing, but among the unpredictability lies opportunity.
With lockdown came unprecedented investment in and reliance upon the internet. The rapid increase in software, as a service provider, means building a website and marketing yourself affordably online requires no technical or coding skills. What’s more, Google’s local SEO service, Google My Business, makes it easier than ever to make your company discoverable online.
Despite the tragedy we’ve all been exposed to, there are exciting times ahead for new business owners. If you’ve got a profitable idea, a viable business plan and the tenacity to make it happen, the hardest bit of starting a business is securing financing. With so many options available, it can be challenging to decide which is best suited to your needs.
The 12 Best Loans to Start a Business
The idea of how hard it can be to secure small business funds puts many potential entrepreneurs off from starting up a company. While it’s more of a challenge for new businesses to access traditional bank loans, there are plenty of options available.
There’s a good chance you’ll need more than one type of loan to start your company. Below is an explanation of the best small business start-up loan options, with some pros and cons of each.
1. Equipment Financing for Startups
Equipment loans for startup businesses follow the same structure as traditional loans. Repayments are paid at monthly intervals over an agreed time scale; however, you must specifically use the money to purchase machinery or equipment for your business.
There are two options for this type of loan, lending and leasing. With the former, you own the equipment, and with the latter you rent it.
- Easier to secure and less risky than traditional loans because equipment can serve as collateral - Spread the cost of potentially large purchases to help avoid cash flow issues New equipment can directly lead to increased production, sales and profits
- Proceeds can't be used toward anything else
- Traditional lenders can take a long time to approve equipment loans
2. New Business Credit Cards
Business credit cards for startups can be a great option for establishing a business entity and building a separate credit rating. To qualify, lenders tend to look at your credit rating and personal and business income. As such, it’s one of the easiest ways to get an unsecured loan, provided you can get a personal guarantee.
- No collateral
- There are usually options available with zero-interest for 12 months
- Small business credit cards can help you manage cash flow effectively
- The owner personally carries the financial risk, so their assets could be at risk if the business fails
- Startup credit card limits can be restrictive and might not be the most affordable option
Less initial expense
The Small Business Administration provides low-cost, long-term loans to entrepreneurs in a variety of formats. The SBA isn’t a lender itself, but it guarantees loans, making its options higher reward and lower risk for lenders.
Due to how desirable an SBA startup loan is, you’ll have to jump through a number of hoops to qualify.
- SMEs that have been rejected by traditional loans might be eligible
- Interest rates are capped
- A broad range of financing options are available
- You're liable personally if the business defaults
- Approval can be tricky and slow
- Approval may require personal collateral
4. Personal Loan for Business Startup
While using personal credit is a viable option, you should be careful to establish business credit as soon as possible. Using personal loans puts your own assets at risk, so you must make sure you have a solid business plan before applying. It’s crucial that you don’t run out of funding before your business can support itself.
- Approval can be as quick as the same day
- If you've got a great credit score, you can secure excellent interest rates
- It's easier to qualify for a personal loan than a business loan
- Personal loans tend to limit the amount of capital you can secure
- You're liable for all repayments and your personal assets could be at risk
There are several types of microloans. SBA microloans are term financing options with a 72-month maximum term. The maximum loan amount is $50,000, although the average is significantly lower. There are other microlenders, usually nonprofits, offering smaller amounts of funding and more agreeable rates than traditional loans.
- Lower interest rates
- Little or no collateral
- Fast application process
- Short repayment terms
- Smaller amounts than traditional startup loans
- There may be limitations placed on what you can use the funding for
6. Traditional Term Loans
This is the type of loan most people think of when considering financing options. You borrow a fixed amount to be repaid over a fixed term with interest, often for a specific business purpose. Business term loans are one of the lowest-interest options, but they also have some of the most demanding eligibility criteria for new business owners.
- You retain full control over your company, as opposed to relying on investors
- Lenders are usually established and trustworthy
- Interest rates are excellent
- Applying can be lengthy and complicated
- You'll need an excellent credit history and evidence of profitability
- You can't usually cover ongoing expenses
7. Short-Term Loans
This is a condensed version of a traditional term loan that’s usually significantly more accessible, but smaller and more expensive. You’ll repay the loan over a shorter period, usually under a year, and interest rates are often high. However, you can usually secure this type of loan with minimal preparation and get approved on the same day.
- The loan application process is easier than many other types of startup financing options
- Approval is fast
- There are less stringent requirements than with other SME startup loans
- High-interest rates
- You might need to make payments on a daily or weekly basis
- There's a significant risk if you're unable to repay the loan
8. Merchant Cash Advance for Startups
Small business merchant cash advances are lower-interest finance options for budding entrepreneurs. Also known as a business cash advance, this type of lending involves getting a cash advance with a repayment schedule that’s usually between 90 days and 18 months.
Repayments are deducted from credit and debit card sales, so you need proof of at least four months of credit card sales.
- Easier to qualify for than other types of startup loans, with minimal paperwork and qualifying criteria
- No interest rate, pay off date or fixed monthly payment
- No legal liability
- More expensive than traditional financing
- Only specific industries, such as retail and hospitality, are eligible
- You won't be able to switch your credit card processing vendor
9. Startup Business Line of Credit
An unsecured startup business line of credit is more akin to a credit card than a traditional loan. You secure an amount of funding for your startup and can tap into it whenever you need it. You only pay interest on the money you physically use, and once you’ve made repayments, you get access to that cash again.
- Builds your business credit
- Helps to spread cash flow and takes the strain off during slow seasons
- Only pay interest on the money you use
- Harder to qualify for than a traditional loan
- There are charges and fees to be aware of
- Small amounts available, which might not cover major business expenses
10. Equity Financing
Equity financing involves selling a percentage of ownership in your startup company in return for funding. Investors give you money to advance your SME, and you give them a stake in the ownership and control of your organization. While you get mentoring and guidance from the investors, you ultimately give up some control over how your business is operated.
- With no monthly repayments, you have more money free to channel into growth
- Creditworthiness isn't an issue, and your assets aren't at-risk
- You benefit from the knowledge and experience of your investment partners
- Your investors have a stake in everything: particularly profits and control
- Investors input could significantly impact the direction of your company and lead to conflicts
11. Debt Financing
Debt financing is an umbrella term covering any type of startup funding that involves making repayments. It’s the flipside to equity financing, which provides investors with a stake in a small business.
- Full control over operations and the direction of the company
- Interest is often tax-deductible
- Easier to make plans for the future
- You must have a sufficient personal credit rating
- Exceptional budgeting, cash flow and financial judgment skills are required
- Your personal or business assets could be at risk
12. Small Business Grants
If you have bad credit or simply want to reduce the burden of debt, there are a number of start-up business grants available, such as:
- Government grants for small business
- New business grants
- Small business relief
- Grants for minority or protected groups
It can take a lot of time to comb through your options, but this type of financing is often great for mission- or community-based SMEs.
Need Help Choosing the Best Loan for Your Startup?
Whether you need help accessing an SBA small business grant or you’re looking for equipment financing, Lendzi can help you navigate the crowded small business loans market. Get in touch today for more information.