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If you’re like many entrepreneurs, you used your savings to get your new business up and running and may have borrowed from family and friends too. Once that money is put to good use, you need to hire employees, buy furniture or equipment, upgrade to the latest technology and pay for inventory. A startup business loan is often a viable next step.
Funding the cash needs of your startup can be a challenge, but it’s not impossible once you understand what’s involved, the types of financing to look for and how to qualify. To help you find the best startup business loan options for your unique situation, this guide covers the essentials of financing a new company including:
Because a new business is unlikely to get approved for traditional funding, you’ll need to get creative about finding sources of capital. You’ve probably seen TV shows where entrepreneurs pitch their business ideas to venture capitalists in the hope of exchanging some equity for needed funding. You may also be familiar with crowdfunding campaigns that have helped startups get the cash they need to develop or market a product.
But these methods aren’t the only ways to finance a fledgling business. Personal loans, credit cards and SBA loans are forms of startup business financing.
Banks and other lenders offer a number of financing tools for established businesses, such as term loans, commercial mortgages and lines of credit. To minimize the likelihood that the money they lend won’t be paid back, most lenders expect established borrowers to demonstrate they have a lengthy time in business, ample cash flow and personal and business credit scores within a certain range. In some cases, lenders also want collateral before they’re willing to approve a loan or other type of financing.
Compare this to a new business with a short track record, little or no credit history and limited cash flow and collateral and it's easy to see why lenders are leery of handing over cash for new business loans --- there's a much higher risk that an unproven startup will default on what they owe.
When you’re looking for alternate access to cash to get your startup further off the ground, you can expect to use your personal credit and even your previous work experience to qualify. How much you can borrow and what’s needed to qualify depends on the type of small business startup financing you apply for, so let’s look at what applying for personal loans, credit cards and SBA loans can involve.
Using a personal loan to give your startup a financial boost can be a good option if your business doesn't have an established history and you've got a solid personal credit score and decent income. Many personal loans are unsecured, which means you won't need a guarantee or collateral like you probably would with a small business startup loan. With most personal loans, you also won't need to include a business plan or financial projections with your application. If you have to state your purpose for the funds, your lender may want more details about your startup.
You’ll need to provide your driver’s license, credit score, bank statements, personal tax returns and/or proof of income. If you apply for a personal loan for your startup, a lender may also want to see proof of business ownership as well as a voided business check, bank statements and any previously filed company tax returns.
Some lenders approve borrowers with scores as low as 525, while others require a minimum of 600 to 680 or higher. Lenders also look at what percentage of available credit you’re using, your debt-to-income ratio and if you have a history of paying bills on time. In general, a high score and healthy credit may qualify you for a lower interest rate and higher loan amount.
The amount of money you can get with a personal loan spans a wide range. You may qualify for a new loan of $1,000 to $300,000 depending on your income, creditworthiness and ability to make monthly payments.
Loan approval and how fast the funds are deposited into your bank account varies depending on the lender and the amount you’re asking to borrow. With some online lenders, it can take as little as one business day to get approved and have the funds deposited. Others can take a week or longer, and you may have to wait up to 30 days before you get the funds you need through a bank or other brick-and-mortar lender.
The amount you borrow and the interest are added together and divided up into equal monthly payments over a set time frame. The repayment period can range from just three months up to five years, depending on the amount of the loan.
The interest and other costs you pay for a personal loan can vary a lot depending on your creditworthiness and income. You may get charged a fixed interest rate of anywhere from 6% to 26%. Some lenders also tack on origination fees ranging from 1% to 6% of the loan amount.
A personal loan is easy to apply for, and some can be approved and funded within just one day. It may not require collateral or a guarantee, so applying may get you the cash your business needs quickly and without headaches or hassles. On the downside, taking out a personal loan isn’t going to help establish credit history in your company name, and it does leave you on the hook if your venture isn’t a success.
Business credit cards aren’t just for large corporations with multiple revenue streams and big budgets. As a business owner, you can apply for a card in your company name, even if it’s a brand-new startup. A business credit card can give your startup more buying power and make it easier to keep business and personal expenses separate. Having a dedicated card for your startup can also help you build a company credit profile so you can qualify for other types of financing down the road.
You may find that getting a company credit card is a lot easier than getting approved for a business loan. Rather than applying for several credit cards and risking multiple hard inquiry hits to your credit score, it’s wise to do your research and only apply for one card that matches your needs. If you’re looking for short-term startup financing, aim for one that offers a 0% introductory APR for six months or a year and as high of a credit limit as possible.
Here are answers to some common questions about applying for a business credit card:
You’ll need to fill out a credit card application with the legal name of your business, your company’s employer identification number (EIN), length of time in business, number of employees and an average monthly spend. You’ll also have to include personal details such as your Social Security number. If your startup has little or no earnings yet, you’ll also need to include your personal income.
You can qualify for certain cards with a credit score between 600 and 700. A score above 749 is ideal to make approval easier and help you get a lower interest rate and higher credit limit. Credit card companies also factor in whether you are using more than 30% of your available credit, are making payments on time or have had credit problems in the past, such as a bankruptcy.
Credit limits for business cards can range from $5,000 to $20,000 or more. The amount you get approved for depends on the type of card you choose, your personal and business income and your credit history.
Some card issuers approve applications instantly, while you may have to wait seven to 10 days to get a credit decision by mail from others. It can take another seven to 14 days to receive a new card in the mail once you’re approved.
You’ll get a statement each month from your card issuer that lists all the purchases made during the billing cycle, a balance that’s due by the date listed and a minimum payment amount. If you pay only the minimum amount by the due date, you’ll be charged interest on the balance beginning the next day. If you pay the balance in full each month, you won’t owe any interest.
Business credit cards can have a variable interest rate between 14.49% and 24.49%. New accounts are usually hit with the highest rates. Some credit card companies also charge an annual fee just to use their card. These can range from a reasonable $25 to a whopping $500 depending on the card and its perks. Other common costs include fees to make balance transfers and get cash advances. There are also late payment, over-the-limit and returned payment fees.
Applying for a credit card in your business name and using it wisely can help you quickly build a commercial credit history, which can pave the way for greater borrowing power as your business grows. However, if you don’t make payments on time or get caught in a cycle of paying high interest charges, you could end up with long-term business credit problems that downgrade your personal score too.
Rather than applying for several credit cards and risking multiple hard inquiry hits to your credit score, it’s wise to do your research and only apply for one card that matches your needs.
The Small Business Administration (SBA) has several loan programs that let small businesses borrow up to $5.5 million for certain purposes, but most require a minimum time in operation and have revenue and credit criteria. However, there are two SBA-backed loans available to help new startups with less than two years of business history — the Microloan and Community Advantage programs
These SBA startup loans can be used for a number of purposes but also have some restrictions. For instance, Community Advantage loans are only available to businesses in underserved areas, and Microloans are only offered through nonprofit or community-based organizations.
Additionally, there may be specific requirements for applicants, such as a providing a personal guarantee or collateral, or having a cosigner. Thoroughly checking and comparing the details of these two programs can help you decide which one suits the size and needs of your startup.
Here are some details to consider about the Microloan and Community Advantage loan processes:
Along with various completed SBA forms, you’ll need to provide your driver’s license, Social Security number and bank statements. Your resume, three years of personal tax returns, a personal financial statement and proof of a down payment of 10% to 20% are also expected. You should have a business plan that details your industry experience and includes two years of sales, expense and profitability projections. Note that if you plan to buy equipment with the borrowed money, you’ll need a quote showing the expected cost.
There isn’t a set minimum credit score needed to get approved for the Community Advantage or Microloan programs. Although a credit score as low as 575 may not get you turned down, some lenders do want borrowers to have a minimum score, and most look for a history of paying back debt responsibly, paying taxes and no previous bankruptcies.
Microloans are limited to a maximum of $50,000, while Community Advantage loans are available from $50,000 up to $250,000.
The length of time it takes to process an SBA application depends on the type of loan and the lender. You may have the funds in hand in just two or three weeks, or it may take two or three months.
These loans are paid back in equal monthly installments over a set length of time based on how much you borrow and the purpose of the loan. For Microloans, the maximum term is six years. For Community Advantage loans, the repayment period ranges from seven to 25 years.
The interest rate is usually prime plus a percentage. The combined rate can range from 7% to 9% for Community Advantage loans and 8% to 13% for Microloans. Other costs typically include application and loan processing fees and closing costs of 2% to 5% of the amount you borrow.
A big advantage of SBA loan programs is that they can give you access to financing for your startup even if you have less-than-perfect credit and getting money elsewhere seems hopeless. The fees charged are in line with those you’d pay to other lenders, and you’ll get a reasonable, fixed interest rate too. Two major drawbacks are the in-depth application and extremely long approval process that can leave you waiting weeks or months for business funding.
The Small Business Administration (SBA) has several loan programs that let small businesses borrow up to $5.5 million.
Personal loans, credit cards and SBA loans are three good options for getting the cash you need to grow your new business. You may be able to use one or more to take your startup to the next level of success. With any kind of business credit, it’s key to understand all the details before you apply so you can use those borrowed funds to your best advantage.
Accessing the right lending assistance can make figuring out your financing options and getting the best terms and interest rates easy. For expert help, fill out our online form or give us a call at Lendzi. We offer clear-cut terms, flexible borrowing options and an uncomplicated application process that create a custom approach to financing. We’re here to put our skill and industry knowledge to work to help take your startup to the next level!
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