Startup loans are specifically for startup businesses. Startups have little to no business history, and usually, require loans or other means of gaining capital to get their businesses off the ground. There are several ways for startups to get funding, however, not just loans.
6 months to 4 years
7.9 to 19.9%
As FaaS as 2 Weeks
How Does a Startup Business Loan Work?
If your business doesn’t have revenue yet, how are you supposed to have the credit to get a loan? That’s where startup loans and other startup funding options come in. There’s no single option for startup loans – various types of funding can be used for your startup:
- SBA Microloans
- Business Credit Cards
- Small Business Grants
- Friends and Family
Pros & Cons
Pros of a Startup Business Loan
- Quickly access cash
- Good for businesses with little history
- Good for many business needs
Cons of a Startup Business Loan
- Must have good credit
- Lower loan amounts
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Who Qualifies for a Startup Business Loan?
If your business is younger than six months, these forms of funding are probably the best options. If you’ve been in business for more than six months, there are most likely other types of loans you qualify for.
A personal credit score is the most important factor in financing a new business – investors and lenders want to see that you have a good history with paying your bills because that signifies how well you’ll be able to pay them back in your business. The higher your score is, you’ll have a greater chance of qualifying for things like an SBA microloan, a credit card or a personal business loan.
Qualifying for grants, crowdfunding or even receiving money from your family will be more about the details of your business. What are you selling? Is it scalable? Does it solve a problem? What is your plan to get customers? These questions will need to be answered before people will invest in your business.
How Do You Apply for a Startup Business Loan?
This process varies for each loan type, here’s a breakdown:
SBA loans will have the most complicated application process of all the startup loan options. They’ll take several weeks to process and will require a lot of paperwork. However, they tend to have the lowest interest rates.
Credit cards are relatively easy to apply and qualify for – they often only require a federal tax ID and a Social Security number.
The application process for grants vary depending on the one you’re applying for. They come from private foundations and government agencies. They’re hard to get, but don’t have to be paid back.
- Certain grants are often offered to disadvantaged populations – minorities (people of color, women, etc) and veterans.
If you’re lucky enough to have friends and family willing to help finance your business ventures, make sure you’re aware of the personal risks.
This form of funding is rising in popularity. Sites like Kickstarter and Indiegogo offer your business a way to solicit funds from individuals via online campaigns.
What You're Going to Need:
- Driver’s license
- Credit Score
- Bank account routing number
- Solid business plan
- Equipment quote
Is a Startup Business Loan right for you?
Let us walk you through your options and help you decide which program is right for you.
What Else Should You Know About Startup Business Loans?
Starting a business can be complicated, and it’s easy to get lost in documents and to-do lists. Here’s a fundamental run-down of each type of funding.
SBA loans are the most traditionally-structured loans for a startup. Facilitated by the Small Business Administration through non-profit lenders and financial institutions, the average microloan is around $13,000, but they can be for up to $50,000.
Many SBA lenders are mission-focused groups that work for specific purposes in local communities. They focus on minority founders or founders operating in disadvantaged areas and are often very well equipped to work in certain communities.
These lenders will give you solid terms for repayment, and this will give your business a chance to grow and establish credit. That way, you can qualify for other types of financing later on.
Credit cards can be an expensive way to fund a new business because the card issuers decide the fees and APR associated with them. If your personal credit isn’t great, it’ll make your APR higher.
It’s not good to rely on credit cards for funding, but they are recommended for some purchases as long as you can pay them off each month to avoid carried-over interest rates.
They do have several pros:
- They’re easy to apply to
- They don’t require collateral
- And they give businesses some flexibility with funds – you can use as little or as much as you want, as long as you don’t exceed your limit.
There are several cards that have 0% APR for an introductory period. This is the ideal and recommended business credit card. However, the rate spikes at the end of the period and they often require very good credit to obtain.
Grants don’t have to be paid back, so they can feel like free money. Clearly, this is ideal when starting a business.
Grants are only given out to businesses that meet certain qualifications determined by the granter. Your business competes with all the other applicants, making grants pretty hard to get.
Some grants are reserved for certain types of businesses, such as women-owned, minority-owned, or veteran-owned. These grants can give historically disadvantaged groups a better chance at business success. Do research on local groups that give mission-specific grants and apply to them if you believe you have a shot, because they can replace a loan and give your startup a competitive advantage.
Another startup funding option is to go to friends and family. They’d take the place of an investor or loan in the sense that they’d provide initial funds to help get your business off the group. It’s up to your personal circumstances if they’d like the money to be repaid or not, but involving friends and family in your finances can be a risky option. Personal relationships can be put on the line.
Make sure you only work with friends and family you trust and have a solid business plan to present to them. They should understand their role in funding your startup and what you’ll be doing with their money. To prevent issues in the future, make sure you keep records of everything.
This can be compared to a loan because technically you repay your funders, just with gifts and not money. This can be your product or swag with your company logo. You’ll set a specific monetary goal, and people donate to reach it. This is usually done through online sites like Kickstarter.
There’s also equity crowdfunding, which gives people shares of your company in exchange for their donations. Certain state laws regulate equity crowdfunding, so make sure you’re aware of your local regulations. Recently, more states have allowed startups to reach out to individuals for equity crowdfunding, instead of just accredited investors.
Our FaaSfunds financing experts provide you with the latest industry knowledge to keep you in the know.
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