Almost 5.5million new businesses were launched in the US in 2023 and the pace of entrepreneurship shows no sign of slowing down. Doing your own thing in business is clearly the way to go.
Many of these budding businesses used personal savings and funds from friends and family to get off the ground. But what do you do if you don’t have cash to hand and no personal sources to finance your great idea? Startup business loans are designed to help new organizations get up and running. More readily available from online lenders than traditional banks and credit unions, these specialized forms of financing can make all the difference when launching a new company, giving entrepreneurs the critical funding they need to get their business through the early months and years.
So how do startup loans work and what do you need to get one? Read on to find out all you need to know about getting a loan to start a business.
There are many types of startup business loan. Interest rates, fees and terms and conditions can vary significantly. This means it is important to review all the options before settling on a deal. Here’s a rundown of the best startup loans to support your new venture
This is the most common startup business loan. You receive a single, lump-sum cash injection and then pay it back in regular instalments over a fixed period of up to 25 years. Borrow up to $5million. Collateral may be required.
A startup loan that functions like a high-value credit card but comes with lower interest rates and fees. Organizations can withdraw as much as they want when they want from a loan facility up to the limit of their borrowing. The best thing about a line of credit is that you only pay interest on the sum you withdraw, not the whole line. This can significantly reduce your borrowing costs. Collateral may be required.
Partially backed by the Federal Government, SBA loans are offered by the US Small Business Administration and usually come with much lower interest rates and fees than other commercial lending. The SBA offers a range of loans, but SBA Express Loans and SBA Microloans may work best if you’re seeking startup funding.
SBA express loans are a faster alternative to the standard SBA 7a loan program. Express loans can give entrepreneurs up to $500,000 to support their business and you will usually get a ‘yes/no’ indication within 36 hours of making your application. Note that unlike their 7a counterparts, which are 85% backed by the US Government, express loans are only 50% supported, so lenders carry more risk. This means interest rates and fees may be higher.
SBA Microloans are available up to $50,000 and may be secured with FICO scores as low as 500, or even with no credit score at all. However, this type of funding often requires collateral or a personal guarantee that makes you personally responsible for the debt, not your business. Community Advantage loans function like standard SBA 7a business loans but come with a maximum of $350,000 and other features that may make them easier for new businesses to obtain.
Equipment loans use the asset you’re financing as security, similar to a car loan or a residential mortgage, so no added collateral is required. Buy machinery, furniture, technology, etc. Use the equipment as you pay for it while the lender maintains a lien over the title of the machinery until the loan is repaid.
Available for businesses that accept customer payments by credit and debit card. You borrow against the value of your card sales. As your card sales increase, your borrowing limit goes up. Pay the loan back with a fixed percentage of your card sales on a daily, weekly or monthly basis. Your sales act as security for the loan, no added collateral is required.
Personal loans work like business term loans, providing a lump sum of cash that you pay back over time. Personal loan lenders are often more relaxed about the use of funds and may demand less supporting documentation. Note that personal loans usually have lower borrowing limits and higher interest rates and fees than business financing. Collateral may be required.
Many small business owners borrow money from family and friends, especially when they’re trying to start a new venture. However, using funds from loved ones can often be a source of contention if the ground rules are not clear from the start. If you have access to this type of financing opportunity, make sure your funders know if they are providing a loan, a gift or an investment from the start. If there are plans to pay the money back, put this down in writing with a clear repayment schedule – including a plan of action if things do not turn out as expected and you cannot pay the funds back on time, or at all.
Applying for a startup business loan is similar to applying for most other types of business funding. To improve your chances of success ensure you have your ducks in a row before you apply:
Getting a business loan is usually decided by several key metrics: How long your business has been operating, your credit report (business and personal), your business bank account data, annual turnover, financial history and the strength of your business plan. However, if you’re seeking funding for a startup loan your business will be very new or may not be trading yet. This means you won’t have much business history and your paperwork may be minimal. In such case, the lender will typically pay more attention to your personal credit score when evaluating your loan application. It is also usual for lenders to ask for collateral or a personal guarantee when offering startup funding.
Getting a business loan is usually decided by several key metrics: How long your business has been operating, your credit report (business and personal), your business bank account data, annual turnover, financial history and the strength of your business plan. However, if you’re seeking funding for a startup loan your business will be very new or may not be trading yet. This means you won’t have much business history and your paperwork may be minimal. In such case, the lender will typically pay more attention to your personal credit score when evaluating your loan application. It is also usual for lenders to ask for collateral or a personal guarantee when offering startup funding.
To get a startup business loan with poor credit, you’ll need to prove that you have the ability to repay the debt. Here are some tips to help you get approved:
Even with bad credit business loans your credit score is still important. Spending the time to re-build your score before applying for a loan can often make the difference between success and failure. Start the process by following these steps:
Every lender will have their own financing criteria. Some bad credit lenders may need to see a steady cash flow and solid positive balances in your business bank account, but others may be more lenient about the need for cash on hand and strong revenues. Review the requirements of each lender and make sure you can meet their needs before applying.
If you can provide collateral – real estate, vehicles, machinery, etc. – it will usually be easier to get a bad credit startup loan. Once again, you should review each lender’s requirements with regards to collateral – some will consider most types of asset, while others may only work with assets that are fully paid for and owned by the business.
A cosigner is a person you trust and who has good credit and assets they are willing to offer as collateral. They agree to make the payments on your business loan if you or your business cannot. Essentially, the cosigner is a fail-safe for the lender. If you don’t pay, they will. This can give added comfort to the lender, and in the right circumstances, may increase your chances of loan approval.
A cosigner can be anyone you know – friends, family, business associates etc. They will need good credit and sufficient assets to cover the value of your business loan. You should choose your cosigner well. They should be someone you trust and who trusts you, because asking them to put their finances, assets and credit on the line is no small thing. Keep in mind that if things do not go according to plan and they end up paying back your loan it could have a detrimental impact on your relationship with them.
Taking on a business loan that can’t repay won’t help you or your new business. Review your cash flow and revenue projections before applying. Is there room in your budget to make the necessary payment instalments? Also be aware that although many business loans require monthly repayments, some startup loans will demand weekly or even daily instalments. Will your cash flow be able to handle these smaller, but more frequent payments?
There are many ways to finance a new business venture. If the options above do not work for you, it could be worthwhile to investigate these funding alternatives:
It may be possible to secure a business credit card to fund your startup – although the interest rates and fees you pay may be very high. The application process for these types of card is usually fast, streamlined and does away with piles of paperwork – in many cases you won’t even need a formal business structure to apply. Business credit cards are also great for re-building your credit if you pay off the balance every month. No added collateral is usually required.
If you’re seeking outside investment for your new business, there are networks of venture capitalists and angel investors readily available online. Some are solely focused on supporting startups and new businesses.
Bringing in external investment can give you the cash you need to get your idea off the ground, and it may also deliver a unique and extra set of skills and contacts that can help your organization grow even faster. However, be aware that investors will usually want a piece of the action in exchange for their money. This means you give up a share of your ownership and it may loosen your overall control of the business. Some investors may also want higher dividends or royalty payments as well as their share of equity. Also note that venture capitalists and angel investors can be very picky about the businesses they choose to back. You could spend many months pursuing one lead after another before you find the right match.
Business grants are another funding option for startups and young organizations. Unlike business loans, the major advantage of this type of financing is that you don’t need to repay the money. However, the downside is that can be tough to secure a grant. They are often restricted to specific locations, industries or causes, making it more difficult to qualify.
Five places to find small business grants:
Available via various online platforms, crowdfunding can bring in large sums if your presentation hits the right spot. Although you will need to be creative to raise big money in small donations from hundreds or even thousands of donors, you do not need to repay the cash if you spend it where you said you would. An eye-catching idea and a powerful pitch is essential to succeed with this funding option.
No matter if you’re seeking your first startup loan or you’re a seasoned borrower, working with business finance experts can make all the difference when applying for your funding. Contact Swoop to discuss your borrowing needs, get help with your application and to compare high-quality startup loans from a choice of lenders. Give your big idea the financial boost it needs. Register with Swoop today.
Swoop was amazing! I was looking for refinancing and they were straight onto finding me the best possible option. I would highly recommend them.
Owner, F45 Cambridge
Written by
Chris is a freelance copywriter and content creator. He has been active in the marketing, advertising, and publishing industries for more than twenty-five years. Writing for Wells Fargo Bank, Visa, Experian, Ebay, Flywire, insurers and pension funds, his words have appeared online and in print to inform, entertain and explain the complex world of US consumer and business finance.
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