How to Get a Startup Business Loan

Business person receiving money.

Launching a startup is no easy task. In addition to coming up with a great idea and putting in the hard work, you also have to worry about funding. How are you going to finance your startup? One option is to get a startup business loan.

This type of loan is designed specifically for businesses that are in the early stages of development. In this guide, we will discuss how to get a startup business loan.

Also Recommended: Read our review of the best startup business loans.

Business Loans for Startups

It's no secret that capital is the lifeblood of any business, especially a startup looking to scale fast. Startup business loans provide a great way to access money fast, but before you dive in, you should understand the basics of what startup business loans have to offer.

What Is a Startup Business Loan?

Business loans for startups offer capital to startups and small businesses – specifically, those that have bad credit or no credit history. These loans are similar to personal loans; however, they require more than a look at your personal credit score to qualify.

A startup business loan or small business loan is a method of obtaining capital for your business from a lender. Depending on the type of loan you choose to use (SBA loans, line of credit, equipment financing, etc.), business loans may require you to pay interest or offer up collateral.

How Do Startup Business Loans Work?

Business loans for startups require business owners to apply and meet eligibility requirements such as minimum credit score, time in business, and type of business. Some startup business loan providers may even require you to provide your business plan during the application process.

Once you are approved for a startup business loan, you will have repayment terms, which can vary from loan to loan and will likely pay interest.

How to Get a Business Loan for Your Startup

Startup business loans are a great way to get the capital you need to launch and grow your business. However, you first need to determine the right business loan for your startup. This starts with determining the right startup business loan for you, assessing your personal credit score and business credit, and finally gathering the proper documentation to apply for the business loan that's right for you.

1. Decide Which Loan is Best For Your Startup

Before you take out a loan for your startup, you'll want to make sure you fully understand the different kinds of startup loans. This will help you save time and energy when learning exactly how to get a business loan for your startup.

Lines of Credit

Lines of credit function similarly to a business credit card in that they give you access to a pool of funds that you can draw from as needed. You don't need to withdraw the entire amount but you are given a set limit that you can borrow from at any time.

This type of business loan is best for startups with seasonal or fluctuating working capital needs like a retailer. That's because these types of businesses will often pay a large upfront fee for their inventory but then be able to pay back the startup business loan as the buying season takes off.

SBA Loan

SBA stands for Small Business Administration, which is a government organization that provides support to small businesses through a variety of programs and services. 

One of the most popular programs is the SBA loan program, which offers more traditional business loans for a wide range of business purposes, including working capital, equipment, and real estate. Business loans from the SBA are best for companies that may not be able to get traditional financing due to factors like a lack of collateral or poor credit history.

Terms Loans

Similar to lines of credit, term loans offer you a set amount of money, but the major difference is you'll be given the entire amount in one transaction. Lines of credit allow you to take what you need when you need it, and terms are all upfront.

Startup loans like this are best for businesses that need a large amount of money for a specific purpose, like expanding their operations or buying new equipment. There are always time limits within which you need to pay back the money (e.g., one year, five years, 10 years, etc.).

Merchant Cash Advance

When startups are dealing with vendors and merchants, they will often offer what's known as a merchant cash advance. This is when you sell a portion of your future sales in exchange for an upfront lump sum of cash.

Businesses that have a lot of credit card sales will do best with this startup business loan because the repayment is based on a percentage of those sales. So, if you had a slow month in sales, your repayment would be lower.

Equipment Financing

Instead of putting your entire business on the line with a line of credit or term loans, equipment financing allows you to use the equipment itself as collateral.

This type of startup business loan is best for companies that need to finance expensive equipment like vehicles or machinery. The downside is that if you default on the loan, the lender can seize the equipment. However, this type of loan often has lower interest rates than other types of loans.

Business Credit Cards

One of the most simple ways to get a business loan is to apply for a business credit card. This is a good option if you have excellent personal credit and you don't need a lot of money.

If your business needs a small amount of money and can repay it quickly, this type of startup business loan is perfect. The downside is that business credit cards often have high interest rates, so you will want to make sure you can repay the debt quickly.

Peer-to-Peer Lending

Startups who aren't looking to have the large interest payments that are required from other loans can look to their peers for help. Peer-to-peer lending is when you get a loan from another person or group of people instead of a financial institution.

This type of startup loan is great if you have collateral or a personal guarantee to offer investors because you'll get the money without having to take on debt. The downside is that it can be difficult to find peer-to-peer lenders that are willing to lend out of their personal savings unless you have a good cause or a unique product.

2. Assess Your Credit Scores

Once you decide which startup loan you will be applying for, your next step will be to look over your personal credit score and business credit. Banks and institutions will use this data to determine whether or not you're eligible for the loan and what interest rate they'll offer based on your minimum credit score.

There are multiple sites that aggregate data from major credit reports and pull an average number for you to work from. You can also get copies of your credit reports from credit agencies. Fortunately, even if you have bad credit or don't meet the minimum credit score, there are many lenders that offer lower personal credit score requirements than others.

3. Gather Documents

Next, you'll want to gather all the documents that are required by your specific lender. The documents will vary based on the type of loan you're applying for, but they will usually require tax returns, business licenses, and financial statements. Some lenders will also ask for a detailed business plan so they can understand how you plan to use the money and what your goals are for the future.

4. Compare Lenders

Lastly, you'll want to compare multiple offers from different lenders to make sure you're getting the best deal. You can check out our review of the best business loans for startups. Some of the most important data points to look for are annual percentage rates, fees and other costs, and the lender's reputation.

Frequently Asked Questions

How much in loans can a startup business get?

The amount of loans a startup can get will depend on the type of loan they apply for, but the typical amount for a term loan is $500,000. This is assuming the startup has collateral down or has proven proof they are able to pay back the loan.

Can a startup get a loan with no collateral?

Startups can apply for an SBA loan, which offers loans without the need for collateral by requiring you to pay interest. These startup business loans typically offer respectful interest rates for small businesses.

What are the disadvantages of loans?

Business loans can often be difficult to pay back if the business doesn't do as well as planned. This can lead to high-interest rates and late payment fees which can put the business in a difficult financial position. Loans also tie up assets that could be used elsewhere in the business.

When should a company borrow money?

Startups will usually borrow money when they are first starting out to help with the initial costs of setting up the business. They might also borrow money later on to help fund growth or expansion plans.