It can be hard to ignore the itch to start a new business, but a great idea isn’t enough for success. Often, you’ll need to invest a lot of time and money, both yours and from outside, to turn your idea into a viable business.
You may find getting a startup business loan for a new venture is more challenging than borrowing for an established business, especially if you don’t have good personal credit or experience in the industry. But many new founders have had success with different types of financing and funding.
What is a startup business loan?
Startup business loans aren’t a specific type of loan; rather, they are any type of loan used to open a new business. You might need this money to help develop a product or service, hire employees, lease space or equipment, and buy inventory. Startup loans can also include funding for businesses that have opened their doors but are still in the earliest stages.
Nine types of startup business loans and financing options
- Financing from friends or family
- SBA loans
- Local business financing
- Asset-based financing
- Business lines of credit
- Online term loans
Startup loans generally don’t require business credit or high revenue—lenders know they’re lending money to support a new idea. However, your personal credit and experience in the industry can affect your eligibility and loan terms. You can also use different types of financing to support your business. Here are nine common options.
Many new small business owners take out personal loans or dip into their savings to finance their businesses. You may be able to do this with an unsecured loan, business credit cards, or second mortgage, or by borrowing against a 401(k) or other retirement accounts.
These options can be helpful if you’re having trouble qualifying for a business loan or you want to fully own your business rather than selling part of it to an investor. However, you may also be putting your personal assets and savings at risk.
2. Financing from friends or family
You could also try to raise money from friends and family members. In exchange, you could offer to repay them with an ownership interest, or let them buy a portion of your business and potentially profit if it succeeds.
Your friends and family might not require a credit check, and may offer you better terms than what you could receive from other lenders. But consider what can happen to your personal relationships if your business fails and you can’t repay the loan.
3. SBA loans
The US Small Business Administration (SBA) doesn’t offer most SBA loans directly, but it partially guarantees loans offered through participating lenders. You can apply for different types of SBA loans depending on your business and how you plan to use the funds. Although the application and approval process can be lengthy, the guarantee can also make it easier to get a substantial loan on favorable terms, even if you don’t have great credit.
- The SBA 7(a) loan program is one of the most popular programs and offers up to $5 million in funding. In 2021, about 17% of SBA 7(a) loans went to startups.
- The SBA 504 loan program could be a good option if you’re buying real estate or equipment, but only 10% of those loans went to startups.
- The Community Advantage loan program is for businesses in underserved markets, and 45% of these loans went to startups in 2021.
- The SBA microloan program offers up to $50,000 to start or expand a business, although the SBA doesn’t say what share of those went to startups.
The SBA also has a lender matching tool you can use to find participating lenders and compare loan offers based on your specific needs.
4. Local business financing
You could also look for traditional business loans from local credit unions, community banks, and nonprofits. Although the rates, terms, and requirements can vary depending on the lender, you may find that smaller lenders are more open to working with you based on your personal experience than large banks or online lenders. Some lenders may also participate in local or statewide loan guarantee programs that are similar to the SBA’s programs.
With equity you’re raising money in exchange for a portion of your business, while with a loan or bond you’re taking on debt that must be repaid with interest. Donor crowdfunding, like GoFundMe campaigns, isn’t often used by startups because you have little or nothing to offer in return. But you could consider a rewards-based campaign and offer donors one of your business’s products or services in exchange for their contributions.
There are corporate, local, state, and federal grants for small business owners, and these can be a great option because you don’t need to repay the money. However, your business will need to align with the grantor’s goals, and there may be a competitive application process.
Grants.gov is a good starting point for finding federal small business grants. You can also search for a local Small Business Development Center, which can provide personalized advice for finding grants, financing, and running your business successfully.
7. Asset-based financing
You can also use business assets as collateral for a loan when you’re starting a business. These can include business vehicle loans, equipment financing, and commercial real estate loans. Sometimes leasing equipment makes more sense than buying. With an operating lease you’re renting the equipment with an option to buy or return it at the end of the lease period. A capital lease, which is more common, is similar to a rent-to-own agreement.
8. Business lines of credit
A business line of credit can give you continuing access to funding for your startup. Unlike with a loan, you won’t receive the entire loan amount upfront. Instead, you draw money from your line of credit, which will have a ceiling on how much you can borrow. You’ll also have more flexibility than you would with a term loan because you only pay interest on the amount you borrow.
9. Online term loans
Online business loans are often term loans, which means you receive the entire loan amount when you accept the loan and then make regular payments over a predefined term until the loan is repaid.
Online lenders may also have easier qualifications and a faster application process than traditional lenders, and they might use modern techniques (such as connecting to and analyzing your bank account) to determine who qualifies.
Online lenders such as BlueVine and Fundbox offer lines of credit to startups that have only been in business for six months and three months, respectively. Small businesses can get a loan through Shopify Capital without requiring a personal credit check.
How to get a startup business loan
- Create a business plan.
- Evaluate your personal credit.
- Compare different types of financing.
- Apply for financing.
You may want or need multiple rounds of funding to get your idea off the ground, and the specifics will depend on the options you choose. However, the basic steps start with preparing your pitch, reviewing your qualifications, and seeing what you can qualify for at the time.
- Create a business plan. Lenders want to see that you’ve thought through the challenges and opportunities that will come with your new business. Include any relevant information about your experience running a business or working in the industry.
- Evaluate your personal credit. Your personal credit may be a factor in whether you qualify for financing and the rates and terms you receive. Many free apps and financial accounts let you check your credit scores for free. See where you stand and what you can do to improve your credit score.
- Compare different types of financing. Consider how much money you need, when you need it, and how much you can afford to repay as you review the options and home in on your top choices.
- Apply for financing. Review the eligibility and application requirements and apply with several lenders or organizations. Compare the offers you receive to determine which will be the best fit.
Startup business loans FAQ
How can I get a loan to open my own business?
There are many ways to get a startup business loan for a new business. Consider using a personal loan, credit cards, borrowing from friends and family, crowdfunding, or getting a loan from a financial institution.
Can I get a business loan with no money down?
You generally don’t need to put money down to get a business loan unless you’re getting an asset-back loan, such as a business auto loan or equipment financing. However, some lenders may want to see that you’ve invested your time or money in your business idea.
How do I finance a startup business?
You can finance a startup using your personal savings or assets, raising money from friends and family, borrowing money from individuals, or by taking out a business loan or line of credit. Many businesses will also use various types of financing at different stages.
What credit score is needed for a startup business loan?
The credit score you need for a startup business loan can depend on the type of loan and the lender, but having a personal credit score that’s at least in the high 600s (the maximum is 850) can be helpful. However, some types of financing, such as crowdfunding, don’t require good credit.