Best Startup Business Loans

Starting a new business is exciting. But when you’re just getting your business off the ground, you might struggle to secure the money you need through traditional financing methods. If you can’t get a small business loan, you aren’t out of options. Consider business loan alternatives, such as a personal loan, business credit card, or even a loan from family and friends. We’ll cover how to secure financing for your new business by these alternative means and what to watch out for. 

Compare personal loans for startup businesses

Ways to finance a business startup

Personal loans

Personal loans are installment loans that allow individuals to borrow a lump sum and repay it, plus interest and fees, over a set term that can last from a few months to over 10 years, depending on the lender and loan purpose. 

They’re offered by a wide variety of banks, credit unions, and alternative lenders across the U.S. Personal loans can be a very good option if you can’t qualify for other types of business funding.

While many lenders don’t offer personal loans for business purposes, the Credible partner lenders in the table above do. You may need to start your application on the lender’s website to qualify for a business loan.

It’s also worth noting that approval will be based on your personal information (credit profile and income), and you’ll be responsible for the loan even if the business fails.

Learn More: What Are the Requirements for a Personal Loan?

SBA loans

If your business is 100% new, a Small Business Administration (SBA) microloan is likely your best bet since it’s designed to help businesses start and expand. If you already have an operating business, you may also be eligible for other SBA loan types:

• Microloan program: Loans up to $50,000 are available for a wide range of startup business needs, such as working capital, machinery, equipment, supplies, fixtures, inventory, or furniture. New businesses not yet in operation are often eligible for this type of loan.
• 7(a) loan program: Loans up to $5 million are available for real estate needs, working capital, debt refinancing, machinery, equipment, furniture, fixtures, changes of ownership, and supplies. To be eligible for a 7(a) loan, you must have an operating business.
• 504 loan program: Loans up to $5.5 million are available for new facilities, land, existing buildings, machinery, equipment, and more. They may not be used for working capital, inventory, debt consolidation or refinancing, speculation, or investment in rental real estate. To qualify for a 504 loan, you must have an operating business.

While the SBA sets the rules and backs the loans, borrowers apply for and get the funds through a network of approved lenders.

Business credit cards

Business credit cards are credit cards designed for business owners that can be used to finance business expenses. Like personal credit cards, they come with a credit line, a monthly minimum payment, an annual percentage rate (APR), and, often, rewards and benefits. To qualify, you’ll need to be a sole proprietor with income if you don’t have a business with an EIN (employer identification number). You may need to provide a personal guarantee or a security deposit due to your lack of business credit history.

Equipment financing

Equipment financing involves taking out a loan to purchase equipment for your business, with the equipment as collateral for the loan. Many banks, credit unions, alternative lenders, and equipment dealers offer equipment loans. And they can be easier to qualify for than an unsecured loan since the collateral reduces the lender’s risk.

Borrowing money from friends and family

Sometimes the best place to turn for funding is to those who know and believe in you. Many startup founders ask their inner circle of friends and family members for loans before looking to institutions. Friends and family often don't base their lending decisions on your credit or income, and offer more favorable terms than you could get elsewhere.

Business grants

Business grants are amounts of money awarded to business owners that don’t have to be paid back. They’re often given by the government or private organizations in an effort to move initiatives forward or support underserved populations.

You can find grant opportunities on grants.gov, by visiting your local Small Business Development Center, or by performing a search online. While an ideal funding source, they can be hard to get due to high levels of competition and program restrictions.

Crowdfunding

Crowdfunding involves asking the public to fund your business. Sites like Kickstarter allow you to create a campaign page where you explain what you’re trying to do and the amount of money you need. You then promote your campaign and try to get people to contribute. Companies often offer something in exchange for donations, such as a product if the campaign is successful.

Angel investors

Angel investors are individuals who invest money in startup businesses in exchange for equity. You can find them via search engines, on professional networking sites like LinkedIn, and on platforms like the Angel Investment Network.

Venture capital

Another route similar to getting funds from angel investors is seeking funds from venture capital (VC) firms. VCs also offer you money in exchange for equity. However, instead of a single investor giving you the money, it’s a firm that manages funds from a collection of investors known as limited partners. You can find VCs online in directories, on social media, or by performing a search on Google.

Pros and cons of startup business loans

Like any financial decision, getting a startup business loan has advantages and disadvantages. Note that pros and cons may differ, depending on what type of startup business loan you get.

Pros

• Low interest rates: Lower interest rates typically reduce the cost of borrowing, and business loans tend to have lower interest rates than other types of financing — in some cases, much lower. According to Federal Reserve data, the average interest rate on new, fixed-rate business loans is around 7.8% and the average interest rate on two-year personal loans is 11.14%. By contrast, the average interest rate on credit cards is 21.39%.
• Varied loan amounts: Online lender Upgrade offers personal loans for business between $1,000 and $50,000, while Upstart offers personal loans up to $75,000 for business. SBA loan amounts can range from $500 to $5.5 million, depending on the loan program.
• Some loan types have fast funding: Many personal loan lenders can process applications and send funds within days or the same day you apply. Some banks and credit unions also offer same-day funding for current customers. Fast funding, however, is not typically an attribute of SBA loans.

Cons

• Eligibility requirements: Some business loans have requirements that might be challenging for a startup. For example, some lenders may require (or prefer) that your business has been in operation for at least two years. Startups that don't meet a lender's minimum requirement might not be approved or may have to submit business projections and other documentation to be considered.
• Application requirements: A business loan application requires a lot more documentation than applying for a personal loan. Depending on the lender, you may have to submit a profit and loss statement, a balance sheet, articles of incorporation, bank statements from you and others with an ownership interest in your company, and other documents.
• Debt obligation: Any type of loan involves taking on debt that must be repaid according to the terms of the loan agreement. If you're uncertain about your startup's immediate prospects, be cautious about committing to a long-term loan.

How to qualify and get a startup business loan

The path to funding for your business’ startup costs may not be as difficult as you think. After all, roughly 5.5 million new businesses open every year in the U.S. Why not yours?

Here’s how to qualify and get a startup business loan for your new endeavor:

1. Determine the right source of funding

As we’ve seen, there are many ways to get financing for your new business, from personal loans and business credit cards to SBA loans and business grants. Weigh the options carefully, and remember that you don’t have to limit yourself to one source of funding.

For instance, you might apply for a personal loan just to cover general startup costs, like launching a new website, building a prototype product, marketing your services, or leasing a space. Meanwhile, you might get a business credit card to cover recurring expenses, like internet and phone, while equipment financing can come in handy if your business requires specialized equipment.

No matter what type of business you’re launching, check if you’re eligible for SBA loans. SBA-guaranteed loans have the most competitive terms, may come with counseling and education as you launch your business, and might not require collateral.

2. Review qualification requirements

Before applying for any type of loan, make sure you meet all the eligibility criteria, including credit score, debt-to-income ratio, and collateral requirements. If you’re considering a personal loan, verify that each lender you’re considering allows you to use the loan for business purposes. While you can use a personal loan for almost anything, some lenders restrict business expenses.

If you’re having trouble meeting qualification requirements for personal loans, credit cards, or equipment financing, an SBA microloan may still be possible, even if you have poor credit.

3. Compare multiple options

Assuming you’re moving forward with a personal loan, SBA loan, or business credit card, take your time to review multiple options. Use an online loan marketplace to see multiple lenders in one place and compare factors such as:

• Interest rates
• Origination fees
• Late fees
• Autopay discounts
• Borrowing amounts
• Repayment terms
• Collateral requirements
• Whether the rate is fixed or variable
• Monthly payments

You can compare similar factors for SBA loans, if you qualify. The SBA includes a full list of participating microlenders to start your research.

For credit cards, think not just about APRs but, if eligible, rewards and sign-up bonuses that could help make running your business slightly more affordable.

4. Gather appropriate documentation and follow the steps to apply

Once you’ve figured out the right path forward, you’ll need to collect a wide range of documentation.

Personal loans generally require the least amount of documentation; recent pay stubs, profit and loss statements, bank statements, or W-2s might be sufficient. Business loans through the SBA, however, require more thorough documentation, including business licensure, legal documents, a business plan, and more thorough financial documents.

Collect these documents and follow the instructions online to apply (or get help in person at a local bank or credit union). If possible, see if lenders offer prequalification; for instance, most online personal loan lenders allow you to prequalify and see potential rates, borrowing amounts, and fees with only a soft credit inquiry. When you’re ready to apply for your chosen loan, however, there will be a hard credit check (which could ding your credit score for up to one year).

How to get a business loan with bad credit

If you’re seeking a business loan but have bad credit, you may run into difficulties. Why? Because when businesses don’t have established credit or income, lenders often look at the owner’s financials. If your personal credit isn’t in good shape, they are more likely to deny your application.

However, you still have a few options. 

• SBA microloan: The SBA doesn’t set a minimum credit score for microloans — its partner lenders might, but credit requirements tend to be flexible. Collateral, a solid business plan, or industry experience could help offset a low credit score. 
• Friends and family: Your friends and family members likely won’t check your credit or finances before lending to you. Instead, they’ll base the decision on their history with you. 
• Bad credit lenders: Certain personal loan lenders are willing to lend to individuals who have a FICO credit score below 580. While you often can’t borrow large amounts or get low rates, you may be able to get a loan large enough to get started.