How We Choose the Best Startup Business Loans
- Loan Features: Review your business plan and determine approximately how much you need to borrow and how your business will be able to pay it back. Startups often need cash quickly but don’t want to hold debt long-term, so consider fast funding times and shorter loan terms.
- Application process: Most applications can be done online in as little as 10 minutes. However, it’s important to check if the company does a hard pull on your credit during the application phase, as that may limit your ability to shop around.
- Interest rates and fees: Compare interest rates and fees when shopping for your startup loan. Fees may include loan origination fees, administrative fees, early payoff fees, late payment fees, and more.
- Qualification process: Know each lender’s basic qualifications and see if your business meets them. This will include your credit score, length of time in business, annual revenue, and other business history requirements.
- Customer support: Do you prefer to speak to a live customer support representative or do you prefer online chat options? Know what type of support is offered and what their business hours are.
- Online user reviews: Check reviews on independent review sites, such as Trustpilot, to see what users have to say about the lender. Read both negative and positive reviews to get overarching thoughts about the company.
- Perks and Bonuses: Consider specified service offerings like payment flexibility, advertising transparency, and advanced technology. Startups often need payment flexibility when they are first getting set up.
The True Business Startup Costs
Entrepreneurs started nearly 5.4 million businesses last year, according to Census data. But not all of those businesses will succeed. Per the U.S. Bureau of Labor Statistics, about 10-20% of businesses fail before their first anniversary. Only about half make it to five years in operation.
While some businesses are more costly to get going than others, all new businesses will require some form of capital. It’s best to make a detailed business and financial plan before getting your business off the ground. Make sure to plan for the unexpected, too.
- Equipment: Your costs will vary widely depending on the industry and nature of your business. For example, a professional services microbusiness might get started with just a few thousand dollars worth of computer equipment. A restaurant business, however, might require an initial equipment investment of up to $125,000.
- Physical office space if needed: Real estate costs vary by location, but expect to spend at least $300 per employee each month on office space.
- Office supplies and furniture: Plan to spend at least $200 per employee per month on items like desks, chairs, headsets, paper, ink, toner, etc.
- Business licenses and permits: These costs will vary depending on the industry and where your business operates. For example, an initial LLC registration is $50 in Iowa but $500 in Massachusetts.
- Insurance: Expect to pay a few hundred a month on insurance policies, which may include general and professional liability (around $50 per month each), business owner’s (around $80 per month), and workers’ compensation (between $80 and $90 per month).
- Payroll expenses: Per the Small Business Administration, each employee costs 1.25 to 1.4 times their salary based on factors like payroll tax, state and federal unemployment, and training.
- Legal services: Business lawyers typically charge an hourly rate ($150 - $1,000 per hour) or a flat fee (e.g., $750 to draw up a lease). Your costs will vary depending on your requirements.
- Accounting: These costs may include accounting software, a CPA or tax preparer, and a bookkeeper. Expect to pay around $1,000 a year or more on these expenses.
- Marketing and advertising: Plan to allocate around 7% of your budget to marketing and advertising expenses. This doesn’t include your website, which will cost a few hundred dollars for a Squarespace or WordPress site or a few thousand dollars for a professionally designed site.
- Inventory: Most experts advise keeping 10% of your projected annual inventory sales in stock at any time. So, if you expect to sell $50,000 worth of products, you’ll need to spend $5,000 in startup inventory costs.
- Utilities: If you rent office space, expect to spend $2.14 per square foot on utilities, per Building Owners and Managers Association International.
For these expenses and more, a startup business loan can come in handy. By having the financial part taken care of, you can focus on running your business and bringing in a profit.
Here’s an in-depth guide to calculating startup costs >>
What Is a Startup Business Loan?
A startup business loan is used by brand-new companies to fund initial setup costs. These businesses have little to no prior operational experience and lack financial history, which typically coincides with higher rates and shorter terms than other types of financing.
Given the aforementioned hurdles, new businesses need to be resourceful regarding financing. To find the best startup business loan for your business, you’ll need to evaluate a wide range of products, including credit cards, microloans, and asset-based borrowing.
How Startup Business Loans Work
Startup business loans can help finance initial investments in equipment, inventory, and staff. They can also help you establish a good credit history and lay the groundwork for expansion.
To secure a startup business loan, you’ll need a business plan, expense sheet, and financial projections. Lenders will use these and factors like your personal credit score to determine whether to give you a loan.
Keep in mind that you’ll need to find a lender who specializes in loans for startups or doesn’t have a time-in-business requirement to qualify. Consider banks, credit unions, and online lenders.
Types of Startup Business Loans
Many brand-new business ventures find it difficult to get funding. A Pepperdine University study showed that only 34% of small businesses secure funding through a bank, compared to 75% of their larger competitors. But there are options available, including:
- Lenders that specialize in new businesses: We’ve covered many of these lenders above. While eligibility requirements can be stringent, good rates are available to those that qualify.
- SBA loans: getting funding from the SBA may take weeks or months (as opposed to days), but rates and terms are oftentimes much better.
- Peer-to-peer lending: This type of financing cuts out the middleman and allows you to borrow money directly from another person or company.
- Credit cards: Credit cards are the most common source of small business lending, largely due to the fact they don’t require long business histories.
- Asset-based financing: Asset-based lending is a type of secured business loan that uses your property as collateral for the loan. The risk with this type of financing is the potential loss of the asset if you can’t make payments.
- Personal loans for business: This type of loan is based on your personal credit score, not your business credit score or time in business.
How to Qualify for Startup Business Loans
Requirements vary by lender. In general, expect to provide the following information in order to get a startup business loan:
- A business plan
- Financial projections
- Financial records including bank statements
- Business licenses and registrations
- Personal credit score
You may also have to provide a personal guarantee or collateral, depending on the lender and type of loan.
Legal Requirements for Starting a Small Business
When starting a small business, you need to make sure you’re in compliance with your state’s rules and regulations. Spending some time learning the legal requirements for your small business will benefit you greatly in the future.
In most circumstances, you’ll need a business name, business license, and a tax ID. In addition, you’ll need to decide how you want to set up your business. Common entities include sole proprietorships, partnerships, C-corporations, S-corporations, and LLCs. All have different tax implications and business regulations to qualify.
We have a few state-specific guides on starting a business. They include:
Both funding your business and making sure your business can legally operate are two of the most important features of starting a small business. Once these things are in order, you can focus on the actual business itself.
How to Apply for a Startup Business Loan
A typical startup business loan application process will look like this:
Step 1: Write a business plan In addition to making your case to potential lenders, a good business plan will help you determine your financing needs. Remember to include market research describing your target market and how you can serve it better than your competitors.
Step 2: Choose a lender As a startup, your options will be more limited than an organization with more time in business. Look at online and traditional lenders based on their credit and revenue requirements.
Step 3: Gather the required materials In addition to a business plan, you will likely need personal financial statements and business licenses
Step 4: Follow the lender’s application instructions Most online lenders have a fairly straightforward online application process. Be sure to read the fine print regarding terms, interest rates, and other conditions before accepting a loan offer.
Alternatives to Startup Business Loans
Starting a business requires capital, but you don’t always have to use an unsecured small business loan to get the necessary financing. Other options you may want to consider include:
Crowdfunding is raising money for your business through online donations. Popular websites to do this on include GoFundMe, KickStarter, Indiegogo, Patreon, and Crowdfunder. While it’s free to start a crowdfunding campaign, the platforms do charge a payment processing fee and they take a small percentage of the money you raise. You can read more about the different types of crowdfunding here.
Friends and Family
Family and friends can help fund your business via loans, gifts, or equity investments. Regardless of which form their support takes, be sure to write out all terms of the agreement and have the parties sign the documents.
Depending on your industry and profile, you may be able to secure funding in the form of federal, state, or private grants. The U.S. Chamber of Commerce provides a list of some of these opportunities, including grants for minority-owned businesses, early-career scientists, and biomedical technology firms. You can learn more about grant programs at Grants.gov.
Home Equity Loan
If you own your own home, you can consider using a home equity loan or line of credit to finance your new business. With the increase in housing prices recently, there’s a good chance you’re sitting on substantial equity. Home equity loans come with significantly lower interest rates than other means of borrowing, making them an appealing option. Keep in mind, though, that your house is used as collateral. If you can’t make your payments, you are at risk of losing your house.
Your Own Personal Savings
If you have a savings account, it may be worth considering using some of those funds to finance your new business. We understand it can feel scary to lose your nest egg, but it can be worth it in the long-run to avoid unnecessary fees and high rates.
Here are 10 additional ways to raise capital for your small business
While getting a business up and running is a task, several online lenders have good loan offerings that can provide you with the backing you need to get started. Online lenders often provide better funding options than traditional banks, with more lenient conditions and repayment terms.