Loans for start-up businesses come in all shapes and sizes, but typically, they’ve got one goal: to help you launch and grow your business.
These days, startup business loans don’t look like they used to. Sure, you’ve got the good old-fashioned bank loan, but now there are also incubators, grants, and crowdfunding, just to name a few.
So, what’s right for your startup? Should you even consider getting a loan at this point in time? And wait—what if you don’t have a credit background for your business?
We thought you might be curious about that. Which is why we’ve put together this post, helping you learn more about the loan programs that can help your business grow in 2024 and beyond.
Ready to fuel your rocket ship?
What is a startup business loan?
A startup business loan is a form of financial support for businesses that are lacking a substantial business or credit background.
When you’re looking at securing a loan, you’ve got options. Common loan types, like term loans or U.S. Small Business Administration (SBA) loans, are available for startups, but there are also alternative options like business credit cards or asset-based financing. But more on that later.
For founders who are less-than-traditional in how they source their funds, they can explore other loan types like crowdfunding so they can get the capital they need to kick-off their company, launch their product, or scaling up through new hires or locations.
Is your small business ready to take on a loan?
Got the itch to deliver a pitch? Then you might need to take on a loan to move your business idea from the whiteboard to the boardroom.
Here are four things to ask yourself to find the answer.
Do you have a credit score?
We mentioned earlier that your business might not actually have one established just yet—and that’s okay. In that case, lenders might look at your personal FICO Score. This score determines your creditworthiness by assessing five areas: your payment history, your current level of debt, types of credit you’ve used, the length of your credit history, and any new credit accounts you may have.
A score in the 600s is ideal for qualifying, but for some lenders, as low as 500 works, too.
Are your financial records in order?
Next up are your tax returns and financial records. To get your financing, you’ll need to meet what’s called a lender’s annual revenue requirements. Essentially, this number is how much your business makes in a fiscal year. Lenders typically want to see a range between $36,000 to $100,000 or higher.
If you’re not hitting those numbers, don’t worry: you’ve got options.
Some businesses haven’t actually gone into business yet. And if that’s the case for your startup, a small business grant from your government or even your local community might be more up your alley.
How long have you been in business?
Just because you’re a startup doesn’t mean you just, well, started up. In fact, in order to qualify for financing, most lenders require that you’ve been in business for a minimum of six months.
But like we said above, not every lender is the same, and not every type of loan has the same requirements.
For example, some institutions and lenders don’t have a minimum, or if they do, it’s a little less than the six-month mark. To make sure you meet the qualifications before you spend your time filling out a lengthy application, make sure you complete your research beforehand.
Do you have a business plan?
Your business plan is your company’s roadmap for growth—which is exactly why lenders want to see it. It identifies your company’s overall goals, mission, and plans for the future, and shows that you’ve put thought into what you’re building.
Your business plan also shows lenders that you’re thinking ahead. It adds credibility to your idea, and highlights the strategy behind your decisions. It also indicates how you’ll evaluate the outcomes, and how you’ll plan to overcome obstacles, including financial ones.
Ultimately, your business plan is proof that you’re serious about success, and that’s what a lender wants to see before they invest in you and your business.
Types of loans for startup businesses
Not every startup founder needs to follow the same route for securing funds. No matter the stage you’re at, how many employees you have, or how long you’ve been around, there’s probably a loan out there to help you and your business grow.
1. SBA Loans
Need a small loan for your small business or startup? The U.S. Small Business Administration (SBA) might just be the place to look. These SBA loans offer up to $50,000 and are administered by various nonprofit community lenders.
Qualifying for them is quite simple, but the funding might not always be enough for every borrower. In the 2023 fiscal year, for example, the average SBA microloan was just $15,643.
Another type of SBA loans is called the SBA 7(a) loan. This one is better suited to businesses that are able to provide collateral, like real estate, that the lender is able to sell if you were to default. Applying is a lengthy process and qualifications are strict, so start early and have all your ducks in a row if this is the route you plan to take.
2. Self financing
While not always the safest option, some small business owners decide to take out personal loans or use their own savings to finance their business or startup. This could look like a second mortgage, borrowing against a retirement account like a 401(k), or getting an unsecured loan.
Self financing can be an easier approach and take less time—especially if you’re having trouble getting a business loan or don’t want to share a piece of the pie with an investor—but remember: you’re putting your savings and personal assets on the line.
3. Grants
Grants have their name for a reason: you don’t have to pay back the money you’re given. That said, whether you’re exploring corporate, local, state, or federal small business grants, you’ll want to make sure that your business aligns with what the grantor is hoping to achieve.
Keep in mind that the application process might be super competitive, too.
Looking to see if you’re eligible and to see what’s out there? Check out Grants.gov. You can learn the ins-and-outs of applying for federal grant opportunities, and even get writing tips for your applications.
4. Friends or family
Have a friend or family member who’s offered to chip in? Consider the risks before you accept.
For example, if your brother Fredrik says he’s got a chunk of change to lend you, ask yourself: What are the terms of repayment? What if he wants a portion of the business? And more importantly, do you really want to give up some of your potential profits to a guy who still goes by “Fake-It-Til-He-Makes-It-Fred”?
While accepting money from the people closest to you can seem a whole lot easier than applying to other funding sources, it’s important to think about the personal side of things.
And you know what they say: this isn’t personal—it’s business.
5. Crowdfunding
Remember edible cups? The ostrich pillow? The Grilled Cheesus maker? All of these (very odd) products got funding. That’s the beauty of crowdsourcing for your financial needs.
Crowdfunding platforms, like Kickstarter and Indiegogo, can help you turn an idea into a campaign, securing you funds from people all over the world. When they give you money to back your product, they typically get a reward (like the product when it launches, for example) or even equity in the business.
The process might take longer, but who knows: depending on publicity and the market, you might get exactly what you need (or more) faster than you can say, “can I get ketchup for my grilled cheesus?”
6. Business line of credit
Business lines of credit are a different type of loan. You don’t receive the total amount upfront. Instead, you have to draw money from it, which has its limits.
That said, you’ll have more flexibility than a typical term loan because you only pay interest on the amount you borrow, which might only be a portion of your total line of credit.
7. Asset-based lending
This is a loan that’s secured by collateral like inventory, equipment, real estate, or other property owned by the borrower. Also called asset-based financing, this type of loan can be for a business that doesn’t have enough cash flow to cover a loan, or business credit to get approved. Instead, the business offers assets as collateral.
| GROWTH TIP: Need some guidance on how to grow your funds? Consider joining a startup incubator. These handy-dandy communities act as a springboard for businesses like yours, providing you with the tips, tools, and people you need to help you thrive as a founder. |
How to get a startup business loan
Before you start applying for a startup business loan, there are a few things you’ll need to do. Some of these steps might take longer than others, but by getting everything in order, you can increase your chances of getting the funds you need to jump into action.
Step 1: Create a business plan
Business plans aren’t only a necessity for the lender to see, but they help you determine just how much you’ll need to take your business to the next level.
Your business plan shows lenders that you’re planning with your brain—not your gut. It shows that your ideas are viable, and that there’s a market for what you’re putting into the world.
Step 2: Assess your personal credit
If you don’t have business credit, your personal credit history might help you qualify for financing. It can also help determine the rates and terms that you’ll receive if you’re approved.
Know your credit score before you go into the loan application, and if you need to, spend time improving it before you accept any funds.
Step 3: Explore your financing options
Once you know how much you need and the state of your personal or business credit, you can start to explore the different types of financing available and what kind would work best for your business.
In addition to how much you’ll need to achieve your goals, you’ll also want to consider how much you can afford to borrow and what your repayment schedule could look like.
For example, some lenders might have higher interest rates while others might be more flexible in their repayment options.
Step 4: Review, improve, apply
Once you’ve determined your financing route, you’ll want to make sure you’re eligible for applying.
To see if you’re qualified, you’ll review eligibility and application requirements, and potentially, follow a few more steps. These can include:
- Boosting your personal credit score if it’s not up to speed
- Improving your debt-to-income ratio by staying on top of bills and having a solid business budget in place
- Assessing your collateral, just in case you need to put it up to show lenders you’re credible and reliable
- Flexing your cash flow, so lenders can see that—if it’s already running—your business is dependable.
| GROWTH TIP: Beware of any business or personal no-credit-check loans. While those might seem like a quick fix to getting the funds you need, they could be a scam or come with high interest rates and sticky terms. |
Growing your business post-funding
Now that you’ve got your funds, are you ready to take your business to the next level? Homebase can help.
Homebase is an all-in-one platform that helps you schedule and pay your employees, and oh-so-much more. After putting in so much work to secure funding and loans for your small business, your next step is helping it grow: and that’s where we come in.
Smart businesses use Homebase for everything from HR compliance, to messaging teams about shift swaps, to tracking employee breaks.
Homebase can help you take control of your day-to-day operations. Get started for free.
FAQ about loans for startup businesses
Can government small business loans be used by startup businesses?
Yes, government loans can be used by startup businesses. Before applying, make sure you meet the criteria and that your plans match that of the lender and their expectations.
Because some government loans are small, you’ll also want to ensure that if you aren’t able to get the full amount you need, you have other options for funding.
What’s the difference between a startup loan and a grant?
Both start-up loans and grants are a great solution for founders to scale up their business, but they do have their differences—mainly, how, or if, you pay the funds back.
A loan is borrowed money, and is commonly paid back with interest. A grant is money that doesn’t need to be paid back, but how you spend the money might be up to your lender.
No matter which route you take for financing, remember to always look at the terms and conditions of your loan or grant.
Can I get a business loan with no money down?
Yes, you can get a loan without having to put money down. This is typically not a requirement. However, some lenders may want to see how invested you are in your business, whether that’s through your own money you’ve put in, or your time.
Remember: This is not legal advice. If you have questions about your particular situation, please consult a lawyer, CPA, or other appropriate professional advisor or agency.
