Most new businesses require more capital than they believe they may need to get off the ground. It was once considerably harder to get a loan for startups because lenders traditionally saw them as having little to no business history. Luckily there are financing methods geared specifically for such entrepreneurial ventures.
You may be wondering about how to get a startup business loan to secure funding for your new business. How you decide to bankroll your business may affect the way it is organized, managed, and expanded. No matter which option, or options, you choose, one thing is for sure—starting a business is expensive.1 Choosing the most suitable loan or blend of loans that best fits and serves your business is key to success and growth. Here are a few of the most common approaches for funding a business startup.
1. SBA loans
The Small Business Administration (SBA), a government agency, defines their role as: “… working with lenders to provide loans to small businesses. The agency doesn’t lend money directly to small business owners. Instead, it sets guidelines for loans made by its partnering lenders, community development organizations, and micro-lending institutions. The SBA reduces risk for lenders and makes it easier for them to access capital. That makes it easier for small businesses to get loans.”2
Pros: Low interest rates, favorable repayment terms, low down payments
Cons: May have a longer approval process than other lenders, good credit is typically required
2. Business line of credit
Akin to a credit card, this option is one in which a bank agrees to loan you a set limit that cannot be exceeded. The nice part, however, is that like a credit card, you’re able to pay it down, and continue to spend up to your limit repeatedly.3,4
Pros: Fast and flexible, backed by a bank
Cons: High and sometimes variable interest rates, good credit is typically required, short repayment window
Crowdfunding is a purely digital, low risk method relying on virality, shareability, and demand in the market. This method requires thoughtful branding and an incredibly well-crafted creative pitch that blends copy, video, images, animations, and illustrations.3,5
Pros: Interest free funding, generally simple to set up
Cons: Exceedingly crowded space, something is usually expected in return from backers (early access, discounts, perks, etc.)
4. Angel investors
Angel Investors are wealthy individuals who see potential in your business and are willing to invest large sums of cash. These are the people who, after thorough examination of your business plan, are willing to take the large risk of investment in hopes of a large reward.3,6
Pros: Fast cash, most often reaches a fully funded phase quickly
Cons: Typically require you to give up equity, investors are often involved with or contribute to business decisions
5. Venture capitalists
Venture capitalists are firms that take a business from idea to market at break-neck speed, most often funding the business in phases or series called “rounds”. They are usually organizations with far reaching influence and the means and methods to put something groundbreaking into the market.
Pros: Speed and agility of a massive, well-connected organization backing and fully funding the idea
Cons: Almost always require equity in the business, most often get a say in executive decisions
6. Startup consultants
Just as it sounds, these are individuals or small groups of highly skilled specialists who focus on a specific area of your business to get you better prepared for a big pitch to larger organizations. They’re not part of your team but will work closely with your team preparing for a pitch and ensuring every detail is examined with a skillful eye.4,7
Pros: An expert outside perspective bringing new methods to the table, they’ve worked with other clients and investors and can help network and open doors that would otherwise be closed
Cons: Can become costly, lack of passion or “love” for your company, their advice does not always pay off
Microlenders are more flexible than traditional bank loans when it comes to applications and repayment plans. Microlenders can be made up of non-profits or even local community groups. They will typically look at things like personal references and collateral instead of just your credit score.3,7
Pros: Good for those with little business experience and/or a less than sterling credit history
Cons: Usually limited to $50,000 USD, higher than average interest rates, can be slow to get fully funded if you need a lot of cash
8. Government grants
Each year the federal government sets aside a predetermined sum of money across a multitude of categories to award to small businesses, startups, research groups, etc. However, these grants do come with caveats. If you are to “win” such a grant, the government gets a say in how the money should be spent.3,4,7
Pros: Essentially “free” money, no fees apply
Cons: Extraordinarily competitive, unusually difficult and lengthy proposal process
9. Series funding
Series funding is a multi-stage, multi-investor type of strategy where capital is raised in “series” often for more or less equity depending on what round of investment an individual or organization feels comfortable joining. The earlier a party enters, the more equity they stand to gain, and the higher their risk. Typically seen as seed funding, and then series A through C with seed funding being the highest risk.8
Pros: Connections to a diversified network of investors, access to large sums of funding during each stage
Cons: Requires giving up equity, often investors at high levels will want to make or influence business decisions and direction
10. Equipment financing
This is a smart option for business owners of restaurants, manufacturers, printers, etc. who need equipment but also require cash for other business-related needs. The equipment itself serves as collateral, and financing of this type can help you get your business up and running faster without spending all your cash up front.9
Pros: Fast way to get your business up and running, you own the equipment once it’s paid off, minimum credit score required
Cons: Variable interest rates can be higher than average, occasionally a minimum amount must be borrowed
11. Personal funds
The most common way to get your startup funded is to do it yourself. This means using your personal savings. This approach should be examined and approached with extreme caution and, preferably, with the advice of a financial professional.
Pros: There’s no one to answer to except yourself or your team, all monies made are kept in-house, flexibility and speed to make instant decisions on how to spend money
Cons: Extremely risky, you need a long enough runway to remain solvent and to pay (or not pay) yourself.
How to qualify for a startup business loan
Finding the right loan for your startup can be time consuming. We’ve covered 11 of the most popular small business loans, but there are still more options out there. The process of qualifying for a startup business loan is as varied as the loans themselves, but in general, most lenders will examine the following criteria: credit, collateral, cash flow, the amount of time you’ve spent in other business ventures, your business plan, the industry you plan on getting into, and the amount of debt you’re carrying in relation to your income.10
How to apply for a startup business loan
The type of loan you’re looking to secure for your business will determine how you apply for it. No matter where you decide to apply for your business startup loan, you should know the lender’s qualifications, have as much of your financial history in order as possible, and have a strong business plan that is well written, designed, and easy to follow.4,9,10
For more resources to help you build your business, visit the Nationwide Business Solutions Center.