It can be hard to ignore the desire to start a new business, but success requires more than just a great idea. Turning an idea into a viable business often requires a lot of investment of time and money, both from yourself and from outside parties.
Obtaining a startup business loan for a new venture may feel more difficult than borrowing for an established business, especially if you don't have great personal credit or industry experience. However, many new founders find success with different types of funding and funding.
What is start-up financing?
Startup business loans are not a specific type of loan. Rather, it is any type of loan used to start a new business. This money may be needed to develop products and services, hire employees, lease space and equipment, and purchase inventory. Startup loans may also include funding for businesses that have opened but are still in their early stages.
Startup loans usually do not require business credit or high profits. Lenders know that they lend money to support new ideas. However, your personal credit and industry experience may affect your qualifications and loan terms. You can also support your business with different types of loans. Here are nine common options.
1. Self-funding
Many new small business owners take out personal loans or dip into their savings to finance their businesses. This may be accomplished by taking out an unsecured loan, business credit card, second mortgage, or borrowing from a 401(k) or other retirement account.
These options are useful if you have trouble qualifying for a business loan or if you want to own a portion of your business outright rather than selling it to an investor. However, it can also put your personal assets and savings at risk.
2. Funding from friends and family
You can also try raising funds from friends and family. Instead, you could offer to pay them back with ownership, or even offer to buy out a portion of your business, potentially making a profit if it's successful.
Your friends and family may be able to offer you better terms than other lenders without requiring a credit check. But consider what happens to your personal relationships if your business fails and you are unable to repay your loans.
3.SBA loan
The U.S. Small Business Administration (SBA) does not service most SBA loans directly, but it partially guarantees loans provided through participating financial institutions. There are different types of SBA loans you can apply for depending on your business and how you plan to use the funds. The application and approval process can be time-consuming, but a guarantee can make it easier to get a large loan with favorable terms, even if your credit score isn't great.
- of SBA 7(a) The loan program is one of the most popular, offering up to $5 million in funding.
- of SBA504 If you are purchasing real estate or equipment, a loan program may be a good option.
- Community benefits The financing program targets businesses in underserved markets.
- SBA micro loan This program provides up to $50,000 to start or expand your business.
The SBA also has a lender matching tool that you can use to search participating lenders and compare loan offers based on your specific needs.
4. Local business financing
You can also look for traditional business loans offered by local credit unions, community banks, and nonprofit organizations. Rates, terms, and requirements may vary by lender, but smaller lenders may be more willing to work with you than large banks or online lenders based on their personal experience. Some lenders may also participate in local or state-wide loan guarantee programs similar to the SBA's programs.
5. Crowdfunding
Online crowdfunding platforms help you organize campaigns and raise money from strangers and people you know. There are four common types of crowdfunding: debt, equity, donations, and rewards.
Stocks allow you to raise money in exchange for a piece of your business, while loans and bonds incur debt that must be repaid with interest. Donor crowdfunding, like GoFundMe campaigns, is not commonly used by startups because they offer little or nothing in return. But you can also consider reward-based campaigns and offer donors one of your business' products or services in exchange for a donation.
6. Grants
There are corporate, local, state, and federal grants for small business owners that can be a good option because you don't have to pay the money back. However, your business must be aligned with the grantor's goals, and there may be competing application processes.
Grants.gov is a good starting point for finding federal small business grants. You can also search for local small business development centers to find grants, raise capital, and provide personalized advice to help your business succeed.
Loan repayment tips: Want to know how much it costs to get a loan? Try our free business loan calculator.
7. Asset-based finance
When starting a business, you can also obtain a loan using your business assets as collateral. These include business vehicle loans, equipment loans, commercial real estate loans, and more. In some cases, it may make more sense to lease equipment than to purchase it. An operating lease involves renting equipment with the option to purchase or return it at the end of the lease term. More commonly, capital leases are similar to rental agreements.
8. Business Line of Credit
A business line of credit provides continued access to capital for your startup. Unlike a loan, you cannot receive the entire loan amount upfront. Instead, you withdraw money from a line of credit that limits the amount you can borrow. They are also more flexible than term loans because you only pay interest on the amount you borrow.
9. Online term loan
Online business loans are often term loans. This means that you receive the total loan amount when you accept the loan, and then make regular payments over a predefined period of time until the loan is repaid.
Online lenders may be easier to qualify for than traditional lenders, may have a faster application process, and may use the latest technology (such as bank account connections and analytics) to determine eligibility. There is also.
Online lenders like BlueVine and Fundbox offer lines of credit to startups that are only six and three months old, respectively. Small businesses can obtain financing through Shopify Capital without the need for a personal credit check.
How to get a start-up loan
Your idea may require multiple rounds of funding or financing to get off the ground. The details vary depending on the option you select. However, the basic steps start with preparing your pitch, checking your qualifications, and seeing what you qualify for at the time.
- Create a business plan. Lenders want to know that you have adequately considered the challenges and opportunities that come with a new business. Please include any relevant information about your experience running a business or working in the industry.
- Evaluate your personal credit. Your personal credit can affect whether you qualify for a loan and the interest rate and terms you receive. Many free apps and financial accounts let you check your credit score for free. Find out where you stand and what you can do to improve your credit score.
- Let's compare different types of loans. As you consider your options and analyze your top choices, consider how much you need, when you'll need it, and what you can afford to pay back.
- Apply for financing. Check eligibility and application requirements and apply to multiple financial institutions or organizations. Compare the offers you receive and decide which one is best for you.
Frequently asked questions about startup financing
How can I get a loan to open my own business?
There are many ways to obtain start-up financing for your new business. Consider using a personal loan, credit card, borrowing from friends and family, crowdfunding, or financing from a financial institution.
Can I get a business loan without a down payment?
Unless you're getting an asset-backed loan, such as a business auto loan or equipment loan, you usually don't need to put down a down payment to get a business loan. However, some lenders may want to see that you have invested time and money into your business idea.
How can I fund my startup?
You can finance your startup using your personal savings and assets, raising money from friends and family, borrowing money from individuals, or taking out a business loan or line of credit. Many businesses end up using different types of financing at different stages.
What credit score do I need for a startup business loan?
The credit score required for a startup business loan varies by loan type and lender, but it may be helpful to have a personal credit score of at least the low 600s (850 is the highest). However, some types of financing, such as crowdfunding, do not require good credit.