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Small Business Loans for Startups

Small Business Loans for Startups; You might need to think outside the box when seeking funding for an early-stage startup. Learn more about your loan options.
Lauren Ward

Lauren Ward

Updated July 16, 2021
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Editor’s note: At Lantern, we strive to help you make financial decisions with confidence. To do this, we occasionally feature content that includes information about our partners and their products or services. We do not provide, endorse, or guarantee any third-party product, service, information or recommendations—and our opinions are our own.
One of the biggest challenges when you’re launching a startup is figuring out how to fund it. Small business loans for startups are often hard to qualify for since your business may not have any credit history or revenue history to evaluate. But even with the potential roadblocks, there are still plenty of options available to finance your new business. The trick is knowing how to find them.

What Is a Small Business Loan for a Startup?

Small business startup loans provide financing for early-stage companies. A traditional loan provides you with a lump sum of funds at the beginning of the loan term. After that, your business makes loan payments, which could be daily, weekly, or monthly, depending on the agreement with your lender, to pay back the loan, with interest. Typically, you can use traditional loan funds for just about anything related to your business, including inventory, payroll, or other operating expenses. Some types of specialty loans, however, limit your spending. Equipment financing, for instance, must go towards some type of equipment, although that includes a wide range of categories from heavy machinery to office equipment. One of the major benefits of a small business startup loan is that the extra financing can potentially fuel growth more quickly than just bootstrapping each stage of progress. Additionally, a startup loan can help you maintain ownership and control over your company rather than seeking outside investments. And while many lenders do like to see that you have some skin in the game and have invested in your business, startup financing can help you limit your personal risk and liability by using external funds.  

How Can You Get a Business Loan for a Startup?

If you’re wondering how to get a startup business loan, be prepared to have a business plan ready, whether you’re pre-revenue or have already launched. Not all lenders require a business plan as part of the loan application, but it’s still a helpful exercise to make sure you’re prepared to spend the funds you are applying for in a smart way. Also think about the money you want to borrow in depth. Calculate exactly how much money you actually want to borrow. Figure out if you need capital for one-time costs or ongoing expenses. Additionally, expect to prepare any financial statements, including:
  • Bank statements (both personal and business)
  • Tax returns (both personal and business)
  • Legal business documents, like your business license and articles of incorporation
  • Financial statements

What Are the Requirements for a Small Business Startup Loan?

All lenders have their own eligibility requirements. Here are some factors that most lenders look at when evaluating small business loan applications.
  • Credit Scores: Lenders typically look at both business and personal credit scores. And you may not have a business credit score if your startup is less than a year old. Your personal credit score should be at least 650 in order to help you qualify for business financing—and some lenders may require a higher number.
  • Business Age: Many lenders require that your business be open for at least two years before they will consider extending any credit to you. As a startup, you may need to bootstrap your expenses in the beginning, and then use a loan to scale your growth once you’re more established. 
  • Revenue and Cash Flow: Lenders want to know that you’ll be able to repay the business loan, so they’ll typically look at your revenue and cash flow as part of the application. There may be a minimum monthly or annual revenue requirement depending on the lender. 
In addition to exploring small business loan options, you might want to consider some business loan alternatives as well.

Where Can You Get a Startup Business Loan?

There are many different types of lenders who may be willing to work with  startups looking for financing. Here are some common ones to think about.
  • Online Lenders: Typically, faster approval and funding times
  • Traditional banks: Wider variety of financing options
  • Credit Unions: Competitive interest rates with a focus on local businesses
  • P2P Lenders: More flexible application criteria

Small Business Startup Loan Type Options

When you’re looking for the best small business loans for startups, you have a wide range of financing beyond loans available to think about. Business Line of Credit: A business line of credit (LOC) gives you on-demand financing to help cover operational expenses or financial emergencies. A startup is more likely to qualify for a short-term LOC. You may also need to secure the financing with collateral, such as real estate or other company assets. Equipment Financing: Equipment financing is a loan you use to purchase business equipment. It is typically secured by the assets you purchase with the funds. You may also need to offer a personal guarantee, which puts your own assets at risk if you default on the loan. In addition to heavy equipment, an equipment loan can be used for things like office furniture and technology.SBA 7(a) Loans: While SBA 7(a) loans go up to $5 million, you’ll likely qualify for much less as a startup. You also need to make a down payment of at least 15%. Loan terms range between 10 and 25 years, and interest rates are competitive. SBA Microloans: A microloan lets you borrow up to $50,000 for as long as six years. It’s designed for newly established businesses, making it a good option for startups. Both collateral and a personal guarantee are required. Invoice Financing: If your startup already has incoming revenue in the form of invoices, you may look into invoice factoring to help with your cash flow. The lender pays a percentage of your outstanding invoices. Once your customer pays the invoice, you get the remainder, minus the factoring fee. It can be quite expensive, and you typically pay more the longer an invoice goes unpaid.Loans for Startups with Bad Credit: Start up business loans for bad credit can help you finance your startup costs regardless of your personal history. It’s important to have some financials to share with a lender. You can also expect to pay high interest rates and be required to use some type of collateral to secure the loan. Small Business Crowdfunding: Crowdfunding your business can help you raise capital for the earliest stages of your startup. The most common option is reward-based crowdfunding, which allows you to exchange tier-based rewards for different donation levels. It also helps you build excitement around your product or service.

Pros and Cons of Small Business Loans for Startups 

There are both benefits and drawbacks to using a small business loan for your startup. Here’s a brief overview of each.

Pros

  • Faster Growth: One of the biggest advantages of using a small business loan to launch your startup is that you can grow much faster with that injection of capital. Ordering inventory in larger quantities, for instance, can save you money and help you jump on new opportunities. 
  • Working Capital. A loan can give your startup funds to work with before you start making enough money to support the business. 
  • Company Control: You also get to retain ownership in your company rather than opening up the doors to equity investors.

Cons

  • Costly. Qualifying for a small business loan as a startup can be tough, not to mention expensive. 
  • Puts You in Debt. Getting a loan means that your startup already has an ongoing financial obligation.
  • Risk of Losing Collateral. You also usually need to provide a personal guarantee and/or collateral, which brings in some personal risk. 
Try to objectively weigh the pros and cons of financing to choose the best path forward for your new business. 

Our Top Picks for Small Business Startup Lenders

Here are Lantern by SoFi’s top eight picks for small business startup lenders (in alphabetical order). We based our choices on criteria that include startup-friendly collateral requirements and time in business requirements, and whether the lender offered special programs for startups, among other factors. (The full breakdown of our rating methodology is given in the next section.) Our top selections here reflect which lenders met the criteria as of March 3, 2021.

Our Methodology for Determining Top Picks

To arrive at our choices for top lenders, we looked at the 30 banks and online lenders that ranked the highest by monthly search volume. We analyzed that list based on the following criteria: 
  • Minimum credit score required is 650 or below
  • Minimum time in business required is one year or less
  • Minimum annual revenue required is $100,000 or less
  • No collateral is required
  • Interest rates start at 20% or below
  • Maximum loan term is 25 years or longer
  • Maximum loan amount is $500,000 or higher
  • Simple application (online, no mailing or going into the bank required)
  • Time to funds is less than a week
  • Whether it offers 24/7 support (online or phone)
  • Special benefits/terms for the interest group startups
Whichever lenders best met the above criteria received the highest rankings. (Data was accurate as of March 3, 2021.)  

The Takeaway

Especially if you’re just starting up your business, it might be tempting to just take the first funding opportunity you get. But no matter what stage your business is at, it’s a good idea to explore all of your financing options before jumping into a decision. Business loan applications can be time-consuming, so it’s in your best interest to focus on those that are best suited for your needs and current situation. You can compare multiple small business loan options in one place using Lantern by Sofi’s comparison platform. Get one step closer to funding your startup today.
The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.SOLC0521091

About the Author

Lauren Ward

Lauren Ward

Lauren Ward is a personal finance expert with nearly a decade of experience writing online content. Her work has appeared on websites such as MSN, Time, and Bankrate. Lauren writes on a variety of personal finance topics for SoFi, including credit and banking.
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