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What is a Startup Small Business Loan?

A startup small business loan is any loan which can be used by a business that has only existed a short time. There is not an exact definition of how long a business can exist or how large it can grow before it is no longer a startup. A startup refers to a business with a lot of growth potential that has not yet met that potential. Typically, startups have existed for less than two years.
There are many options to choose from including SBA loans, micro-loans, lines of credit, merchant cash advances, and business credit cards. Since most startups, by their nature, do not have much business credit history, lenders tend to rely more heavily on the entrepreneur’s personal credit history and the quality of their business plan.

Rates (%)

Rates for startup loans vary depending on the type of loan, as well as the risk assessment of the borrower. Most lenders consider startups to be a significantly higher risk than established businesses. This suspicion is not without good reason: nearly 90% of startups fail. Since they are higher risk, loans to startups tend to have higher rates, than loans to established businesses.

Of the means of financing a startup, SBA approved loans, and non-profit micro-loans usually have the lowest rates. However, they are often only granted to businesses which they deem to be beneficial to the community, either through job creation or by supporting a marginalized population.

Merchant cash advances can be easier to acquire, but they have much higher rates. Since merchant cash advances are not technically loans, they are mostly unregulated, so be wary of predatory lenders.

Credit Requirements

Since startups usually have little to no business credit history, most lenders require excellent personal credit (720 or higher) for traditional loans or lines of credit. If you fail to qualify for a traditional loan, some business credit cards can be acquired with lower personal credit scores. Business credit cards are also an easy way to build credit, which will help you to apply for traditional loans in the future.

In certain circumstances, new entrepreneurs with weaker credit may get a loan through the Small Business Administration (SBA) or a non-profit organization. The SBA may back an SBA 8(a) loan to entrepreneurs who come from socially and economically underprivileged backgrounds. The SBA may also back an SBA 504 loan if they believe the startup would be a significant benefit to developing the community, either through job creation or by filling an essential local need.

For Bad Credit

Getting bad credit can happen very quickly; just a few missed payments can put a blemish on your credit for a long time. However, if you are looking for a traditional loan for a startup and have bad personal credit, you might have a tough time.

There are a few ways in which to improve your credit history. The easiest, and sometimes the most drastic way to improve your credit score is to correct any errors. All three major credit check providers will send you your credit report free of charge; if there is an error and you can provide proof of the mistake, the institute will gladly correct it. These sorts of clerical errors happen more frequently than you’d think if you feel like your credit score is lower than it should be than it is likely worth checking. Paying off outstanding debts can help your credit score. As can using a personal credit card and making all your monthly payments (although this takes time).

Alternative lenders tend to be more flexible than traditional lenders about accepting borrowers with a weaker credit history. However, many still have a minimum credit score. Even if you do qualify, your rates are likely to be higher than if you had a better credit score.

If your startup cannot qualify for any traditional forms of financing, there are several alternatives you can turn to (although these do typically have much higher rates) for short-term cash. These include invoice financing and merchant cash advances.

No Credit Check

There are very few traditional options (such as loans or lines of credits) which do not involve credit checks. However, over recent years many new alternatives have become available. These alternatives include merchant cash advances and peer to peer microloans. While these forms of financing may be easier to acquire, they often have higher fees than traditional loans.

While traditional loans require a credit history to establish the likelihood that you’ll be able to pay back the loans, a merchant cash advance uses your daily credit card receipts to verify your earnings. The cash advance is paid back by automatically deducting from your daily credit card sales. Paypal offers a similar loan for online businesses which use PayPal for their sales. Be cautious of these sorts of advances as the industry is not well regulated and rates tend to be very high.

Peer to peer micro-loans are crowdfunded loans for new innovative businesses. This loan is composed thousands of smaller loans (often around $25), provided by people who want to support your business, either because of your backstory or because you’re offering something that they think will benefit society. While few campaigns gain the notoriety to earn significant funds, there are no fees and no interest associated with these loans.

SBA Startup Loans

While some SBA 7(a) loans are granted to Startups, they are difficult to get, and the vast majority go fairly established businesses. However, there is the SBA 7(m) microloan program which gears itself more towards smaller startups. The disadvantage to these microloans is that they are quite small, typically around $10 000 with a maximum of $35 000. They may not provide a massive amount of funding, but these microloans can be very beneficial to expanding a startup and helping it to establish business credit.

Unsecured vs Secured

The difference between a secured and an unsecured loan is that a secured loan involves collateral. Collateral is something of value which the lender can take from the borrower if the borrower fails to make payments on their debt in time. Secured loans are considered lower risk than unsecured loans, as the lender can recoup some of the costs of the loan by collecting the collateral. Unsecured loans tend to have higher rates and tend only to be offered to well-established businesses. Most traditional loans available to startups will be secured and therefore will require collateral.