Get your business off the ground with a startup small business loan.

Financing isn’t always easy to secure as a new business, but there are a growing number of options out there for promising startups.

What is a Startup Small Business Loan?

Sometimes it can be hard to get proper financing as a small business if you’re just getting started. Startup small business loans are designed to help businesses that are new to their field by providing financing using means such as collateral and personal guarantees to help lenders get comfortable with the seemingly high-risk loans.

There is not an exact definition of how old or how large a business can be before it is no longer considered a startup, but generally, “startup” refers to a business with a lot of growth potential that has not yet met that expected potential. On average, startups have not been in operation for more than two years.

If you are running a startup, you have many financing options to choose from, including SBA loans, micro-loans, lines of credit, merchant cash advances, and business credit cards. Since most startups don’t have much in the way of business credit history, lenders tend to rely more heavily on personal credit and the quality of a business plan.

Rates (%)

Rates for startup loans vary depending on the type of loan, as well as the perceived risk of the loan. Most lenders consider startups higher-risk than established businesses, and this is not without good reason: nearly 90% of startups fail within the first few years of operation. Since they are higher risk, loans to startups have higher rates than loans awarded to established businesses.

The most cost-effective way to finance a startup is through SBA-approved loans or non-profit micro-loans, both of which are designed to help businesses which are seen as vital to their communities. A business is usually deemed important to its community if it helps create jobs, especially for marginalized people, or if it provides essential services.

Another good option, potentially, is a merchant cash advance. Merchant cash advances, a pseudo-loan financing option where you sell a portion of future credit card sales for a lump sum, can be easy to acquire, but they come with high rates.. Further, merchant cash advances aren’t well regulated by the government, leaving a lot of room for financiers to take advantage of you.

Credit Requirements

Since your startup probably has little or no business credit history, most lenders look at your personal credit instead. To qualify for a conventional loan or line of credit, you need a personal credit score of 720 or higher. If you can’t get a traditional loan, some business credit cards allow for lower personal credit scores, albeit with higher rates. Business credit cards are also an easy way to build credit, which will help you to apply for traditional loans in the future.

New entrepreneurs with low or unavailable credit can sometimes get a loan through the Small Business Administration (SBA) or a non-profit organization. The SBA may back an SBA 8(a) loan, for example, for entrepreneurs who come from 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 meeting an essential local need.

For Bad Credit

Bad credit can happen quickly; just a few missed payments can put a blemish on your credit for a long time, keeping your score below where it should be. If you are looking for a startup loan, this can prove to be a big hurdle to accessing the financing you need.

There are a few easy ways to improve your credit history quickly. The first thing you should do is get a credit report and correct any errors you see, and content items that you think are inaccurate. All three major credit check providers will send you one credit report free of charge. If there is an error and you can provide proof of the mistake, the institute will correct it, raising your score immediately. Clerical errors happen more frequently than you’d think, and fixing one can quickly improve your credit situation. Likewise, paying off outstanding debts will immediately impact your credit score. In a more long view approach, using a personal credit card and making all your monthly payments will help you build credit, albeit slowly

Alternative lenders, such as online lenders, tend to be more flexible than traditional lenders about accepting borrowers with bad credit. However, many still have a minimum credit score, and if you qualify your rates will be higher than if you had a better credit score.

No Credit Check

There are very few traditional financing options for startups that don’t involve some kind of credit check. Over recent years, however, many financing alternatives have begun to flood the market, such as merchant cash advances and peer-to-peer microloans. While these forms of financing may be easier to acquire, they often have high fees and/or interest rates and may end up being costlier than traditional loans.

While traditional loans require a credit history to establish the likelihood that you’ll be able to pay back a loan, a merchant cash advance uses your daily credit card receipts to verify your earnings, the lender in effect paying you today for a share of your credit card sales in the future. The cash advance is paid back progressively by automatic deductions taken from your daily credit card sales. Although MCAs can be a good option for businesses in a pinch, be cautious while looking around for a financier, as the industry is not well regulated and rates can be unfairly high.

Peer-to-peer microloans are crowdfunded loans for designed for new, innovative businesses. These loans are composed of thousands of small loans (often around $25) taken from a large pool of small-time investors, usually, 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 there are no fees associated with these loans, it’s important to note that only a very small percentage of businesses get significant financing this way. There is no risk in trying for one, but it takes a particularly compelling business to win big with a peer-to-peer loan.

SBA Startup Loans

The SBA 7(m) microloan program is geared towards smaller startups. The disadvantage to these microloans is that they are quite small, typically around $10K with a maximum of $35K. They may not provide a massive amount of funding, but they can be beneficial to an expanding startup in need of new machinery or supplies, and help it to establish business credit that can be used to leverage larger loans in the future.

Unsecured vs Secured

In short, a secured loan is backed by collateral, while an unsecured loan is not. Collateral usually comes in the form of some asset, such as a car or a house, that a lender can seize if you fail to make your payments on time. Secured loans are lower risk than unsecured loans for lenders, and tend to have lower rates, as a result, Most traditional loans available to startups will require some form of collateral.

The startup world can sometimes be chaotic and challenging, even for the big success stories, and financing can feel like a constant game of cat and mouse. You can always take the quick route, using microloans, merchant cash advances, business credit cards, and peer-to-peer funding, to get through the day today, but if you want to succeed in the long run you’ll need to get your credit in order and start working towards larger, more stable forms of traditional financing. The secret is that it’s easier than it looks, it just requires a little bit of effort every day to achieve big moves in your first couple of years in business.