One of the biggest challenges a new small business must face is obtaining the money it needs to launch and grow. New employer small businesses are the primary source of U.S. job growth but are much more likely than larger firms to face financial challenges accessing borrowed capital. In order to proudly turn on your physical or metaphorical “open for business” sign, you may need to get startup small business financing.
Here we’ll explore what types of loans may be available to your new business and how to qualify.
What is a Startup Business Loan?
A business startup loan is financing meant to help with the startup costs of a new business. Startup business loans can go towards things like working capital; the purchase of equipment, machinery, supplies, inventory, and furniture; and the purchase of construction equipment or real estate.
Although some lenders offer business loans for startups, you may need alternative solutions to finance a new business. Many small-business lenders require at least a year in business to qualify for financing. But if you’re in the market for a startup business loan, alternative financing options may be available to help get you going, as well as a few types of small-business loans.
Here are options to consider:
Business Credit Cards
This is one of the top choices for new businesses. Why? Because most small business issuers don’t care how long you’ve been in business, As long as you meet their minimum requirements— typically that means good or excellent personal credit scores and sufficient income from all sources, not just the business— you may qualify.
And while you may think of a credit card as a convenient way to pay for purchases, at the core, credit cards offer access to a type of financing: a line of credit. In the Federal Reserve Small Business Credit survey, 53% of small businesses reported using credit cards to help fund their operations.
That means business credit cards can be a viable alternative to startup business loans.
They can also help you get off on the right foot by separating business and personal finances and establishing business credit.
To qualify for a business credit card, issuers will generally look at your personal credit scores and combined income (personal and business). While they may not require collateral, they typically do require a personal guarantee. Most business credit cards have the added bonus of great rewards programs and sign-up bonuses.
For the most part, the U.S. Small Business Administration (SBA) doesn’t make loans—it guarantees them. Individual lenders are approved by the SBA to make loans under SBA programs, and these generally offer lower interest rates. The exception is Disaster Loans which are made by the SBA.
There are roughly ten different types of SBA loans, and among the most popular is the 7(a) program, which offers loans up to $5 million. If you’re wondering if you can get an SBA loan to start a business, keep in mind that in the 2021 fiscal year, 17% of the money lent to small businesses through the 7(a) loan program went to startup businesses.
Getting an SBA loan isn’t a super-fast or easy process, though the SBA Express loan program (which generally offers loans of up to $500,000) aims to speed it up somewhat.
There are a number of qualifications required, including acceptable credit. There is no minimum personal credit score required, but for 7(a) Small Loans of $350,000 or less, the SBA requires a minimum FICO SBSS credit score of 155 to avoid a manual credit review. (This commercial credit score can take into account the personal credit of multiple owners along with the business credit of the business. The score ranges from 0-300.)
SBA 7(a) loans for startups are more likely to go to business owners with experience in their industry (a veterinarian opening her own practice, for example) or those purchasing an existing business, including a franchise. Because the terms are favorable, it is a financing option worth exploring.
In addition, SBA 504 loans may be helpful for businesses looking to acquire real estate or equipment, while SBA Export Loan programs may be available to businesses that will be participating in international trade.
SBA microloans are made by approved intermediaries, often community development financial institutions (CDFIs) and other non-profit organizations. While the total maximum loan amount is $50,000, the average loan is closer to $14,000. An SBA microloan is a term loan, with a maximum term of 72 months; the average is about 40 months. Funds may be used for working capital or the purchase of inventory or supplies, machinery or equipment, or fixtures and furniture.