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The Best Small Business Loans for Startups

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.

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What is a Startup Business Loan?

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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.

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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:

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Business Credit Cards

Girl credit card Images | Free Vectors, Stock Photos & PSD

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.

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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.

SBA loans

Small Business Administration (SBA) Loans | California Bank & Trust

The U.S. Small Business Administration’s microloan program is startup-friendly, offering loans of up to $50,000 for small businesses looking to start or expand. The average SBA microloan in fiscal year 2021 was $16,557
SBA microloans are administered by nonprofit community lenders and are typically easier to qualify for than larger-dollar loans. The downside: Funding may not be sufficient for all borrowers.
The SBAs flagship 7(a) loan program also offers financing that borrowers can use to start businesses. But SBA 7(a) loans are tougher to get. The loans typically go to established businesses that can provide collateral, a physical asset, such as real estate or equipment, that a lender can sell if you default. The qualifications are strict, and even if you qualify, applying for an SBA loan can take several months.

 

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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.

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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.

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Microloans

How Long Does It Take to Get an SBA Loan?

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.

Microloans are also available outside of the SBA program, and microlenders and nonprofit lenders can be a less difficult route to access startup business loans, especially if you have shaky finances. Many of these lenders focus on minority or traditionally underserved small-business owners, as well as small businesses in communities that are struggling economically.
Because these startup loans often come from mission-based organizations, the terms will likely be better than you would receive from a private lender, making it possible for you to grow your business and establish better credit. That can help you qualify for other types of financing down the road.

Grants

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Startup business grants from private foundations and government agencies are another way to raise funds for your small business. These aren’t loans, which can make them tough to get. But free capital might be worth the hard work for some new businesses.
For example, businesses getting started in scientific research and technology innovation may be able to qualify for grant funding through the Small Business Innovation Research (SBIR) program or Small Business Technology Transfer (STTR) program. Or, if you served in the U.S. military, you can access small-business grants for veterans. There are also small-business grants for women.

Credit cards

Many entrepreneurs rely on business credit cards as funding. You can use this option as short-term financing for business purchases that you can pay off quickly. Startup business credit cards also typically come with rewards programs that offer cash back, rewards points or travel miles — so you can earn more for your spending.
Let the balance linger and interest charges will pile up, quickly turning your credit card into an expensive small-business loan.
The annual percentage rates on your business credit card are based largely on your personal credit scores. If you have poor personal credit, you’ll have a higher interest rate.

Crowdfunding

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Crowdfunding has become a popular way for small businesses to raise money, thanks to such sites as Kickstarter and Indiegogo, which let you solicit funds through online campaigns. Instead of paying back your donors, you give them gifts, which is why this system is also called rewards-based crowdfunding.
Avenues are also available for equity crowdfunding, in which you tap a public pool of investors who agree to finance your small business in exchange for equity ownership. You can even reach out to mom-and-pop investors with this type of crowdfunding, and not just accredited investors.
Crowdfunding is a great funding option for business owners who want to test out their product or service with a customer base and gauge the response without having to take on debt.
Crowdfunding involves raising capital from a large amount of people. Online platforms allow you to create a campaign where people can contribute small amounts of money. Depending on the campaign time and number of people that participate, crowdfunding can raise enough money to help cover working capital costs and other expenses.

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