A Guide to the Best Startup Business Loan Options

A startup business loan is any type of financing available to businesses with little to no history. A variety of

and financing methods are available to startups—including SBA microloans, asset-based loans, business credit cards, and more—although it can be difficult for startups to access funding.

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Best Startup Business Loan Options

The terms, rates, and details of a business startup loan vary based on the specific product and lender you choose. The best startup loan for you is the one that works for your business: one that can meet your unique funding needs, and of course, one that you can afford.

Here’s a closer look at some of the top options for startup business loans and some alternative financing options for new businesses.

SBA Microloans

Best for: Affordable, traditionally structured loans; qualified business owners.

If you’re looking for a lump sum of capital that can be used for a variety of purposes, an

SBA microloan

is worth considering.

Through its microloan program, the U.S. Small Business Administration (SBA) loans money to intermediary nonprofit lenders and financial institutions, that then issue loans to small businesses. You can access loans up to $50,000 with terms up to seven years. SBA microloans generally have interest rates that range from 8% to 13%.

Although these SBA loans are only available in smaller amounts, they offer affordable access to funding that can otherwise be hard for startup businesses to find. Microlenders often work with business owners with fair credit, as well as those with limited time in business.

Additionally, because SBA microlenders are community organizations, they often focus on

minority-

veteran-

, and

women-owned businesses

, as well as those operating in disadvantaged areas.

Explore our

guide to the top SBA lenders

Asset-Based Financing

Best for: Specific financing needs such as purchasing equipment or receiving capital for outstanding invoices.

Asset-based financing encompasses any type of financing backed by an asset—whether real estate, invoices, equipment, or another form of

collateral

Since this financing is backed by tangible collateral, lenders are more likely to be flexible with their requirements and offer business loans to startups. The most common types of asset-based financing are invoice financing and equipment financing.

With

invoice financing

, a financing company offers you an advance of capital in exchange for your outstanding invoices—typically up to 90% of the invoice value. When your customers pay the invoices, the company will give you the remainder of the funds, minus their fees. Invoice financing is great for B2B companies that have capital tied up in outstanding invoices. With the advance from an invoice financing company, you can cover your working capital needs.

With

equipment financing

, a lender finances the purchase of your equipment, sometimes up to 100% of the value of the equipment. Typically, you receive a lump sum of capital to purchase the equipment and then you pay back the lender over time, with interest. Equipment financing is a worthwhile option for startups that need to purchase equipment.

Business Credit Cards

Best for: Fast access to a line of credit; startups with less than six months in business.

If your startup has been in business for less than six months—or only needs a limited amount of financing—consider a business credit card.

A business credit card is a useful financing product for any business owner, but it can be particularly helpful in place of a business startup loan for a few reasons:

It’s quick and easy to apply.
It gives you the freedom to borrow as much or as little as you need each month.
It doesn’t require physical collateral to secure the credit line (although you’ll likely need to sign a personal guarantee).

Of course, you’ll want to make sure that you pay your balance off each month to avoid high interest rates on carry-over balances.

If you’re looking for a business credit card to cover larger startup expenses, you may want to start with those that offer 0% introductory APR periods. These allow you to carry a balance for a limited time, interest-free. After the intro period expires, you need to pay off your balance in full to avoid facing interest at the variable APR that sets in.

Personal Loans for Business

Best for: Very new startups; business owners with great personal finances and credit history.

personal loan for business

is exactly what its name implies—it’s a loan you take out as an individual, based on your personal finances, but used for business purposes. One of the benefits of this type of startup business loan is that you can often secure lower interest rates than with a business loan. Additionally, it can be much easier to qualify if you have strong personal finances but limited business history.

However, it’s extremely risky to take on a personal loan for business—if your business fails and you can’t pay back the loan, your personal finances and credit history are on the line. Moreover, mixing your personal and business finances can put you at risk for organizational, bookkeeping, and even legal issues.

But if you’re looking for a small amount of capital when you first start out, a personal loan for business can be worth considering if you don’t have any alternatives—as long as you understand the risks and manage your finances wisely.

Alternative Sources of Startup Financing

Small Business Grants

Best for: Access to capital that you don’t have to pay back; startups in specific industries or communities.

Small business grants

aren’t a traditional replacement for startup business loans. However, if you think you can qualify for a grant, it’s well worth the effort to apply since grants don’t need to be repaid.

There are a variety of types of grants you can apply for, including those from the federal government, state and local governments, as well as those from corporate organizations. In particular, the

Small Business Innovation Research Program

and Small Business Technology Transfer Program are great options for small businesses involved in science, technology, and innovation.

In addition, you’ll find that there are a number of grant options reserved for certain kinds of businesses, like mission-oriented businesses and those owned by

women

, minorities,

veterans

, and

immigrants

With business grants, it’s important to remember that applications are very competitive. Therefore, you may spend a significant amount of time gathering and preparing your application materials with no return.

Friends and Family

Best for: Flexible and fast funding; business owners who have a network willing to invest.

Similar to business grants, if more traditional small business startup loans aren’t available to you, another option is to turn to friends and family to raise initial funds. Or, if you have received a startup business loan, you may work with friends and family to supplement this capital.

Although many successful businesses have been built off the backs of generous friends and family members, this type of

business funding

can be risky for startup owners. When you fund your startup with money from friends and family, both your business’s financials and your personal relationships are on the line.

For that reason, you’ll want to be sure to work with people you trust. Before you enter a funding agreement, make sure that the contributors understand your

business plan

, what you’ll be doing with the money, and what their role will be in the funding relationship. Handling the situation as professionally as possible will help prevent issues that could arise in the future.

Crowdfunding

Best for: Small amounts of capital; testing a product or creative idea.

Finally, another creative form of funding for startups is crowdfunding. Like grants or investments from friends and family, crowdfunding can be a worthwhile alternative when you can’t yet qualify for a more traditional business startup loan—or as a supplement to initial capital.

In essence, crowdfunding lets you raise capital from online campaigns—typically through a dedicated crowdfunding platform, like Indiegogo or Kickstarter.

With crowdfunding, you set a specific amount of capital as a “goal” you’re trying to hit. Users on the platform can donate money to your campaign if they feel inspired to do so. Unlike

equity or debt financing

, you don’t have to give up ownership in your business or pay interest to these funders. Instead, you usually repay their generosity with a perk, a free gift, or a simple “thank you” note.

Crowdfunding is a good way to raise a small amount of capital from a large amount of people. It tends to work best for product-based businesses or those with creative, innovative ideas.

Fundera Can Help

Curious to see what business loans your startup qualifies for? Fill out one simple application with Fundera, and we’ll show you your loan options. This won’t impact your credit score, and there’s no obligation to get your funding through one of our partners.

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