Startup business loans aren’t super easy to come by. The reason is obvious: if you’re a startup, a bank is taking a huge risk on you. You may have already come up against this challenge in meetings with lenders. If you’re at your wits end, or you’re about to set up a hard lemonade stand on the corner to fund your endeavor, we’re here to help.
We’ve compiled the ultimate list of startup funding options in 2018 so you can make your dream a reality.
Credit Score and Startup Business Loans
You’ll probably have to borrow based on your own personal finances. Because of this, your personal credit score may be the key factor in whether or not you can secure a small business loan.
Building your credit score can take some time, especially if your financial history contains some smudges (like late payments), but there are several things you can do to make your score the best it can be:
Keep your personal credit card balances low (below 30%) – or better yet, pay them off completely
Keep paid off debt on your credit report
Pay all your bills on time
Don’t take cash advances
Check your credit report to ensure it’s accurate
Pay down your debt
When your credit score is strong, you’ll have better and more varied options for obtaining a startup loan. There are several tried-and-true loan options, but your financial standing and qualifications can help guide you toward the right one for your startup.
Here are some of the most popular funding resources for small business owners.
Personal Business Loans
In 2018, there are more online companies than ever offering personal business loans. These are loans made to you (the individual, not the business owner). You can use these funds however you’d like – including toward your startup venture. These loans report to your personal credit history, so if you make payments on time, they could help you raise your own credit score, but if you miss payments, your personal finances will suffer.
The downside of many of these loans is that the interest rates are generally high (not unlike a credit card) especially for borrowers with sub-par credit scores. They also mix personal and business finances, which can get tricky down the line as your business grows. These loans are also for smaller needs, since they’re typically offered at less than $40k. However, borrowers with great credit scores and a solid income may find that these loans work best for them.
Microloans and Nonprofits
Worried about your credit? Microlenders and nonprofit lenders can be great options for startup owners without stellar credit or assets. Many of these loans cater to minority or disadvantaged business owners, or startups in communities that are struggling financially.
Another great use for these loans is to help you build your business until you can qualify for other types of loans. Like personal business loans, microloans and nonprofits are a good option if you only need a small amount of money to get your startup off the ground.
Using a credit card is a relatively simple way to get funding for a startup – especially for small expenses. However, because of the interest rate on most credit cards, it can be insanely expensive over time.
If you do opt to fund your business expenses with credit cards, get a business credit card. You’ll get a line of credit to use whenever you want, and as little or as much (up to your credit limit) to use as you need.
This is also a way to separate your personal and business finances, and begin to build your business’ credit history. Reward programs can give you money back for travel, supplies, gas, restaurants, and more. But beware: high usage and making late payments will hurt your business’ financial reputation.
If you just need some funds here and there and have the willpower to keep from using too many credit cards too often, a business credit card could be the right choice for you.
Friends and Family
You may not think to ask friends or family for help, but you might be surprised how quickly you can raise the money you need with a little bit here and there (it’s the reason platforms like Kickstarter and Go Fund Me are so massively popular).
Another benefit of going the peer lending route is that you’ll probably get the best terms with the least amount of risk. Of course, if you haven’t handled your own money well, you’ll need to convince them that you really will pay them back before they’ll be willing to hand you the cash.
The downside to this method is that business becomes deeply personal. Make certain you lay out the terms (including amount, interest, and time to pay in full) clearly and communicate often with personal acquaintances who lend you money.
And if borrowing from people you love makes you feel queasy at all, you’re probably better off avoiding it! Better not to wreck a lifelong relationship over money issues.
SBA Startup Business Loans
The Small Business Administration is a government agency that protects small business interests. Its loan program guarantees loans to business owners to help reduce the risk banks take when lending to small businesses. The SBA doesn’t lend directly to business owners; the lending happens through a bank, credit union, or financial institution. However, the SBA can grant you a tentative approval that you can use as leverage at the bank.
SBA small business loans are fantastic for business owners who may not qualify for more traditional business loans. Because the government will cover the loan if a borrower defaults, banks are more willing to offer these loan products to high-risk borrowers. You can also use them to address your biggest concerns as a small business owner, like cash flow problems, payroll, and commercial real estate expenses.
SBA 7(a) Standard Loan
SBA’s flagship lending program is the 7(a). SBA 7(a) loans are permitted up to $5 million, which can be used for nearly everything you can imagine. They’re available to startups, but because of the fickle nature of the startup industry, recipients typically need an excellent credit score (680+); a squeaky-clean financial history free of foreclosures, bankruptcies, and tax liens; collateral (for loans over $25k); and sometimes a down payment as much as 10%.
SBA startup loans also require borrowers to show the bank they have sufficient field experience, or experience with business management. They are only open to businesses in the US, and that operate primarily in the US.
Like traditional loans, SBA loans are typically awarded to an established business that can provide collateral (like real estate, supplies, or equipment). This gives the lender some security, because they can sell your assets if you default on your loan payments. But with good financial standing and a solid business plan, it can be a solution for startups that need money.
SBA Express Loans
SBA startup loans can take months to process, and to combat this, they’ve introduced the SBA Express Loan, which guarantees a response to your loan application within 36 hours. These loans follow most of the same guidelines as the regular 7(a), but the maximum loan amount is lower at $350k. Also, only some lenders are eligible to participate in the Express Loan program, so the pool of possible lenders is smaller.
SBA 504 Loans
SBA 504 loans are designed for purchasing fixed assets for your business, like land or equipment. The SBA guarantees up to 40% of the value of the asset, but personal guarantees are required. Nearly all national and regional lenders participate in the SBA program, so if you plan to get funding for your startup through a bank, it’s worth asking about an SBA startup loan for your business.
And if none of it pans out, you can always bootstrap it -- or set up that spiked lemonade stand on the corner (we’re sure it would be a hit). Just make sure to get a permit, and keep good records for when tax time rolls around. Happy entrepreneurship! We believe you'll be able to get the funding you need to get your business started. And if you're having trouble, drop us a line. We're here to answer any of your questions about the SBA loan programs for startups.