What are Startup Loans?
Startup business loans are a type of secured or unsecured fixed-rate loan that is used to finance startup costs and expenses. The most common type of startup loan is an installment loan with one-year to five-year payment terms. Interest rates are determined by the creditworthiness of the borrower and the current prime rate offered by the lender.
Types of Startup Loans
The traditional startup loans described above are just one option for funding a new business venture. There are lenders outside of local banks and credit unions that can provide startup financing. Online term loans, short-term loans, and asset-based financing can keep a company afloat during those tumultuous early days. Here are some examples of what to look for:
The microloan program from the Small Business Administration (SBA) was designed to help small businesses and certain not-for-profit childcare centers get off the ground. Through intermediate lenders, the SBA offers short-term loans of up to $50,000 which can be used for working capital, inventory, supplies, furniture, fixtures, machinery, or equipment.
Asset-based financing is a broad term used to describe secured loans. Startup founders and owners don’t always have the credit score or history necessary to qualify for unsecured loans, so they put up an asset like property or equipment to secure the loan. This mitigates risk for the lender and gives the borrower more runway to make their business profitable.
Short-term loans are loans with payment terms of less than one year. They can be unsecured if the borrower has a good credit score or is secured by property or equipment. A common example of the latter is a title loan, where the borrower can use the title of a vehicle or real estate holdings as collateral. These loans usually come with high-interest rates and fees.
Peer-to-peer lending (P2P) is popular with first-time business owners looking for start-up business funding. Also known as “crowdfunding,” P2P cuts out the bank as a middleman, connecting the borrower directly to a private lender. There are several online P2P lending platforms, including Kickstarter, iFundWomen, GoFundMe, and Fundable.
Lenders treat equipment financing differently than traditional loans. That’s because the funds are used to purchase a physical asset that adds value to the borrower’s business. Equipment loans are common in the manufacturing and farming sectors, but they can be used by any business for items like office furniture, medical equipment, commercial ovens, and more.
Accounts receivables show up as an asset on the company’s balance sheet for a reason. They have value. Many lenders recognize this and will issue a loan based on the total amount the company has in accounts receivable. This is known as “factoring.” Some business owners describe it as “selling their invoices” for a percentage of what they’re worth.
Merchant cash advances
Merchant cash advances are like invoice factoring because the loan amount is a percentage of revenue that has not come in yet. The lender sets the loan limits by tallying up the previous month’s credit card receipts and offering an “advance” based on projected credit card revenue for the upcoming month or months. This creates immediate cash flow for the business.
Top Startup Loan Providers
Lendstart has reviewed several lenders that offer business startup loans and we’ve made a list of some of the key advantages each provider offers. We’re publishing the observations made by our team, but this shouldn’t be considered as an endorsement list. We always recommend you should do your research before picking a lender to suit your needs. The following six companies scored the highest out of all the traditional and online lenders we reviewed:
One of the most well-known lending platforms, LendingTree has established a reputation as the go-to platform for startup funding. They connect borrowers to lenders using an AI-assisted application process that is fast, easy, and secure. Business owners can be matched with lenders that offer a variety of different loans from $1,000 up to $5 million.
Unlike traditional banks and credit unions, National Funding weights company revenue above credit scores in their approval process. Businesses with revenue over $100,000 can receive a short-term loan of $10,000 to $500,000 if the applicant’s credit score is 500 or better. That’s significantly lower than the industry standard for loan approval.
Fora Financial specializes in merchant cash advances. They guarantee approval within twenty-four hours and funds deposited within 72 hours. Loan amounts range from $5,000 to $750,000, depending on credit card sales volume. Best of all, repayment is based on a percentage of future credit sales, so business slowdowns mean lower payments due.
Fundera Business Loans
Fundera is a portal where the borrower can fill out one application that is shopped to multiple lenders. The credit score requirement is 680, loan amounts range from $5,000 to $5 million, and loan terms are 5-25 years. The best feature of this platform is variety. Borrowers can apply for installment loans, lines of credit, merchant cash advances, equipment financing, and more.
Reliant Funding Business Loans
Established during the financial crisis of 2008, Reliant Funding is best known for a more forgiving approval process and fast funding. They are one of the few online lenders that can put funding into the borrower’s bank account in as little as twenty-four hours. Their loan options include small business startup loans, merchant cash advances, and equipment financing.
BlueVine offers short-term loans and lines of credit up to $250,000 with no loan origination fees. They also offer invoice factoring up to $5 million with one to twelve-week repayment terms. Doing business with BlueVine is more like forming a partnership than simply applying for a loan. Our team has found them to be business-friendly and transparent about costs and fees.
Comparing Startup Business Providers
There are several factors to consider when shopping for a startup business lender. The most obvious is affordability. Business owners should have a firm grasp on what their revenue is and how much they can afford to pay back each month. Doing the proper “due diligence” before applying for any type of funding will ensure those funds are an asset, not a liability.
Established lenders with a track record of success are preferable to new lenders. Look for company reviews and complaints with the Better Business Bureau or other reporting agencies. The internet provides a “permanent record” on lenders that can help prospective borrowers identify which firms to do business with and who to stay away from.
Once the choices have been weeded down to a “shortlist” of potential lenders, the next step is to look at average monthly revenue requirements. These vary by lender. Borrowers can often pare the list of potential lenders down when they get to this stage because some revenue requirements might be too high. It’s best to check this before applying.
Collateral may also be an issue. Business owners with lower credit scores might be required to post some type of security for approval. This is usually explained in the terms and conditions published on the lender’s website. Applicants can also look for the terms “secured” and “unsecured” in the loan description. The former means that collateral will be required.
Last but certainly not least, most lenders have credit score requirements. Some may put less emphasis on credit score, but there’s always a minimum number that they need to approve a loan application. The lowest is usually 500. Borrowers should check their credit scores before embarking on this journey. This can be done for free at FreeCreditScore.com.