Best Startup Business 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.

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: 

SBA Microloans

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

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

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

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. 

Equipment financing

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.

Invoice factoring

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.

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.