Start-up business loan options

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It can be expensive to start a new business. Most individuals don’t have all the capital they need up front, so they turn to a lender for help. Financial institutions offer start-up business loans to help business owners with the costs of a new business. Let’s take a look at what loan options are available and tips for how to get an SBA loan. 

How can you fund your start-up?

While they’re a great concept, start-up business loans can be quite challenging to get. These loans are risky for lenders, so the approval process can be difficult. Luckily, there are many options to consider.

SBA microloans

The U.S. Small Business Administration (SBA) has a microloan program that offers loans up to $50,000 for small businesses and not-for-profit childcare centers. The average microloan is about $13,000.

The SBA provides funds to specially designated nonprofit community-based organizations that act as intermediary lenders. These intermediaries administer the microloan program for eligible business owners. Here’s a list of providers.

How to get an SBA loan

Each intermediary lender has its own set of unique requirements for borrowers.

Here’s a rundown of important details of SBA loans:

• Collateral: Usually, the intermediary lender will require collateral for the loan.
• Expenses limitations: These microloans can be used to pay for working capital, inventory, supplies, furniture or fixtures. Microloans can’t be used to pay existing debts or purchase real estate.
• Repayment: The repayment terms on the microloan will vary, depending on factors such as the loan amount, the planned use of the funds and the small business owner’s needs. However, the maximum repayment term for an SBA microloan is six years.
• Interest rate: The interest rates typically range between 8 percent and 13 percent.
• Training: Business owners who apply for SBA microloan financing may be required to fulfill training or planning requirements before being considered for the loan.

Note that the downside to a microloan is the “micro” part: funding, on its own, may not be enough for all borrowers.

If you’re ready to apply, you can work directly with an SBA-approved intermediary in your area on your microloan application. 

Other microlenders

There are nonprofit organizations that are microlenders for small-business loans. These microlenders are generally considered an easier route than an SBA microloan, especially for individuals with questionable credit history. A nonprofit microlender usually focuses on offering loans to minority or traditionally disadvantaged small business owners. Additionally, they help small businesses in communities that are struggling economically.

These microlenders offer reasonable rates and allow business owners to establish better credit. This can help the business owner get other types of financing later on.

Individuals may consider a nonprofit microlender for a variety of reasons:

1. Because profit is not their goal, the loan terms are fair and don’t take advantage of people in difficult situations.
2. Besides financing, many microlenders offer free consulting and training. This can help small business owners make the right decisions to build their credit.

Business credit cards

Business credit cards can be an alternative financing solution to start-up business loans. To qualify for a business credit card, the lender will typically look at your personal credit health and combined income (business and personal).

Benefits of a business credit card include:

• You’ll separate your business and personal finances.
• You start establishing business credit, which will help with additional business financing in the future.
• Many business credit cards have great signup bonuses or rewards, such as cash back.

Some owners assume that relying on a credit card for business expenses is a poor decision. But having and using a business credit card is much more common than you might realize. A 2023 report by Intuit revealed that 30 percent of small businesses in the United States use a credit card as a primary or secondary funding source. 

If your score or income is low, you may have to consider a secured business credit card. Secured credit cards require a deposit and help prevent you from accruing debt. 

Even if you receive an unsecured credit card, a low credit score will mean your interest rates on the card are higher than average. That’s why you’ll want to focus on improving your credit before applying for a business credit card.

Personal funding

You can also consider personal funding options to start up your business. Some examples are personal loans, dipping into your savings, accessing home equity or personal credit cards. However, you should understand the risk of using this type of financing for your business. You’ll want to do some realistic calculations and ensure the company can stand independently without relying on further personal funding down the road.

If you use a personal credit card for business expenses, make payments on time and watch your credit utilization ratio. Mistakes can significantly destroy your personal credit score, which could have serious consequences.

If you have a good amount in your personal savings, using this money is smart because you won’t have to pay interest. But you’re ultimately taking a high risk. If your business doesn’t do well for a while, you won’t have savings to tide you over. The same applies to borrowing against your home equity—it will likely be a cheap option, but it comes with significant risk.

If you do choose to use personal funding to start your business, make sure you take steps to start establishing business credit as quickly as possible. This will allow you to leverage business credit to gain more financing in the future and make the transition from personal financing to business avenues.

Grants

Both private foundations and government agencies offer small business grants. These can be quite difficult to get, but it’s worth trying.

Grants are often offered for specific groups, such as U.S. veterans or female entrepreneurs.

Venture capital investments

If you believe your business idea has the potential for massive growth, consider pitching it to venture capitalists. A venture capital investment gives you money in exchange for an ownership share or active role in the company. 

The benefit of a venture capital investment is that it’s not a loan, so you’re not acquiring debt. Instead, the third party offers capital in return for equity. However, this does mean a higher risk, as you may end up paying them significantly more if your business yields high returns. You’re also often giving up some control of your company to the investor.

Crowdfunding

Platforms like Kickstarter have made crowdfunding an option for individuals wanting to start a business. You typically share your business plan and objectives with a public forum and hope people make donations or backings to fund the project.

These campaigns typically require a lot of marketing effort but can get significant funding if successful.

Which option is best for you?

Knowing which of these options is the right approach for your business can be challenging. Follow these steps to identify which solution works for you:

1. First, determine how much funding you’ll need to start. This number will automatically rule out some of the options.
2. Next, determine your credit score—both your personal score and business score (if applicable). Once again, this may rule out some funding options if your credit score is too low. For your personal consumer credit scoring, consider using credit repair services to improve your credit so you have more funding options available to you in the future.
3. Understand that some business funding options will need collateral. Complete an analysis of your assets and identify if you have any collateral to offer.
4. When you apply for most types of financing, you’ll be required to share certain documents. You can have these documents prepared ahead of time. Some of the most common documents needed are a business plan, a business forecast, a business credit report, a personal credit report, tax returns, applicable licenses and registrations and legal contracts, to name a few.
5. It’s essential that you only borrow an amount you can repay. Sometimes you’ll be approved for much more than you need—avoid taking it just because it’s offered to you.

More than anything else, applying for start-up business loans starts with your credit. You should know your credit health, identify whether it’s poor and consider credit repair services if needed. Ultimately, the better your credit, the better rates and financing options you’ll receive. Lexington Law could help with your credit needs, so get started with a free credit assessment today.

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