Loans For Starting A Small Business

loans for starting a small business
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As wonderful as it may seem to want to start a new business, it’s usually not an easy venture, especially when cash is involved. Often, you’ll need to invest a significant amount of time and money, both your own and that of others, to transform your idea into a profitable business. Furthermore, getting a loan for starting a small business is quite harder than for an already existing business. But not to worry; this article is a guide on how to get loans for starting a small business. Read on.

What Are Small Business Startup Loans?

Startup business loans are any sort of loan used to start a new business. This money could be used to assist in developing a product or service, hire personnel, lease space or equipment, or purchase goods. Startup loans can also involve investment for enterprises that have already opened but are still in their early stages.

Sources Of Loans For Starting A Small Business

Startup loans typically do not require business credit or a high level of revenue because lenders understand they are offering money to promote a new venture. However, your personal credit and industry experience may have an impact on your eligibility and loan terms. You can also use other sorts of finance to help your firm.

Here are some sources of loans for starting a small business:

#1. Self-funding

To finance their firms, many new small business entrepreneurs take out personal loans or tap into their savings. This may be possible with an unsecured loan, company credit cards, or a second mortgage, as well as borrowing against a 401(k) or other retirement account.

These options can be advantageous if you are having difficulty qualifying for a business loan or if you prefer to fully control your company rather than selling a portion of it to an investor. However, you may be jeopardizing your personal assets and money.

#2. Financing from friends and family

You could also try to raise funds from relatives and friends. In exchange, you could offer to reimburse them with an ownership stake in your company, or you could let them acquire a stake in your company and profit if it succeeds. 

Friends and family may not demand a credit check and may be able to offer you better terms than other lenders. Consider the impact on your personal relationships if your firm fails and you are unable to repay the loan.

#3. SBA loans

The US Small Business Administration (SBA) does not make direct loans, but it does guarantee loans made by participating lenders. Depending on your business and how you intend to utilize the funds, you can apply for various types of SBA loans. Although the application and approval process might be time-consuming, the guarantee can make it easier to obtain a large loan on favorable terms, even if you don’t have excellent credit.

  • The SBA 7(a) loan program is one of the most popular, with funding of up to $5 million available. In 2021, startups received approximately 17% of SBA 7(a) loans.
  • If you’re looking to buy real estate or equipment, the SBA 504 loan program may be a suitable choice, although only 10% of those loans went to startups.
  • The Community Advantage lending program is for businesses in underrepresented communities, and startups received 45% of these loans in 2021. 
  • The SBA microloan program provides up to $50,000 to establish or expand a firm, albeit the SBA does not specify how much of that amount went to entrepreneurs.

You can also utilize the SBA’s lender matching tool to identify participating lenders and compare loan offers based on your individual circumstances. 

#4. Local business financing 

Traditional business loans are also available from local credit unions, community banks, and nonprofits. Although rates, terms, and requirements differ by lender, you may find that smaller lenders are more willing to work with you based on your personal experience than giant banks or online lenders. Some lenders may also participate in local or statewide loan guarantee programs similar to those offered by the SBA.

#5. Crowdfunding

Online crowdfunding sites can assist you in organizing a campaign and raising funds from strangers as well as individuals you know. Crowdfunding is classified into four types: debt, equity, donations, and prizes. 

With equity, you raise funds in exchange for a share of your company, but with a loan or bond, you incur debt that must be repaid with interest. Donor crowdsourcing, such as GoFundMe campaigns, is rarely employed by startups because you have little or nothing to offer in exchange. Consider a rewards-based campaign in which you offer donors one of your company’s products or services in exchange for their contributions.

#6. Grants

There are corporate, municipal, state, and federal grants available to small business owners, and they might be an excellent option because you do not have to repay the money. However, your company’s goals must correspond with those of the grantor, and there may be a competitive application procedure. is a wonderful place to start when looking for government small business grants. You can also look for a local Small Business Development Center, which can help you locate grants, finance, and operate your business successfully. 

#7. Asset-based financing

When beginning a firm, you can also utilize business assets as collateral for a loan. Business car loans, equipment financing, and commercial real estate loans are examples of these. Leasing equipment makes more sense than buying it at times. An operating lease allows you to rent equipment with the option to buy or return it at the conclusion of the lease period. The more prevalent capital lease is akin to a rent-to-own agreement. 

#8. Business lines of credit

A company line of credit can provide you with ongoing finance for your startup. Unlike a loan, you will not receive the complete loan amount at once. Instead, you use your line of credit, which has a limit on how much you can borrow. You’ll also have more freedom than with a term loan because you simply pay interest on the amount borrowed.

#9. Online term loans

These are usually term loans, which means you receive the entire loan amount when you accept it and then make regular payments over a certain period of time until the loan is repaid. 

Online lenders may also have lower prerequisites and a speedier application process than traditional lenders, and they may employ current techniques to assess who qualifies (such as connecting to and analyzing your bank account).

Online lenders such as BlueVine and Fundbox provide credit lines to startups that have been in operation for six and three months, respectively.

How To Get Loans For Starting A Small Business

#1. Determine the type of loan you need

Many small business owners prefer to obtain funding from traditional banks and credit unions. However, there are numerous sorts of business finance available to assist companies in getting off the ground. 

#2. Examine Your Personal and Business Credit Scores

Lenders look at an applicant’s credit score to determine how much danger they pose. Applicants with a higher credit score are more likely to make on-time payments and, as a result, have a better chance of acceptance. Business credit ratings are normally accessible after six months to one year of operation, thus new enterprises may lack one, particularly if the startup is brand new.

However, because loans are sometimes personally guaranteed—that is, the borrower legally promises to repay the debt with personal funds if the business fails to repay—lenders also consider the applicant’s or business owner’s personal credit score.

Before asking for a loan, acquire copies of your business credit reports and check your personal credit score to prepare for the application process and calculate your chances of acceptance.

#3. Gather and prepare all necessary documents

The exact paperwork needed to obtain a business loan differ depending on the lender. However, most lenders utilize certain documents to analyze and verify an applicant’s identification and the existence of a firm. Lenders, for example, frequently want tax returns dating back at least two years, as well as financial data such as bank statements, accounts receivable, credit card transactions, and outstanding invoices dating back at least four months.

As a startup entrepreneur, you can also increase your chances of approval by creating a comprehensive business plan. This might show lenders that the company is financially secure enough to repay its loans based on projected future revenue and expenses. Lenders may also request documents of relevant business licenses and registrations, as well as banking details for direct deposit.

#4. Investigate and Compare Lenders

Depending on your personal and business credentials, you may be able to obtain a startup loan from a variety of lenders. Consider the following aspects when comparing lenders to find the best startup company loans for your needs:

  • Annual percentage rate (APR). In general, business loan APRs begin around 9%. However, rates for new business loans may be higher, and rates for the most qualified applicants may be lower. To find out what APRs are available, go to each lender’s website or call a customer service representative.
  • Fees and other expenses. To cover the costs of handling paperwork and validating application information, business lenders frequently levy origination fees ranging from 3% to 5% of the entire loan amount. Others levy prepayment penalties on borrowers who pay off their loans early, as well as late payment penalties on those who miss their due date. These costs can raise the overall cost of borrowing, thus some lenders waive them in order to remain competitive.
  • The lender’s repute. Even if a lender appears to be a good fit on paper, study internet evaluations to assess its reputation among current and past borrowers. Similarly, contact other members of your business community to learn about their interactions with the financial institution. If your study shows any red flags, like as unsatisfactory customer service experiences, you should consider switching lenders.

#5. Fill Out and Submit Your Application

Once you’ve decided on a lender, educate yourself with its application process and ensure you’ve gathered all necessary papers. The application and underwriting processes differ by lender, so find out if you can apply online or by phone—or if you’ll need to visit a branch. Following the submission of your application, a lender representative may contact you to request more evidence, such as collateral verification or extra financial records.

The Benefits and Drawbacks of Loans For Starting A Small Business


  • Maintain control of your business.
  • Fixed-rate loans provide predictable monthly payments.
  • Spread the cost of launching a firm over time.
  • If you make on-time payments, your credit score will rise.


  • It could be difficult to qualify for.
  • Loan fees and interest rates may be extremely high.
  • It is possible that loan collateral will be required.
  • High loan payments can put your company at risk of failing.
  • If the business collapses, you may be required to repay the loan with personal cash.

Is It Hard To Get A Small Business Loan?

A small business loan might be difficult to obtain without a solid personal credit score and proof of consistent revenue from your organization. A lender faces a considerable risk of making a loan without these. If a bank considers an applicant’s profile to be less than solid, loan offers may require collateral or exorbitant interest rates. These restrictions may put a hardship on a company. If you believe your credit score or business earnings are insufficient, seeking finance through alternative sources, such as money from friends and family or crowdsourcing, maybe a better option.

Do SBA Loans Require a Down Payment?

Yes, a down payment is required for SBA loans. The down payment will vary based on the lender and borrower, but a typical down payment is 10%. In rare circumstances, this proportion might be as high as 30%.

Can SBA Loans Be Used for Personal Purposes?

Personal usage of SBA loans is not permitted. The money can only be used for your company. This includes paying for business expenses, expanding your business, and paying your own salary. SBA loans cannot be used to pay off personal debts such as mortgage or credit card obligations.

In Conclusion

Obtaining a loan for your business can be difficult, especially if you are expected to put collateral on the line, which increases your risk. The Small Business Administration (SBA) is a fantastic resource for business entrepreneurs since it offers financing without the requirement for collateral.

Businesses can acquire loans without collateral outside of the SBA, but it is critical to understand the terms before signing the contract. Other severe requirements or high-interest rates may apply to loans without collateral. Determine what conditions work best for you and the business when deciding on a loan.

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