Startup small businesses may need to provide funding to drive their businesses off the ground. This funding could provide much-needed capital to purchase equipment, inventory, or daily expenses until the business makes a profit.
Unfortunately, startup business loans can be difficult to qualify as lenders want to see a track record of success to ensure you can pay off your loan. You may need to start with a lender who offers business loans for your startup. You may also need to provide collateral, personal guarantees, and/or business plans to demonstrate your ability to pay off your lender.
Before you sign a loan agreement, you need to look at the pros and cons of startup business loans and make sure the loan is the right choice for you. If not, you can fund your startup in other ways, such as bootstrapping your business, applying for grants, or even securing investors.
Compare the pros and cons of startup business loans
The advantages of startup business loans
There are several main reasons why you might want to look into business loans for your startup.
Access to capital
Startup business loans provide access to funds that can be used in many ways, such as moving your business off the ground.
For example, lump options such as business term loans and equipment financing are often used for high costs that businesses need to carry out, such as product development, office equipment, and semi-truck financing. Revolving capital sources such as business lines can provide revolving capital sources to use when necessary.
These business loans are then repaid with the revenue that the business generates over time.
Maintain ownership
Startup business loans can save the problem of finding investors and selling fairness. This means giving up partial management of your business. Depending on the amount of stock you are selling, you may need to meet the investor’s requirements. With a business loan, you can maintain full ownership and run your business in a way that looks good.
Helps you build credits
If you choose a lender to report payments to the credit department, you can actually help with your finances by getting a loan.
Building credits is an important step if you don’t have anything or have bad credit. This makes it difficult to qualify for an affordable loan. Even if you don’t need to raise funds right now, a loan or business line is a good way to build your credit and make sure you qualify for the best loans for your future business. Some lenders, like Bank of America, even have programs that help you build secure credit. And you can graduate to the unsecured credit line of the future.
Please note that not all business lenders report to the credit department. It is important to check and confirm before applying for a loan.
Cons of startup business loans
There are also some cons to consider before examining a startup’s business loan.
Default risk
If your business doesn’t generate the revenue you expect or make profits for several years, you may not be able to pay back your business loans. If you are unable to repay it, you risk defaulting the loan. Lenders can seize assets that they used to secure a loan to pay off, and your credit will be hit hard.
According to the SBA Advocacy Office, 67.7% of companies have won it in the past two years, while 48.9% survived five years from 1994 to 2020. If you’re not sure your business will make a profit anytime soon, you might want to look into alternative financing options rather than business loans.
Strict Eligibility Requirements
Startups may have a hard time securing small business loans. A typical business loan requirement is a credit score of 600 or higher. Also, many lenders prefer to see established businesses that have been around for at least two years and have annual revenues ranging from $100,000 to $250,000 or more.
These requirements can be difficult for startups to achieve. According to the Federal Reserve Bank’s 2024 company, 49% of companies under the age of 2 earnings are under $100,000 per year, according to a company chartbook by revenue scale.
You can find more generous lenders. For example, some are willing to offer safe business loans to startups, while others accept credit scores below 600, but options may be limited, allowing them to pay more interest than established businesses with higher credit and revenue.
cost
Business loan fees and interest rates can also be a special burden on startups. The highest interest rates are reserved for established business owners with excellent individual or business credits. Some lenders are not willing to help startup businesses raise funds, as they are often seen as high-risk investments. And those who provide business loans will charge a higher fee of 30% to 60% or more to offset that risk.
You may also need to be aware of the fees that vary depending on the lender and the type of startup loan. For example, origination fees could be flat or a percentage. Typically between 0.5% and 8.00%. You may also need to deal with late payment fees, underwriting fees, and even maintenance fees. These costs can be summed up and you will need capital and planning to pay these costs when you obtain a business loan.
Personal warranty or lien requirements
To get a business loan, you usually need to sign a document called a personal guarantee. According to this legal document, if there is a default on a loan, you are personally liable for the company’s liability. If the lender is unable to pay off the loan, he can take you to court to collect the loss.
When retrieving a secured business loan, you will need to provide some form of collateral. This is an asset you place to protect your loan and reduce the risk to your lender. Lenders place a lien on the assets. This is a legal claim that gives the lender the right to seize the assets if the lender defaults on the loan. For example, if you take out a semi-truck equipment loan, use the truck as collateral, and default on the loan, the lender can ride the truck.
Defaulting on a loan and losing personal or business assets are risks that many business owners take. To make sure it’s right for you, you need to be able to manage your small business loans so that they don’t go into default.
Where to get a startup business loan
Traditional banks may be an option, but they usually have the most stringent requirements. Below, let’s take a look at lenders that tend to be more accessible.
SBA Loan
SBA loans can have a reputation for requiring a lot of documents. The approval process can take 30-90 days. However, they can become affordable and accessible options for startups. SBA loans are designed to support small businesses that are not eligible for traditional funding, offering long repayment terms and low interest rates. There is also a microloan program that offers under $50,000. This can be used to help businesses run and operate.
Online lender
Various online lenders are stepping up as startups and small businesses can have difficulty securing traditional bank loans. Many are specialized in working with startups, and these lenders offer loans with relaxed eligibility requirements and faster approval and financing time. Online lenders tend to accept businesses with just six months of business and revenues of $100,000, some accept even lower revenue.
Startup Business Loan Alternatives
If you find that a small business loan is not suitable for you, here are some common options to consider.
Bootstrap
Bootstrap is the process of funding a business using only personal funds or operating revenue. This works well when business overhead is low, such as running a consulting business from home. People who bootstrap businesses often get immersed in their own savings, either taking on personal debt or reducing as much money as possible when starting a business.
Business grants
Business grants are usually provided by government agencies, private companies, and nonprofit organizations. Grants provide the opportunity to receive funds without debt burden and without repaying the funds. However, grants are highly competitive as other companies apply. Also, this is not a quick fundraising solution as you may have to wait several months to see if you have won the grant.
Business Credit Card
Business credit cards help to cover the short-term needs of business owners. They are similar to the business line, but may offer unique perks such as rewards, discounts on specific purchases, and intro APR offers. You can also use your business credit card to build business credits and avoid interest charges if you can repay your monthly balance.
Crowdfunding
Crowdfunding is a popular option that includes an online platform for running fundraising campaigns. It takes more time and energy than taking a loan because you raise small amounts of cash from multiple sources. However, this is a viable alternative for startups struggling to get loan approval.
Conclusion
Startup business loans are options for getting advance cash to get your business up and running. They may also help build trust.
However, be sure to consider all options before applying it. This includes risks to consider, such as the default risks if you can’t make payments and high charges and fees. If you haven’t got a startup loan, consider alternatives to fund your startup, such as crowdfunding or business credit cards.
