A guide to startup business loans

By Julian Bonte-Friedheim | March 19, 2023
A guide to startup business loans

The world of online retail is thriving. Ever since the COVID-19 pandemic, which increased total eCommerce sales by 43% in 2020, an increasing portion of shopping is done online. There are great opportunities for startups to expand in the sector, but the competition is fierce. To succeed in this space and establish yourself as a brand, taking a startup business loan can be a wise choice. This additional financing can open the door to new projects, products, and ideas that can put your business on the road to consistent growth.

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Table of Contents

What Is a Startup Business Loan?

A startup business loan is a way to fund the establishment of a new company. This type of financing is important as startups often face significant initial expenses, such as developing and testing a product, renting space or equipment, ordering inventory from suppliers, or hiring employees. Companies that have already passed these stages but are still in the early phases of growth can also benefit from a startup business loan. It can help them fund their supply chain and operations, in order to build stronger and longer-lasting revenue streams. Since startups don’t usually have a large amount of revenue to begin with, they can find it more challenging to get approved for traditional forms of loans. This is why it is important to develop a thorough understanding of the various financing options that are available.

What Can You Use Startup Loans For?

There are many reasons you may need funding for your startup, which depend on the type of business you’re launching. If you’re a manufacturer, your equipment budget might be higher than that of a retailer who simply sells goods to the consumer. Dropshipping businesses usually have smaller teams and office spaces so they might focus their budget on marketing.

Companies looking to launch a new and unique product are likely to invest in ad campaigns to drive consumer demand. Others that are entering markets with lots of competitors might want to raise funds to order large batches of inventory at a better price, which they can pass on to consumers. Some businesses might not even know which product they want to sell yet, so they might focus their finances on market research. Startup business loans open endless doors.

Who Qualifies for a Startup Business Loan?

If you’re looking for funding, you’ll find that banks and lenders can have very particular eligibility requirements. Banks prefer to work with those who have extensive trading histories and good credit scores, while private lenders offer more wiggle room. Startups generally have a harder time obtaining funding since they tend to be at an early stage where they haven’t brought in a lot of revenue yet. If you’re in this situation, it’s simply a matter of research to find a lender that is willing to fund you. This may involve having to pay high interest rates or share ownership with investors. The better your company performs and the longer it has brought in revenue, the better the startup business loans you qualify for will be.

Startup Business Loan Types

Getting the right kind of funding for your business will require extensive research. It is best to build a list of options that you can compare and contrast with each other. Some lenders may be happy to give you an offer early on, but you could find that you’ll get a better offer from a lender that takes longer. Each type of lender will have different requirements so try to develop an understanding of what awaits to avoid wasting your time on unnecessary paperwork.

Personal Loan

Since many startups don’t get approved for bank loans, their next choice is to take out a personal loan instead. These are typically easier to qualify for. However, it will depend on your personal financial background rather than your business history, which new startups lack by default.

Benefits – Personal loans involve longer repayment terms, which means lower monthly payments, making it easier to manage your operations. The interest rates for personal loans are often lower than those of credit cards. You are also free to use the capital for anything you want, so if you want to order larger batches of inventory or boost your marketing, then you can do so.

Downsides – Monthly payments are fixed, so it doesn’t matter if sales are down, you will need to pay anyway. Interest rates might be quite high as well, so make sure you fully understand any agreement before you sign it. Some companies also impose prepayment penalties, which means that even if you pay the whole loan early on, they still collect all remaining interest. Finally, even if your business defaults, you will be on the line for repaying what you borrowed personally.

SBA Loan

SBA (Small Business Administration) loans are backed by the federal government. They come in a variety of different types, with varying terms. That means you have a wide selection of options to choose from. Some loan providers might ask you to make a down payment first while others might restrict the amount they are willing to give you.

Benefits – This loan type offers flexible repayment terms, as they tend to consider your current situation and budget. Deals tend to be on the longer side, so you’ll have lower monthly payments. Deals often set maximum interest rates, so you won’t experience any surprises down the line.

Downsides – The approval time for an SBA loan is very long, which can mean that you can’t kickstart your projects for what can be a significant amount of time. The terms of SBA loans aren’t the best, and other lenders are likely to have better conditions and interest rates.

Business Grant

business grant can be offered to businesses by private organizations, the state, and the federal government. If you obtain one, then you don’t have to repay the funds, but they will dictate what you spend them on, as well as your spending schedule. For those who don’t qualify for regular loans or can’t afford large monthly payments, this can be a good option.

Benefits – The ability to receive money without having to pay it back is clearly highly desirable. You get to invest in your business without worrying about repaying the funds. This could give you a huge head start that would facilitate long-term success later on.

Downsides – Grants are very difficult to obtain. There are many applicants to compete with, and even highly qualified businesses get rejected due to the limited amount that organizations can offer. It’s also a short-term solution, as businesses require consistent cash flow to keep their doors open.

Peer-To-Peer Loan

Peer-to-peer loans allow private individuals to loan each other money, without a middleman. This transaction is often facilitated through a website or app. You’ll have to repay any funding you receive with interest, regardless of your company’s success, which makes it similar to a regular loan.

Benefits – Peer-to-peer loans have lenient requirements compared to regular loans, as you are dealing with private people whose spending isn’t regulated like a business. While they will review your credit history, a low score doesn’t mean automatic rejection. You’ll have flexibility with interest rates, as you can negotiate them. Plus, you’ll receive your funding faster than you would have with a lender.

Downsides – When you borrow from a bank or lender, you have protections in place if you fail to pay the loan back. With this loan type, you don’t have those protections. Lenders can add disguised fees into the contract if you don’t review it carefully.

Equity Loan

If you’re looking for funding and are open to having business partners you can sell shares of your company to investors. This can help you raise the funding you need to get your startup off the ground. Investors can be family, friends, venture capitalists, or angel investors.

Benefits – You have access to funds quickly, as these investors are private people who aren’t subject to heavy regulations. If the business fails, you have no obligation to repay them, but be careful who you work with, as conflicts may arise. New partners can offer insights into your business operations, improving it as you grow together.

Downsides – Your ownership is weakened with every sold share. Although you don’t have to repay their investments if the business fails, you do have to share profits among them when you thrive. This could cost more than the interest you would pay on a regular loan, but if investors are your only option, you can always offer to buy them out later.

Business Line of Credit

A business line of credit is useful for day-to-day expenses and emergency costs. For example, you can use it for paying rent, utilities, and payroll during your launch when income might still be low. This type of loan is easy to qualify for, and it’ll keep you afloat until you get your hands on a larger loan or your profits get to a self-sustaining level.

Benefits – Lenders usually have lenient eligibility requirements when it comes to this loan type. It’ll help increase your credit score, so you can qualify for better financing options further down the line. You are also able to spend these funds wherever you see fit, as the lender doesn’t dictate your spending conditions.

Downsides – This loan, which is mostly for startups or new small businesses, is considered high risk for the lender, meaning higher interest rates. Additionally, the borrowing limit is usually on the lower side, which means this type of funding might not be enough to cover all your expenses. You should consider this a partial solution to any cash flow issues.

Business Credit Card

If going for loans and investors doesn’t work out the way you might hope, business credit cards can be a good solution. There are many banks and lenders that offer good funding at reasonable rates. Depending on your credit history, you might just get a high enough credit limit to fund the process of establishing your operations.

Benefits – This type of loan is relatively straightforward to obtain. Business credit cards have a quick application process, so you can receive the funding you need within days. You then get easy access to the money, which you will be able to take out whenever you need to. Going with this option also helps improve your credit score.

Downsides – While interest rates vary, a low credit score means yours will surely be on the higher end. Business credit cards also offer less purchasing protection than a personal credit card would. This includes difficulties with returning purchased goods, billing errors, and fraudulent charges.

Merchant Cash Advance

If you’re in need of quick financing to launch your operations or ensure your supply chain doesn’t face disruptions, a merchant cash advance is one of the easiest loans to obtain. It entails getting a sum of money that you then repay via a percentage of your sales or monthly payments. Merchant cash advances are usually flexible so you can adapt repayment schedules to your predicted cash flow.

Benefits – You can usually get approved without your credit score or business history being a major factor. There is no need for collateral, so none of your business assets are at risk. The flexible payment options make it easier for you to remit funds without disrupting your operations.

Downsides – If you’re looking to improve your credit score to qualify for better loans, this isn’t the type of funding for you. Since it’s not technically a loan, your credit history isn’t affected. Interest rates are also on the higher side. If you fail to make payments, depending on your deal, the lender may be able to remove money from your account, regardless of sales volume.

How To Apply for a Startup Business Loan

When researching loan types and lenders, there are a lot of variables to consider. The type of deal you choose can have a strong impact on your company’s long-term performance. Here are the steps involved in applying for funding:

  • Review your budget
  • Determine your business goals
  • Find lenders whose conditions fit your needs
  • Request your desired funding amount
  • Submit your applications
  • Wait for responses
  • Receive the funds

Remember that you don’t have to accept every offer that comes your way. Banks and lenders usually give you a few weeks or even months to think it over before they take back their offer. To give yourself the most options you should try to find several deals and apply. This way, you can always compare and contrast the offers you end up receiving. You should review factors like your budget and predicted income, consult with experts, and do market research, in order to best understand what you need from any deal. Banks and lenders are willing to consult with you even if you haven’t decided to apply yet.

Expand Your Success

Once your startup is more established and has experienced solid sales for at least six months, you may want to consider an 8fig Growth Plan. It involves receiving regular cash injections to fund your operations. This capital can be spent on whichever project you think is best for your company. You maintain full equity and don’t have to answer to anyone about your business decisions. There are no hidden fees or interest, and nothing has to be offered as collateral. Instead, you agree on a cost of capital that you will repay over a pre-arranged schedule. Join 8fig and accelerate your business growth today.

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