Everything You Need to Know About Startup Business Loans

The word “startup” often conjures up the image of a young, scrappy team brainstorming in a coworking space trying to get a new app off the ground. But in reality, any brand-new business is a startup.

Maybe you’re an aspiring small business owner looking to open a local cafe, a gym, a daycare, or a salon. Or maybe you’re dreaming of starting a tech company that sells software. In either scenario, you may need early stage business financing.

Companies need a lot of cash flow to operate and cover their startup costs, and in the early days, there’s not a lot of money coming in — if any. To get past this stage, and help you hire a team, create your offerings, and sell them to the world, there are a number of financing options that help you bridge the gap.

We’ll cover everything you need to know about loans for new businesses, what kind of business lenders are available, and how different loan programs can help you turn your idea into a brick-and-mortar reality.

What is a startup business loan?

A startup business loan is an agreement where a lender will give a borrower a predetermined amount of money that will eventually be paid back with interest. Different funding options will provide different types of startup business loans — each option’s loan terms will outline the loan amount and repayment terms that will apply.

Startup business loans, like other types of business loans, can only be used for business expenses, and different types have various restrictions about what they can and cannot be used for. 

Entrepreneurs often need startup business loans to secure funding to help them bring an idea from dream to reality, because very few people have enough money on hand to start a business with no help.

What is the best way to borrow money to start a business?

The best way to borrow money to start a business depends on the type of business, the amount of money you need, and the repayment terms that your business projections show you’ll be able to meet. There’s a wide range of options, from the SBA to merchant cash advances to friends and family loans. 

We’ll get into all of them. Nearly all loans will require you to provide lots of business documentation, so keep your business operating plan at the ready.

Startup funding options

SBA loans

The U.S. Small Business Administration, or the SBA, offers a few types of business funding that can be helpful to startups.

7(a) loan

7(a) loans are the SBA’s most popular loan program. Business owners typically use them to pay for business real estate (buying, renting, renovating, or redecorating), but others choose to take out these loans for short- and long-term working capital, to purchase equipment, and to refinance business debt.

The maximum amount you can receive with an SBA 7(a) loan is $5 million.

The SBA 7(a) loan qualification requirements can be found on the SBA's 7(a) loans site.

504 loan

In order to fund businesses and create jobs within their own communities, Certified Development Companies work in partnership with the SBA to provide 504 loans. These are long-term and fixed-rate loans, up to a maximum of $5 million, and can only be used for specific types of expenditures. 

Businesses can use 504 loans for expenses like existing buildings or land, new facilities, and long-term machinery and equipment. They can also be used in order to upgrade land, streets, and utilities. 504 loans cannot be used for managing existing debt, buying inventory, working capital, or investing in real estate.

Learn more about eligibility and requirements on the SBA’s 504 loans site.

Microloans

As their name suggests, microloans are for small amounts — they only go up to $50,000 and are, on average, granted at around $13,000. This makes them best suited for small startups and local businesses that are either just getting off the ground, or need a little financial boost to kick off their ability to generate revenue.

Microloans are meant to fund community businesses and sometimes also come with management assistance from the lender, which are nonprofit SBA funding intermediaries, called microlenders. They can be used for virtually anything to improve a small business or startup, like working capital, inventory, and equipment, but not for real estate or to pay debt.

Startups can use the SBA list to find approved intermediaries in their area, and learn about their various eligibility and credit score requirements.

Learn more about the microloans application process and requirements on the SBA’s microloans site.

Line of Credit

A business line of credit, also known as a business credit line, is a credit amount granted to you that’s available to be used for a certain period of time. Business owners only need to pay back what they actually use once they’ve started using it, and that flexibility is the key appeal of lines of credit. 

Unsecured lines of credit are harder to qualify for, have lower limits, and higher interest rates, but they don’t require businesses to put up collateral. Secured lines of credit do require collateral, but they are easier to qualify for, have higher limits, and lower interest rates.

To see if business owners qualify for a line of credit, lenders will typically look at your credit history (including personal credit score and business credit score), the fundamentals of your business (including profit and loss statements, your business plan, and your bank account information), among other requirements that vary across lenders.

Business owners tend to get business lines of credit from banks, but you can also get them from other types of financial institutions. Always avoid payday lenders who offer lines of credit and loans with astronomical interest rates that keep their customers in ever-growing debt.

Merchant Cash Advance

Merchant cash advances are a great option for businesses with busy owners who don’t want to spend time proactively making monthly payments via bill pay or transfers — because merchant cash advances are paid with a percentage of credit card sales, plus a fee, collected by the payment processor. That means the amount you automatically repay each day will fluctuate along with how much volume you’re selling each day — slow days mean lower repayment, and high-volume days mean higher repayment. Financial institutions like banks can provide merchant cash advances, but many payment processors have started offering them as well.

This type of funding is best suited for businesses a little bit further along in their opening journey, because you’ll need to have some steady revenue coming in to be able to start making payments. A salon that’s fully built and almost ready to go but needs a little boost to hire well-paid staff might be a good candidate for a merchant cash advance, whereas a software startup that’s still deep in the development phase of the product might be better off pursuing a different funding option.

Business grants

Business grants are an often-overlooked source of funding for businesses. Private companies, community organizations, and federal and state organizations all have programs that provide business financing in the form of grants. 

Grants can be preferable to traditional term loans as they do not have to be repaid, and they can come in the form of free services (especially when they come from private companies) or in cash. However, most government grants require at least six months of time in business, so these grants are not always the right approach for startups looking to get off the ground. 

Competition for grants is understandably very high, and they can be time-consuming to apply for. But they are ultimately free money, which is not the case for any other type of business financing. 

Grants have an extremely wide range of eligibility requirements, and different grants are created to help different types of businesses. There are grants for specific industries, identity-based grants (like programs for Indigenous women entrepreneurs, or for LGBTQ+ businesses), and there are grants for different states or regions. 

One of the most well-known business grants from the US Government is the Chamber of Commerce’s Dream Big Awards, which gives $25,000 to selected businesses that, in their first year of operating, have made significant contributions to the US economy.

Here’s a list from the U.S. chamber of Commerce of 68 different business grants.

Personal loans

Some entrepreneurs have the fortune of having friends and family that are interested in and financially able to pitch in to help start their businesses — meaning they can turn to them instead of taking our small business loans from banks or other institutions. 

If that’s the case for you, protect yourself, your family and friends, and their investment by working with a lawyer to draw up a contract that includes fair interest rates (if any) and a repayment schedule that works for your business and your lender. 

How do I qualify for a startup business loan?

Startup business loan eligibility requirements

Most startup business loans will require applicants to have any or all of the following: 

• A strong business plan for a for-profit business

• A track record of fair, good, or great credit

• Proof of need for the loan

• Good character

• A net worth below a specific threshold

• A plan and proof that they can pay the loan back

Some loans will require you to show you’ve pursued other avenues for funding, that you have no existing debt obligations to the government, or that you have reasonable invested equity. 

Some loans will require collateral, and some won’t. Some will have flexible repayment terms and others will be more rigid. 

Talk to your peers, your accountant, and your lawyer as you research various funding options to determine which loan programs, grants, and financing plans are worth pursuing for your new business.  

Startup business loan application process

Seeking out loans for a new business, whether it’s from a brick-and-mortar bank, an online lender, a credit union, a private company, or a government organization, is a process that will require some paperwork. Regardless of which loan option you pursue, you will likely need to provide the potential lender with some or all of the following documents:

1. Credit history (personal and business credit scores)

2. Personal and business tax returns

3. A very strong business plan, which is particularly important for startup funding

4. Social security card

5. EIN

6. Proof of collateral

7. Leases and other contracts

8. Disclosure of other debts

9. Licenses and permits

10. Proof of ownership and affiliation

Some loan application processes ask for information about your business like annual revenue, a balance sheet, and accounts receivable and accounts payable aging — but if you’re working on funding a brand-new business, you won’t have any of these. Assemble any other financial information that shows you have a strong track record with finances, business, and paying off debt. 

Every lender has a different application process — some completely online, others involving phone calls, in-person meetings, or even presentations. 

Go to the website or the type of financing you’re applying for and thoroughly read the application requirements. Submit your application, including all your supporting documentation, and await the notification that you’ve been approved or denied.

Is it hard to get a business start up loan?

As mentioned above, it can be challenging to get a startup loan — especially if this is your first business — because borrowers have less proof available to show the lender that shows how strong their business is. But pursuing various different avenues, including SBA loans, grants, brick-and-mortar bank loans, merchant cash advances, and lines of credit can help you find the funding you need to bring your business to life.

Get your startup funded

Whether you need a small short-term loan, or you’re looking for a major source of funding to take your business from 0 to 100, there are many options you can pursue. Startups often seek out investors as well as traditional business loans, but diversifying your funding search with options like microloans, grants, and lines of credit can help you meet your early startup financial goals. 

Continue learning about loans with our guide on How to Apply for a Business Loan.