Small Business

8 Types of Small Business Loans for Startups

8 Types of Small Business Loans for Startups

Beginning a new startup is an exciting time in the life of an entrepreneur. You have an idea. You have a plan. Now you’re taking the plunge into the waters of the great unknown. Before you dive in, it’s important you have the tools and resources necessary to keep your business, and your head, above water. That’s why every potential entrepreneur needs to know these eight types of small business loans for startups.

The most important lifeboat for new business owners often comes in the form of working capital. While many businesspeople already understand the importance of working capital, securing it can be easier said than done for a startup. So, how do you find small business loans for startups? What options are available? First, it’s important to understand what differentiates a loan for a startup when compared to other small business loans.

What Makes Small Business Loans for Startups Special?

A small-business loan is exactly what it sounds like. It’s a loan specifically designed to help small businesses secure the capital they need to thrive and succeed. Small businesses account for an overwhelming percentage of the American economy, so it’s only natural to want to foster growth within these companies.

Small business loans come in the form of government loans, private loans from banks, and other alternative lending sources. Where small business loans differentiate from startups is in the history of your business, its available credit, and what type of loan it’s able to secure.

Many small business loans require extensive credit histories and excellent credit scores in order to qualify. By their nature, startups haven’t been around long enough to establish the credit history necessary to qualify for a traditional bank loan. Thankfully, there are all kinds of other options available from SBA loans to equipment loans for startup businesses that are specifically designed with startups in mind.

With a better understanding of what’s out there, startups are able to set realistic and attainable goals for their business without biting off more than they can chew.

Small Business Loans Available for Startups

1. Traditional Equity Financing

Anyone who has watched “Shark Tank” is familiar with the idea of equity financing. Equity financing is when you raise money by offering ownership interest in your company. Let’s say your business was valued at $1 million, and you were hoping to raise $100,000 through equity financing. You would offer an investor a 10 percent ownership stake in your company.

Equity financing can be beneficial because your new partners are more invested in the success of your business. That’s because it’s also their business now. Equity financing can also keep you off the hook for repaying the loan in certain situations if your business fails. A downside of equity financing can be the loss of control in your business. As someone that worked hard to build your company from the ground up, it can be hard to let go and not have full say in how things run.

2. Crowdfunding

As technology and social media continue to expand in influence, crowdfunding keeps growing as a popular small business loan for startups. The Securities Exchange Commission (SEC) approved a new section of the JOBS Act in 2015 called Title III. What Title III did was loosen the purse strings and allow companies to raise up to a maximum of $1 million in a rolling 12-month span.

Furthermore, Title III changed up who is allowed to invest in companies in exchange for equity. Equity used to be only available to accredited investors with a lot of money (at least $1 million net worth). Now, companies can offer equity to all kinds of investors through online crowdfunding platforms. The big disadvantage here is that, with so many different people holding equity shares in your company, it can be difficult to secure funding through more traditional means later on.

Equity financing can be beneficial because your new partners are more invested in the success of your business. That’s because it’s also their business now. Equity financing can also keep you off the hook for repaying the loan in certain situations if your business fails. A downside of equity financing can be the loss of control in your business. As someone that worked hard to build your company from the ground up, it can be hard to let go and not have full say in how things run.

3. Commercial Bank Loans

As we get into traditional commercial bank loans, we’re entering the world of debt financing. Debt financing is what you think of when it comes to getting a loan. It’s money that’s going to be loaned to your company with the expectation that it will be paid back in a certain time frame, often with interest or fees attached.

Chief among available debt financing is the commercial bank loan. Securing a loan from a commercial bank can be a boon to startups, but you may have an easier time catching a unicorn at the end of a rainbow. Commercial bank loans are difficult for well-established companies to qualify for. It can be nigh impossible for a startup. To qualify, you need an impeccable credit score and credit history. Many bank loans require two years of operation, so it’s not really a safe bet for businesses in the startup phase.

4. Small Business Administration (SBA) Loans

SBA Loans are loans provided by the United States government, with small businesses specifically in mind. We’ve covered SBA loans in the past, but the most important thing to remember is that these are long-term loans meant to get small businesses off the ground and up and running.

Because SBA loans are operated by the U.S. government, they can also have strict eligibility requirements that can make them difficult to come by for startups. It’s also important to note that these loans are for businesses that are in it for the long haul. We’re talking about 10 or 15 years. This is great for a local business looking to gain a foothold but might not be ideal for a startup looking to find money fast.

5. Equipment Loans for Startup Businesses

Startups find themselves looking for loans for more than making payroll and keeping the lights on. There are all sorts of unforeseen expenses when it comes to starting your own business. A large part of these expenses are equipment costs. And equipment covers more than you might think. This is where equipment loans for small businesses come in. It’s not all about tractors, nuts, and bolts. Your equipment costs also cover computers, office supplies, and many of the other tools that help you to keep your business running every day.

Equipment loans for startup businesses are also known as equipment financing. The reason they call it equipment financing is that the equipment for which you use the loan also acts as collateral for the same loan. This built-in collateral helps to mitigate the risk associated with the loan, making it much easier for startup businesses to qualify. Even better, equipment loans for startup businesses come in both short-term and long-term varieties; so your company can decide how much it needs and for how long.

6. Online Invoice Financing

The first year in the life of a startup can be sink or swim. Because it’s still so early in the life of the business, startups often don’t have the extra cushion or working capital to cover cash flow gaps that arise through net payment terms. This can prove fatal when your company is desperately awaiting payment on a large invoice to fund new orders and keep the doors open.

Online invoice financing is an alternative lending option that is gaining favor in the startup community. It works through a small business or startup borrowing against its existing invoices or accounts receivable. The startup provides the existing paperwork for its invoices and is then advanced up to 100 percent of their invoiced amount in as little as 24 hours. Because the money is being loaned against invoices for services the company has already provided, there’s less risk for the lender. This makes it much easier for startups to qualify.

7. Credit

When all else fails, sometimes there’s only one thing left to do: charge it! We kid, but taking on debt through credit is never something that should be done lightly. That said, it can still be a valuable resource for startups looking to make ends meet.

A line of credit can be obtained through a commercial bank or even a high-balance credit card. The key difference with a line of credit from a bank is that you’ll often get much better interest rates (and a larger credit limit) than anything you’re going to find with a credit card. In a pinch, credit can be a great way to bridge the gap in the early days of a startup, but it’s important not to hamstring your business too early with a tremendous amount of debt.

8. Personal Loans

As a startup, much of your business is relying on what you, personally, bring to the table. This early in the life of a company, lenders are investing in the people of a business just as much as they are its products or services. The same is true when applying for a loan. While it can be difficult for startups to qualify for traditional bank loans, you might have better luck applying for a personal loan instead.

If you have a fantastic credit score and a sound credit history, there’s a good chance you can qualify for a personal loan to find the money your business needs. However, it’s important to keep in mind that personal loans can be risky. When you take out a personal loan, you’re the one who is on the line. If your business goes south, there won’t be anyone to help and it will be your credit taking the hit.

Small Business Loans for Startups Make the Impossible Possible

The power of the entrepreneurial spirit and the excitement of starting your own business is almost impossible to resist. For the brave people willing to take the plunge and put themselves out there, a little help in the form of a small business loan can go a long way. Now that you have a better idea of the sorts of small business loans available for startups, you’ll be that much more prepared to find the funding you need to succeed.