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Start Up Business Loans: Coworkers around a table

6 Types of Start-Up Business Loans for Your Company

Last updated: October 25, 2019
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When it comes to launching a small business, most people will need some initial investment. That investment can come from savings or personal wealth, but often, entrepreneurs with business ideas will need to look for financing. This is where start-up business loans frequently come into play.

Understanding your business loan options can often make the difference between a startup being successful or not. In this article, we will look at different types of business loans and help you understand the best way to acquire capital to launch your business. Plus, we’ll get to some frequently asked questions about smart finances for entrepreneurs.

Understanding Business Loans

Business loans allow companies to get off the ground, whether that’s acquiring new equipment or leasing a storefront. They provide the upfront money needed to take a business to the next level. If you have an idea you feel passionately about or have a business you feel can take off if it just gets that little push, a business loan can be exactly what you need to get started.

When it comes to small business financing, you will need more than just a business name and a smile. Start-up business loans can come from different places, but all require you to have your financial ducks in a row before you apply.

If you pursue a personal loan, you will need a strong credit report that demonstrates to a bank or lender that you are responsible about paying back your debts on time and regularly. Small business loans will often also have a requirement of decent personal credit, but they may also require you to provide a business plan to convince them your idea is feasible and will find success.

6 Start-Up Business Loan Options

Small business startup loans can take many forms. Some are from traditional financial institutions, such as a bank or credit union. Some will be as simple as opening a credit line. Others will require a comprehensive business plan as part of an in-depth loan application process. Let’s take a look at six different business funding options to understand this world deeper.

1. Microloans

Microloans are smaller loans, typically up to $50,000 that are usually perfect for smaller businesses. Microlenders will review a business plan and give a business some money to help them purchase equipment, initial inventory, or working capital to get their business off the ground.

The benefit of these smaller loans is that they tend to have lower interest rates and favorable loan terms. The SBA Microloan Program, run by the Small Business Administration, offers loans of up to $50,000, with up to six-year term loans, and interest rates between 6.5% and 13%. The organization does limit who can access these SBA loans by businesses that fit their criteria of a “small business” — these criteria vary widely by industry, but are defined by number of employees and annual revenues. To understand this better, it’s helpful to review a full industry-by-industry guide to the SBA’s small business criteria.

The drawback of microloans is that they are limited in their size. Small business owners looking to acquire real estate will often not be able to borrow enough to secure a storefront or warehouse. These startup loans are often just meant to be enough to help get a small business off the ground. The SBA is a popular place to look, but there are more and more nonprofit lenders out there as well.

2. Equipment Loans

An equipment loan will let a business owner acquire expensive equipment and finance it through monthly payments instead of paying a massive bill upfront. For a company just getting off the ground, this type of financing can allow them the opportunity to get what they need to run their business and pay it off once money starts to come in. To receive equipment financing, you do need decent credit, but the criteria isn’t as strict as one might need for a business loan.

3. Personal Loans

A personal loan will allow a new business owner to use their personal assets to acquire financing. This can be through a second mortgage or another type of homeowner loan. It can also just be through a loan taken directly from a credit union or a bank. The terms of these loans, including interest rates and maximum loan amount, will often depend on a personal credit score. But with interest rates low, banks and credit unions will often allow people to negotiate favorable loans to help them launch new businesses, especially businesses that might not qualify for a small business loan.

Along with bank loans, there are also several online lenders offering personal loans. More and more companies, such as Upstart and LendingTree, offer people with good credit the chance to take out a personal loan on favorable terms.

4. Business Credit Cards

man with credit card at computer

A business looking to get going quickly can get some start-up financing through a business line of credit. Business credit cards function like normal credit cards, and if you’ve got a strong credit score, you can usually secure a relatively high credit limit and manageable interest rate, though the interest rates tend to be much higher than other loans, especially if loans are not paid back quickly.

People with bad credit scores (think sub 500) or not much credit history can also acquire business credit cards, but they will often require a deposit or some sort of collateral.

5. Crowdfunding 

Crowdfunding is one of the hottest new ways to acquire business financing. Crowdfunding platforms like Kickstarter and GoFundMe let you pitch your business to large groups of people, then offer rewards or early access to products for people who pitch in funding. This way relies on some good initial marketing, but you can get quick cash flow for your business idea without having to agree to onerous loan terms.

6. Friends and Family

The drawback of asking friends and family for help as a loan option is that they might not have the capital you need to get off the ground. Also, there’s always a risk when mixing friends, family, and money. The good thing is you can negotiate a great payback schedule that works for everyone, get money when you need on fair terms, and hopefully get annual revenues up to the point that everyone makes money and is happy.

Picking the Right Loan for Your Business

When it comes to picking from financing options, you need to take several factors into account. The first and biggest question you need to ask yourself is: What are your startup costs?

If costs are manageable, it might be smartest to just open up a business line of credit through a credit card, and get to work. If, on the other hand, you need expensive equipment to launch your business, or are looking to acquire storefront real estate, you need to slow down and assess your options. In that instance, it’s much smarter to explore SBA loans or look into equipment financing.

Nimble and quick aren’t always the best ways to go when launching a business. It can be tempting to take out a personal loan or open a credit card to get off the ground, but do your research. Find the best terms. Talk to multiple banks and lenders. Get the right deal.

Frequently Asked Questions

Start up Business Loans: taking payment at checkout

We’ve covered different types of start-up business loans, and how to pick the right loan for your business. Let’s get to some frequently asked questions.

1. Should I open a separate business bank account?

Absolutely. Immediately. One of the biggest mistakes many small businesses make is not getting their finances in order, often through lackadaisical bookkeeping or by mixing personal expenses with business expenses. This can be a nightmare come tax time, and hinder your ability to make smart decisions for your company.

2. Speaking of taxes, do I need to file separate taxes for my business?

Yes, provided your business crosses a certain threshold of revenue, you will need to report it to the IRS. You can file taxes as a freelancer if your business is run by yourself, but if you employ other people, you will need to file taxes as a small business.

3. What about getting money from venture capital?

Venture capital often isn’t technically a loan, as usually angel investors will come in and offer you capital in exchange for a stake in your business. In essence, they’re not lending you money; they’re buying a piece of your business and coming on as a co-owner. This can be a great way to raise cash, but seed money usually will only come in for companies that investors believe can make massive amounts of money back. Understandably, you need to have a pretty big idea to get that interest.

Finding the Best Loan for Your Small Business

Businesses need money to run, and a business loan can be a smart, responsible way to get the capital needed to run your business. After reading this article, you should have a good sense of the options available to you and what can help you get the financing you need to become the next great entrepreneur.

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