- Good for young businesses with limited financial history
- Interest-free for first 9 to 15 months
- No prepayment penalty
- Only a credit report needed for pre-approval
- Can take 30 to 45 days to complete financing process
- Functions as a high-limit credit card, not as cash
- Exceptional credit required
Who Qualifies for Small Business Startup Loans?
Because there’s no one option for a small business startup loan, we’ll broadly cover the various financing options for startup owners—SBA microloans, business credit cards, small business grants, friends and family, and crowdfunding.
As you might guess, many young and new businesses can qualify for a small business startup loan options.
For businesses younger than 6 months, it typically makes sense to pursue one of these small business startup loan options. Businesses older than 6 months (or businesses approaching one year) might have more traditional business loan options available to them, and should consider applying to those instead.
The most important factor in all of these small business startup financing options will be your personal credit score: The higher the score, the better your chances of qualifying for an SBA microloan, business credit card, or even a personal loan for business.
Your eligibility for more alternative small business startup financing options like grants, crowdfunding, or friends and family will depend less on your credit score and more on the details of your business—like what your business model is, who your customers are, what community you operate in, and so on.
How to Apply?
The application process for small business startup loans depends on which method of financing you’re applying to. Here’s a breakdown of what to expect with each type of small business startup loan option.
- SBA microloans will typically have the most intensive application process. Many documents will be required and the process as a whole can take at least a few weeks.
- Business credit cards have a very simple application process, only requiring your federal tax ID or your Social Security number.
- The application process for a small business grant depends on the grant you’re applying for.
- Creative funding options like friends and family or crowdfunding won’t have traditional small business startup loan applications, and will depend on your unique funding situation.
How Do Small Business Startup Loans Work?
Just starting up and already feeling lost?
The world of business financing can be confusing—especially for first-time business owners just striking it out on their own.
Getting capital in the form of a small business startup loan is challenging. With no proven business history to show, a startup is the riskiest kind of business to fund.
But not to worry. As we’ve mentioned above, there are a variety of different small business startup loans and financing methods available to new business owners.
Check them out and see what fits your business best.
The SBA microloan program is probably the most traditional small business startup loan on this list. The Small Business Administration’s microloan program offers small businesses anywhere from $500 to $50K in capital. The average SBA microloan is $13K.
While the smaller size of these small business startup loans may be a plus for very small businesses with less substantial startup costs to bear, some businesses might find that a maximum of $50K is insufficient.
Despite the name, SBA microloans aren’t really loans issued by the SBA. Instead, the SBA loans to intermediary, non-profit lenders and financial institutions who then make the ultimate decision of which startup businesses to fund.
One of the benefits of applying to SBA microloans as a small business startup loan is that most of the partnered intermediary lenders are mission-oriented organizations that work specifically in their local communities. Not only do these lenders tend to focus on minority-owned businesses or those operating in disadvantaged areas, they’re also well equipped to work with businesses in local communities and have helped similar small businesses start in your area.
Business owners with less than 6 months in business should absolutely consider getting a business credit card to help cover startup costs.
While not a traditional small business startup loan, a business credit card can give you access to a credit limit that you can borrow up to when you need to cover big expenses. Just as long as you pay off your balance each month, you won’t have to worry about high interest rates on the balances you carry over.
While a business credit card makes sense for every business owner to have in their wallet, a business credit card can be especially helpful in place of a small business startup loan for three reasons:
- They’re very fast to apply to.
- They give you the freedom to borrow as much or as little as you need each month.
- They don’t require collateral to secure the credit line.
Our recommendation for startup business owners are 0% introductory APR cards . In a lot of ways, putting expenses on a business credit card with a 0% intro APR period is like using a free loan. Plus, if you have existing balances on other business credit cards, you can transfer them over to your 0% intro APR card.
Be careful, though—it’s an introductory rate. Make sure you can pay the balance before that rate spikes at the end of your introductory APR period. Also, you might need a certain credit score to qualify for the promotional rate in the first place.
Small business grants are a great way to raise money for your startup business—who doesn’t want free money?
But small business grants from non-profit or government organizations can be challenging to secure, as many small businesses across the country are applying to them. On top of that, some grants are reserved for certain kinds of businesses, like mission-oriented businesses, non-profits, or businesses operating in specific communities.
While small business grants aren’t a traditional replacement for small business startup loans, they’re certainly worth applying to if you think you have a shot at receiving one.
When more traditional small business startup loans aren’t available to your new business, another option is to turn to friends and family to raise initial funds.
While many successful businesses have been built off the backs of generous friends and family members, this financing method can be risky for startup owners.
When you fund your startup with the money of friends and family, both your business’s financials and your personal relationships are on the line.
For that reason, be sure to work with people you trust. Before you get into a funding agreement, make sure that the contributors understand your business plan, what you’ll be doing with the money, and what their role will be in the funding relationship. Handling the situation as professionally as possible will help prevent issues that could arise in the future.
Another creative funding method to consider when other small business startup loans don’t make sense just yet is crowdfunding.
Crowdfunding lets you raise capital from online campaigns—typically through a dedicated crowdfunding platform, like Kickstarter or IndieGogo.
With crowdfunding, you set a specific amount of capital as a “goal” you’re trying to hit. Users on the platform can donate money to your campaign if they feel inspired to do so. Unlike equity or debt financing, you don’t have to give up ownership in your business or pay interest to these funders. Typically, you’ll repay their generosity with a perk, a free gift, or a simple “thank you” note.
Crowdfunding is a good way to raise a small amount of capital from a large amount of people. It tends to work best for product-based businesses or those with creative, innovative ideas.