So you’ve taken the leap into entrepreneurship and it’s time to figure out how to get your business up and running. You need funding to start achieving your goals. If you’re looking at financing options, a startup business loan is a great solution that allows you to build your business’s credit history, which will help you qualify for other types of credit in the future.
Traditional bank loans can be difficult for entrepreneurs to secure until they have a solid business history and strong business credit. Because many small businesses are underserved by banks, there are plenty of other options available to new businesses looking for financing to help them get started.
Online term loans and business lines of credit
Online lenders can provide similar financing options to banks, including term loans and business lines of credit, with significantly streamlined application and approval processes. However, most online lenders require you to be in business for at least six months, as credit decisions are based on your financial history (as opposed to projections).
If you’ve been in business for more than six months, look for lenders that offer flexible business credit and loan options for growing businesses with reasonable interest and annual percentage rates (APR).
Interest rates on loans from online lenders typically start at about seven percent. Also consider your repayment terms, to ensure that you can make your regularly scheduled payments without disrupting your cash flow. The more structured your repayment plan, the more likely you are to pay off your loan in time without extra financial burden.
Loans from local community organizations
One of the best places to look for funding, especially when you’re at the beginning of your business journey, is your local business and economic development organizations and nonprofit groups.
Lenders like these can provide resources, education, and networking opportunities alongside financing options. They have a vested interest in helping local businesses thrive and can point you towards different funding opportunities as you expand.
Community development financial institutions (CDFIs) provide access to loans from the Small Business Administration (SBA) as well as funds from other lending programs such as the Tory Burch Foundation Capital Program, which provides financing for women entrepreneurs.
State and municipal business development programs also provide startup business loans, so check your local government websites for options. For example, New York state offers the Metropolitan Economic Revitalization Fund (MERF) for businesses that are creating jobs in low-income areas.
There are also many microlenders across the country who work with startups and small businesses to help them get off the ground. Microlenders like Pacific Community Ventures in California and LiftFund, which serves the southeastern U.S., provide access to SBA loans and other financing opportunities alongside educational resources.
When you have a limited business credit history or a low credit score, secured, asset-based financing options like invoice factoring, merchant cash advances, and loans against specific collateral can help you get the financing you need as a startup.
Invoice factoring is a type of financing where you sell your outstanding invoices to a third party who in turn provides a sum of cash equal to a portion of the invoice amounts. Your clients then pay their invoices to the factoring company. This type of financing works well if you already have a high volume of outstanding invoices in your accounts receivables.
With a merchant cash advance, you’re provided with a sum of money up front that you pay down with a percentage of your credit card sales. This financing option carries one of the highest interest rates, since it does not typically rely on your credit, but is instead based on your everyday customer credit card transactions. This option works best if your customers pay you primarily with credit cards.
Equipment financing is one of the best ways for new businesses to get the machinery and vehicles they need to get started because they use the equipment itself as collateral — similar to a mortgage. You can also leverage leasing and rent-to-own options to get the equipment you need.
If you’re a business owner with a low personal credit score who’s looking for financing, be wary of lenders who say that they will guarantee approval without looking at your business credit or financial standing in any capacity, as these options can turn out to be expensive or untrustworthy.
Also keep in mind that some lenders will perform what’s known as a hard inquiry or “hard pull” on your credit report that may negatively impact your credit score, potentially preventing you from securing funding. If several hard inquiries appear on your credit report in a short period of time, you may be less likely to be approved. Online lenders, including Fundbox, take a look at your financial history and only perform what’s known as a soft pull on your credit report when you apply, which will not affect your credit score. Be sure to look for lenders that offer a balance of flexibility around credit requirements and security around repayment terms and interest rates when it comes to securing financing.
Small Business Administration (SBA) microloans
The SBA provides microloans up to $50,000 for small businesses to start up and expand. SBA microloans are provided by intermediary, nonprofit lenders who often have a mandate to support small businesses with a focus on minority- and women-owned businesses. This can make it easier for startups and early-stage small businesses to qualify for the funding they need.
Lenders who facilitate SBA funding will have their own terms for the loan, but interest rates are typically between 8 and 13 percent with a maximum repayment term of six years. You can use microloans for most of your business needs, including working capital, inventory, supplies, and equipment.
Borrowers need to have a credit score of at least 640, but some lenders offer loans to borrowers with scores as low as 575. Proving that you have steady revenue, providing collateral, and leveraging a cosigner can help you secure a loan even if you have a low credit score. Be aware that it can take around two to three weeks or more to get approval for a microloan.
Microloans are typically easier for new businesses to obtain than the SBA 7(a) loan, a popular option for established businesses with more credit history who need up to $5 million in financing. To see if microloans are the right option for your business, you can search here for your local SBA office.
Business loans can boost long-term growth
Investing in your business will pay off as you grow. Startup business loans empower you to build a business you’re proud of with the right resources, equipment, and team members. With financing options that meet your needs, you can feel confident about taking on business debt to achieve your goals.
If you’ve been in business for more than six months, apply to see if you qualify for a business line of credit from Fundbox and get financing to take your business to the next level.
Disclaimer: Fundbox and its affiliates do not provide tax, legal or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.
Fundbox makes capital available to businesses through business loans and lines of credit made by First Electronic Bank, a Utah chartered Industrial Bank, member FDIC, in addition to invoice-clearing advances, business loans, and lines of credit made directly by Fundbox.