You’ve got a great business idea, motivation, and the desire to make it work. But maybe you don’t have much money. If that’s the case, you’ll need financing.
As a new business owner, you likely will have a limited number of business financing options. Why? Because most small business lenders prefer to lend to businesses that have a track record of making money. This is an issue that every business owner faces when they start out.
Finding startup business financing can be challenging. But if you’re serious and willing to put in the work, it’s possible.
Understand Your Starting Point
Before diving into specific financing options, take stock of three key factors that will often influence your choices as a startup seeking financing:
- Your credit profile
- Available collateral or assets
- Current business revenues or projections
Once you know where you stand, here are six financing options to investigate:
1. Business Credit Cards
Business credit cards are very popular with new entrepreneurs. While traditional lenders may turn away new businesses, credit card issuers often welcome them.
Unlike small business loans that often require two years in business and proof of revenues, business credit cards are available to brand new businesses.
Credit card issuers often evaluate applications based on personal credit scores and total household income, which could include a spouse’s income, investments or rental property income.
And credit limits can be substantial. It’s not uncommon for business owners with strong credit to receive starting credit lines of $20,000 to $50,000 or more. Some business owners find that two or three business credit cards can provide as much available credit as a traditional business line of credit.
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There are a couple of downsides, though. Interest rates can be high, in the range of 18% or higher. Consider taking advantage of 0% APR introductory offers for larger expenses, but make sure you can afford to pay off the balance before the promotional period ends.
Most small business credit cards also require a personal guarantee. That means if your business doesn’t work out, and you can’t pay back the debt, you are personally responsible for any remaining balances.
Business credit cards can be good for:
- Entrepreneurs with good or excellent personal credit scores
- Short-term financing
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2. Microloans
Microloans are smaller loans, typically for a few thousand dollars, made by nonprofit lenders and Community Development Financial Institutions (CDFIs) that focus specifically on helping new and growing small businesses that may not qualify for traditional financing.
Unlike traditional banks, microlenders are more likely to lend to smaller and younger businesses. Your loan will usually come with additional support like business coaching or training (called “technical assistance”) to help increase your chances of success. Some programs offer lower interest rates if you participate in their education programs.
Most microlenders can be more flexible if you don’t have a strong credit history. Some work with those who are considered “underbanked” because they haven’t used many traditional financial accounts.
Interest rates tend to be higher than traditional bank loans but lower than credit cards, usually ranging from 8-15%. Terms are typically 3-6 years. Qualifications are often more flexible, and lower credit scores may not be required.
Microloans for businesses can be good for:
- Businesses that need a small amount of financing
- Entrepreneurs who may not qualify for traditional loans
- Business owners who want coaching along with capital
Business Entity Types Affect Financing Options
3. Equipment Financing
If you’re starting a business that requires specialized tools—whether it’s a pressure washer, a delivery van, or computer hardware—equipment loans or leases can help you acquire what you need without draining your savings.
Many equipment lenders will work with newer businesses, though you’ll likely need good credit and a downpayment of at least 10-20% of the equipment cost. Terms may range from 2 to 10 years or longer, depending on the useful life of the equipment. Interest rates vary widely based on your credit score, time in business, and the type of equipment, but are usually reasonable.
Another advantage is flexibility in structuring the financing. You may be able to choose between a loan or a lease. Some leases let you upgrade to new equipment at the end of the term—particularly valuable for technology that becomes outdated quickly.
Equipment financing can be good for:
- Businesses that need specific equipment to generate revenue
- Entrepreneurs with fair to good credit who can make a down payment
- Companies that want to preserve cash flow while acquiring essential equipment
4. Crowdfunding
If you’ve got a really unique business idea or a loyal following that you could turn to for support, consider crowdfunding. This involves using an online platform to pitch investors, lenders or backers. (Think Shark Tank with a lot of sharks.)
Different types of crowdfunding serve different purposes. Rewards-based crowdfunding, through platforms like Kickstarter or Indiegogo, lets you pre-sell your product or offer rewards to backers. This can work well for creative or physical products where supporters can easily understand what they’re getting.
Regulation crowdfunding is more complex but can raise larger amounts, up to $5 million annually, from investors.
Debt crowdfunding platforms connect you with individual lenders who provide small portions of your loan. Interest rates and terms vary widely, and this is the only type of crowdfunding where good credit may be required. (But crowdfunding platform Kiva, which offers no interest, no fee loans of up to $15,000 for US-based businesses, does not require high credit scores.)
The catch? You’ll likely need to start by raising money from your network and be able to make a compelling pitch. Most successful campaigns leverage a strong social media presence or other types of loyal fans and spend weeks or months planning and nurturing their crowdfunding campaign.
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If friends or family are willing to back your business, consider whether it makes sense to let them seed your campaign so your business reaches even more potential supporters.
Crowdfunding can be good for:
- Businesses with strong marketing capabilities and an interesting offering
- Entrepreneurs who have an engaging story and strong network
- Companies that can offer attractive rewards or investment potential
5. SBA Loans for Startups
While most SBA loans are made to established businesses, it may be possible to qualify as a new business.
The SBA does not directly provide loans, except for disaster relief loans. Instead, it provides a guarantee to banks and approved lenders, which enables them to make loans they might otherwise consider too risky.
The most popular SBA loan program, the 7(a) loan program, offers up to $5 million in funding. Interest rates are fairly low (they fluctuate based on the Prime rate or other indexes) and repayment terms can extend up to 10 years for working capital and up to 25 years for real estate.
However, the application process can be rigorous. You will often need a detailed business plan and financial projections. Most lenders will require a personal credit score of 680-720 or higher, and you’ll need to personally guarantee the loan, as well as pledge collateral if available. The process can take 60-90 days or sometimes longer.
SBA loans can be good for:
- Entrepreneurs with strong personal credit and business experience
- Startups with comprehensive business plans and financial projections
- Business owners who can wait several months for funding
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6. Trade Credit (Supplier Financing)
Trade credit allows you to purchase inventory or supplies now and pay later—typically within 10 to 30 days for new businesses or 30 to 90 days for those with strong credit and payment history.
Ask your suppliers if they offer financing, or seek out ones that do. Pay on time and you may qualify for longer payment terms.
Trade credit can be good for:
- Businesses needing inventory or supplies
- Businesses that can manage short payment terms
- Owners focused on building business credit
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Getting Financing in Your First Year
When you’re ready to move forward, here’s how to approach securing financing:
Calculate your funding needs:
- How much capital do you need?
- What will you use it for?
- When do you need it?
- What will the payments be, and how will you make them?
Check your qualifications:
- Review your personal credit scores
- Establish business credit
- Calculate your current revenue or projections
- Start with your strongest option:
Choose the financing type that best matches your qualifications
- Research lenders and apply
- Respond quickly to lender requests for additional documentation
- Don’t approach this process with an all-or-nothing mindset. Many successful business owners use a combination of different types of financing types, or they tap loans at various stages in their business. Flexibility is crucial.
Remember: As with most business decisions, each financing option has its pros and cons.
Look into your options early and read the fine print so you don’t get hit with expensive surprises. Financing can work for or against you; the research you do to find the best option can make a big difference.
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