It can be incredibly difficult for business owners to fund a startup. It costs a lot of money to start a business, and you have to find someone, a lender, an investor, anyone who believes in the endeavor as much as you do and is willing to take a chance.
That’s the only way to get a business loan as a startup.
The very first thing you need to get a startup business loan or investor funds is a professional business plan. It’s best to have this in place before you start looking for funding so it is ready to go when you are asked for it. Not all funding options will require it, but many will.
A traditional lender and any type of SBA loan will most certainly require a business plan.
Some Funding Options Work Better for Startups than Others
The fact is, traditional lenders, and even private lenders, do not always work well when it comes to getting a business loan for a startup. Most SBA loan options are even more difficult to get for a startup.
Many require at least one year, more often three years or more, of business tax returns for a business startup loan or business line-of-credit. So, where do business owners go to find funding for startups that are newer? Here are some options that almost any small business startup can get.
Startup Business Loan: Credit Line Hybrid
When it comes to a startup business loan, the credit line hybrid typically offers the most money. It allows business owners to fund their business with no collateral and very low interest rates. It’s basically a business line taken from credit cards.
No financials are required for this type of business loan. It is no-doc financing, meaning you do not have to provide any documents.
You can get a loan up to $150,000. This is probably the highest amount of financing you’ll see for a startup from one small business loan source.
It is easily more than what you could get on your own when applying for cards. You can get cash out on this program as well.
There is no impact on your personal credit with this type of small business loan. You need a 700+ credit score. But, even if you have bad credit, you can still get approval with a credit partner that meets the credit score requirement.
Using Unsecured Credit Cards for Startup Funding If You Have Good Personal Credit
As a small business owner, you can definitely get funding for your startup from credit cards if you have good personal credit.
Just be aware that since you are relying on the merits of your personal credit, these cards can affect your personal credit score. Essentially, it is the same as a personal loan.
You may also need several of these cards, as personal cards tend to have lower limits and business expenses are often huge.
Using Unsecured Credit Cards for Startup Financing If You Have Bad Personal Credit
These are business credit cards that you get in the name of your business. You use your business name, contact information, and EIN vs. your personal SSN.
A business credit card that will report to the business credit reporting agencies is your best option. It’ll take 6 months to build a credit profile before you can apply for these types of cards. They do not use personal credit for pre-qualification.
Be careful with this option. It’s viable, but if you aren’t careful you can end up with cash flow issues. As always, handle all credit responsibly.
Work With a Guarantor
Here’s another option if you do not have or want to use assets as security for a loan. Ask a friend or family member who has these kinds of assets. They may let you leverage their assets in exchange for a percent of your business. They usually want less of a percent of your company than a venture capitalist would.
If you are looking for a pure business startup loan, not a personal loan, collateral-based loans are going to be your best bet. Use your assets as collateral. Rates are lower, and your personal credit doesn’t have as much of an impact. Here are a few options.
Startup Funding with Securities-Based Financing
You can also use your existing stocks as leverage to get small business financing. Borrow as much as 90% of their value.
You continue to earn interest on the stocks you pledged as collateral, and generally closing and funding happens pretty quickly.
Using 401(k) Financing as a Small Business Startup Loan
A 401K can help you fund a business in a number of ways. Of course, you can get a personal loan out of your 401k even with bad credit.
However, the 401K for Working Capital program is a flexible and powerful financing option that a new or existing business can use to leverage assets that are in a 401(k) plan or IRA.
It doesn’t take long either. In as little as 3 weeks you can invest a portion of this money into your business. Then, you not only have more control over the performance of your retirement plan assets, but you also have the working capital you need.
This type of program is even IRS approved. They have their own term for it. It’s called a Rollover for Business Startups (ROBS).
Startup Funding Using Accounts Receivable Financing
Additionally, you can use your outstanding account receivables to get startup business loans. Get as much as 80% of receivables advanced in less than 24 hours. You get the rest of the accounts receivable amount once the invoice is paid in full. Closing takes 2 weeks or less.
Receivables should be with the government or another business. Getting financing with receivables from individuals is not as easy. If you also have purchase orders, then you can get financing to have those filled. You won’t need to use your cash flow to do so.
Consider using your existing inventory as collateral for small business financing also. You’ll need inventory valued at $500,000 or more. Often, you can get approval for a line of credit for 50% of inventory value.
Inventory loans are another option. The minimum inventory loan amount is $150,000. The general loan to value is 50%. So, inventory value would have to be $300,000 or more. It’s important to note, it can’t be lumped together with inventory, like office equipment.
Equipment financing is a great option if you need to buy or lease new equipment for a new business or an existing one. Rates vary widely based on risk factors, but usually you can get approval for equipment financing with a credit score of 650 or better.
The lender will undervalue equipment by perhaps up to 50%. This is on major equipment only. Lenders won’t combine a lot of small equipment. You can get loans up to $2 million.
Equipment Sale – Leaseback
If you already own your equipment free and clear, you can use it as collateral for financing. The process involves selling the equipment to a lender for cash. You then lease it back from them. You need at least one larger piece of higher value equipment to qualify, and you can get funding in as little as 3 weeks.
Other collateral can also be used. Investors looking to buy and flip properties can get financing. They must also have cash, experience, and average credit or better. You can get financing against commercial real estate, and insurance agents can get book of business financing.
Book of Business Financing
A book of business is a list of accounts or clients. Finance and legal professionals often use this term, as do insurance agents. In an ideal situation, an insurance agent is continually adding to his or her book of business.
You can have an insurance book of business valued by a professional company. There are many companies which only conduct business valuations. These valuations help determine an appropriate sale price for a particular asset or organization.
In the insurance industry, the average sale price for a book of business is often between two and four times that of the annual earnings.
There are a lot of funding options out there in the form of small business grants. Who doesn’t want a grant? After all, it’s free money. You don’t have to pay it back. I mean, what’s not to like?
Truly, grants sound like the perfect solution for small business funding, especially if you have poor credit. Actually, they are great if you can get one. Yet, there are two cons most don’t realize. Of course they are highly competitive.
But also, the money isn’t as free as you may think. Even though there is no interest and no repayment, it often takes a lot of time and effort to apply for a grant. Not to mention, sometimes there is an application fee.
On top of the highly competitive nature of most grants, the result is that you could spend a lot of time and money applying for grants with nothing to show for it.
Venture Capital and Angel Investors
Don’t forget about investors. It is possible to get business funding for a startup through venture capital or even angel investors. Do some research, put together an awesome pitch deck, and give it a shot. Your business plan will help you when it comes to creating a pitch deck.
Getting a business loan may even be easier if you have investors already onboard. Of course, if you already have loan funds it may be easier to get investors on board.
You Don’t Have to Wait to Fund Your Small Business
Funding a startup is hard, there is no doubt about it. Startup business loans are not easy to come by either. However, there are options. You just have to find the one, or combination, that works best for you and your small business.
This depends on a number of things, including which phase of startup you are in, your current credit history and cash flow situation, and how much funding you need. It can take time, but these options should give you a good start.
Which loan is best for startup business?
The quick answer is, the loan you can get. However, there are a number of options that many don’t even realize are available.
If you have a good personal credit history and collateral, then you may be able to get the best term and rate with a traditional term loan, as long as you are willing to offer a personal guarantee. For startups especially, that is sometimes the best startup business loan option.
If you have an eligible 401K, then a ROBS is likely the very best option. If not, or if you need more funding that you can get from that, the Credit Line Hybrid is a great option.
Of course, without at least a 700 credit score, you’ll need a credit partner that meets that score requirement.
It’s important to note that there are some options that, although they do not require a strong credit score, do not work well for startups. For example, a merchant cash advance, or invoice financing options, are probably not good options.
This is because they require either steady credit card receipts (merchant cash advance) or a large number or dollar amount of open invoices. These things are not typically available in a startup situation.
What credit score is needed for a startup business loan?
Credit history requirements vary based on the lender and the type of loan. For example, most traditional loans at traditional banks will require well over a 700, while some Small Business Administration loans will allow for a 650 or higher.
The thing to remember is, even if you don’t have bad credit per se and you can get a loan with your credit score, the higher the score the better terms and rates you’ll get.
So, if your credit score is on the lower end of what a lender will approve, consider looking at alternative funding options. The key is to find the most funding possible with the best terms and rates you can get.
How can I get a loan to start my first business?
The first thing to do is research. Figure out what is out there and what you are eligible to get. If you have good personal credit and collateral, you will likely be able to get a traditional loan from a traditional lender.
However, keep in mind you may be able to get better rates and terms with an SBA loan. You just have to find an SBA lender.
If you find that you are not in a position to get a traditional loan due to bad credit, and as a startup you do not yet have business credit, start considering alternative options.
The Credit Line Hybrid, 401K Financing, and alternative lenders are all potential sources of funds to start a business.