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(aka - No B.S. Talk About Small Business Loans )

Everfund Staff

The Best Business Loans for Start-Ups

While it can be very challenging to find money for a new business, in this post we’ll explore some of the most likely options - and some less common ones - to help you get funds for your new business.



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The Problem for Small Businesses

“It takes money to make money” - one of the most frustrating though true parts of starting and running a small business. Even if you want to put a lemonade stand on the corner, this is true! You need to buy a table, make a sign, buy lemonade, buy cups - all before you sell a single cup.


The lucky few small business owners have money in the bank to buy supplies, start advertising, or hire the first employees. Most new business owners, however, need to find a loan of some kind. But how are you supposed to prove you can repay a loan when you haven’t yet started making money? This is the hardest part of starting a business for 99% of all small business owners.


While it can be very challenging to find money for a new business, below we’ll explore some of the most likely options to help you with your new business.



What is a Start-Up Business Loan

OK, first, let’s be clear about what we’re talking about. A start-up business loan is any financing meant to help with the earliest startup costs of a new business. A start-up business loan can help with working capital, buying supplies or inventory, acquiring equipment, hiring the first employees, or even buying real estate needed for the business.


Start-up loans usually describe the money needed before the business begins, but even loans in the early days of a business can be considered start-up loans. Really, any financing you are seeking before there is evidence that your business can make the money to repay that financing can be considered start-up financing. (In the hyper-growth tech world, this will be called ‘early stage’ financing, but for most small businesses, when you’re trying to get a loan in the first few months with little to no revenue, you are often in the same boat as those who have not yet opened their doors.)



Lenders - What Are They Thinking?

Before we offer some advice on where to get a start-up loan, it can be helpful to first understand the mindset of the lenders.


We know what it’s like in the entrepreneur’s mind - we’ve been there many times. Most of the time, we’re thinking “I’ve got a great idea”, “I’m confident I can make it work”, “I WILL make this work”, “I’m willing to work my butt off to get this started”, and “I’m definitely going to pay back what I borrow”.


For any lenders (other than maybe your family - more on that below), they have one overriding question that floats through their mind on an infinite loop when faced with an application - “how likely is this loan to be repaid?”.


That’s it. They will ask questions, review credit reports, gather documents, analyze your business, maybe consult a Magic-8 ball - whatever they do, you can be sure they just want to know “how likely is this loan to be repaid?”. In other words, how much risk is there that they won’t get their money back.


If your business has been going for 2 years, and generated a profit every month, their answer to that question is far different than if your business is just getting started and there are no historical results to consider.


If this is your first restaurant, and you need money for equipment, the answer to “how likely is this loan to be repaid?” is far different than if this is your fifth restaurant after opening four successful ones.


We know isn't the magic bullet answer on how to get a loan. However, it can be helpful sometimes when searching for money, and talking to possible lenders, to remember where they’re coming from.

Ok, now let’s get into the nitty gritty. Where can a new business get money?



The Best Financing Options for Start-Ups

Below, we’ll explore the variety of ways a new business can obtain financing help. There are many different sources of funding, and there are pros and cons to all of them. Some useful rules of thumb to keep in mind:


  • The cheapest money is never the fastest: the cheapest money will come from a traditional bank, usually through an SBA loan. These can take anywhere from 1 to 3 months and require tons of paperwork and due diligence as the lender tries to learn everything there is about you, your business and your industry. To the lender - more information = less risk = lower cost.


  • The fastest money is never the cheapest: if you need fast money, a lender will have to make the decision quickly, and that means making the decision with less information. To the lender - less information = more risk = higher cost.


  • Collateral and credit always win the day: if you have collateral (real estate or equipment to provide as a guarantee you will pay back the loan), you will have more options. If you have good personal credit, you will have more options. To the lender - collateral or strong credit = lower risk = lower cost.


SBA Loans

The Small Business Administration (SBA) is government agency tasked with supporting and protecting small business activity in the US. Many business founders have heard of SBA loans such as 7(a) loans, 504 loans, and Express loans - and hope they can get one to start their business. Of the many different kinds of small business financing available, SBA loans are indeed some of the most favorable in terms of repayment conditions.


However, with their favorable terms, and government imposed restrictions, SBA loans are harder to qualify for than many financial options. For many business owners with good credit and a strong business plan, it’s worth it to understand and explore SBA options.


The SBA operates several different loan programs, and for most, loans are made by approved lenders all over the United States. While SBA loan programs do not have a specific “time in business” or “monthly revenue” requirement, a borrower must show the ability to repay the loan. This can be difficult for new businesses. Lenders will want to see a business plan to help understand how the loan will be repaid.


For more details about SBA loan programs and qualifying for SBA loans, visit Are SBA Loans Right for Your Business?


Since SBA loans are made by lenders, usually banks, and not the SBA directly, these lenders often have their own stricter requirements. For example, many SBA lenders require two years in business to qualify. Some SBA lenders prefer to make loans to franchises.



SBA Microloans

Depending on how much money you need, you might consider the SBA Microloan program. These loans of up to $50,000 are often used for start-up businesses.


SBA microloans are made by approved intermediaries, often community development financial institutions and other non-profit organizations. The maximum loan amount is $50,000, though the average loan is much closer to $15,000.


Many of these SBA microloans are SBA loans for women, minorities, veterans, or low-income borrowers, but they are available to any for-profit small business. An SBA microloan is a term loan, with a maximum term of 72 months; the average is about 40 months. Funds may be used for working capital or the purchase of inventory or supplies, machinery or equipment, or fixtures and furniture.



Bank Loans

Some of the lowest cost loans will come from banks or credit unions, and many business owners therefore consider these their first choice. However, for most startup businesses, bank loans will not be available to them.


Banks have very strict small business lending guidelines, and most of them are very hesitant to make loans to brand new businesses. (Editor’s note: yes, this is very frustrating, and it’s why so many online lenders are starting to try to fill the void left by traditional banks.)


As mentioned above, banks are thinking about “how likely are we to be repaid?”, and they demand an answer of “very very likely”. Banks are looking for the very lowest risk loans, and therefore they will require strong personal credit scores, a business plan, experience in your industry, a down payment toward your business costs and a personal guarantee.


Most bank loans will be term loans, meaning a lump sum of money that will be repaid monthly during a fixed term. The length of the term depends on the use of the money and can vary from typically 2 to 10 years. Loan terms can be 20-30 years when commercial real estate is involved.



Business Credit Cards

A business credit card can be very helpful in starting a business: you can purchase items you need for your business and pay for them later. Most business credit cards offer a grace period, which can give you days or weeks to pay before owing interest, depending on the timing of your purchase.


Some business credit cards have special offers, such as low-rate purchases or balance transfers. These initial offers can be very helpful to a new business that only expects to need the funds for a relatively short period of time.


A business credit card can be very beneficial in another way: it can help you build business credit. This in turn can help you borrow money in the future at lower costs. Most business credit cards report to at least one of the business credit bureaus and most report to more than one. Paying at least the minimum payment on your business credit card on time can help you build strong business credit.

When you apply for small business credit cards, card issuers will usually check your personal credit and require a personal guarantee. Often, having a good personal credit score and some income from any sources will be enough to qualify you for a business credit card.

These business cards are therefore often available to startups and businesses with little revenue. Once you have a track record in your business and significant revenue, you can pursue corporate credit cards that do not carry the personal credit and guarantee requirements.


Personal Credit Cards

If you can obtain a business credit card, we recommend using that before using personal cards. As described above, using a business card can help you build business credit. Also, using a business card can help you easily keep track of business expenses so that accounting is made easier.


However, if you can’t secure a business credit card, personal credits cards can help you get your new business off the ground. It’s seldom mentioned in the news, but personal credit cards are likely the most common financial resource used for small businesses just getting started.


If you’re using a personal card, be sure to keep an eye on your credit utilization (how much of your available credit limit are you using). Also, be sure to pay all bills on time so that you are only helping and not hurting your personal credit scores.



Small Business Grants

It is not easy to find and secure small business grants, but if you can find one, they are a fantastic source of funding since they do not have to be repaid. The recent SBA PPP (Paycheck Protection Program) loans were a great source of grants to businesses struggling during the pandemic, but that program has ended.


When searching for grants, be sure to search for both state-level and national grant programs. Most states offer small business grants aimed at the state’s particular social and economic priorities. Often they work hand in hand with federal programs with matching grants. Check with your city, county and state, and visit your Secretary of State website.


There are too many federal and private grant programs to attempt to list here. To get started, you can visit Grants.gov, a listing of federally sponsored grants. A high percentage of all federal grant programs are aimed at companies in the science, technology, or health fields. However, there are grant programs for many other industries as well.



Friends & Family

A very common source of funding for new businesses is personal funding from friends or family. Using your own money is a gamble, but using money from friends and family can be even more of a gamble. You are not only risking money in the new venture but also possibly relationships with those you care about.


If possible, we’d advise putting some of your money at risk alongside the money from friends and family. When others see you taking a financial risk, they are not only more likely to support you, but they are also more likely to be forgiving should things not go as planned.


It’s always best, when possible, to borrow from people you trust. Also, before you take other people’s money, make sure that the contributors understand your new business plan, what you’ll use the money for, what their role will be (if they have one) and when you hope to pay them back.


Finally, even if you use personal funds from friends or family to start, we strongly suggest you take steps to establish business credit as soon as possible. That way you can start to work toward having business credit and access to more loan options in the future.



Home Equity

If you have to tap personal funds to start your business, and you own your home, using your home equity can be the least expensive option available. If you have equity in your home - in other words it’s worth considerably more than your home mortgage - you may be able to get a home equity loan or a home equity line of credit (HELOC).


While this option can give you inexpensive capital, it is very risky. You are using your home as collateral, and if your business does not succeed you have reduced the amount of value, or equity, you have in your home.


If using your home equity, we suggest doing it with a HELOC. By using a line of credit instead of a loan, a) rates are usually very low, b) you can only borrow what you absolutely need, and c) you can pay it back as soon as the business generates the income to repay it.



Invoice Financing

If you will invoice your business customers, and they will pay you at a later date, invoice financing (also called accounts receivable financing or A/R financing) is a convenient way to get cash. While it’s of course not an option for a start-up before invoicing customers, it’s included here because it can be a source of cash early in the life of a business.


This is best for businesses that have cash flow issues caused by fairly long invoice cycles. It’s not the least expensive type of financing, but you can get invoice financing very quickly - as little as 1-2 days - and without too much paperwork. Again, this is available to your business only if you’ve invoiced business clients for goods or services and are waiting to get paid.



Merchant Cash Advances

If your business takes credit cards, this could be an option for you. It’s not available as a start-up loan before your business is active, but it can be available to you just 3-6 months after starting. A merchant cash advance (MCA) is a type of funding that allows your small business to borrow against future earnings.


An MCA loan is very fast - lenders can provide cash advance funds within hours. To qualify, lenders look at your monthly receipts to see your ability to repay. The money is repaid through automatic payments that are based on a percentage of your future daily, weekly or monthly sales.


For more about MCA’s, see What is a Merchant Cash Advance?


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Final Thoughts - Startup Loans

While finding money to start a business can be difficult, it’s often possible with enough time and energy invested in the search. Every situation is different, and financing available to one business may not be available to the next.


Finding a startup loan is always easier if you have collateral or great personal credit. If you don’t have those, the next most important things to have are clear answers to the questions of: how much do you need, how will it be used, and how will it be repaid.


Consider a wide range of options and alternative lenders, including business credit cards, personal or family funds, personal cards or loans, or even invoice financing or merchant cash advances once you have a few months of revenue.


Most importantly, keep focused on the energy and excitement you have for the business you are starting. Every business, from the local dry cleaners to Apple or Facebook, starts with just an idea and the energy of the founders. Stay creative, stay motivated and stay optimistic, and you’ll find a way to achieve your goals.


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