Small business assistance
Owners learn types of loans for a small business startup to open their business

The Best Loans for a Small Business Start-Up

If you’re an entrepreneur planning to launch your enterprise, you’re considering loans for your small business start-up. For any business to thrive, financing your business is critical. You can have the best idea in the world and a great business plan, but if you don’t have enough funds to launch and keep it going till you make a profit, you’re dead in the water.

When should you consider loan options for your small business?

Some business owners try to go it alone and not borrow money for their business. That’s a reasonable strategy during the experimental stage of your business when you’re determining your pricing, understanding your best target market, and fine-tuning what products and services you’ll offer. However, there will be times when not having an infusion of cash will cripple your ability to respond to opportunities and grow. What follows are some of those times:

Start-Up Costs

Separate from your ordinary costs of operating your business or the cost of goods sold to produce a product or service, you’ll need one-time startup costs. These could include vehicles, equipment, display cases, signage, licenses and certifications, a deposit on rental space, and computer equipment. Keep track of the cost of these up-front investments, especially if you’re buying tangible assets like vehicles and equipment. Their value is recorded as assets on your financial statements and addressed in your tax returns.

Working Capital

For most businesses, there will be a gap in time between when you launch your business and when you begin to “break-even” and make a profit. Working capital is what you call the money needed to cover your operating costs such as rent, salaries, and payments on equipment and vehicles until you make money.

New Customer

You may have an opportunity to take on a new customer that requires an upfront investment in inventory, staffing, or equipment. To deliver your product or service to your new customer, you’ll need to have cash on hand to cover the cost of the sale until the customer pays you.

Expanding the Business

Moving from your home office to a storefront or a business office? Expanding your existing space use? Adding a product line? Launching a marketing campaign? All of these are common next steps for a growing business. Be prepared to move on to these opportunities with cash from a business loan.

What are the best loans for a small business start-up?

This guide outlines the best loan options for anyone starting a small business. Read on for our list of startup business loans.

1. Bootstrap Financing

The term “bootstrapping” comes from the idea that business owners will pull up their own bootstraps and fund their businesses themselves. Practically speaking, most small business startups are financed by the owners themselves, especially during the first couple of years. The alternative to startup business loans can come from a credit card, home equity, or savings. If you’re funding the business yourself during the startup stage, keep track of your investment. Better yet, keep a credit card or line of credit strictly for your startup. That way, you can clearly demonstrate to others that you believe in your business startup.

2. Family and Friends

Borrowing from relatives and friends is another typical technique to secure a loan for a small business. Keep in Borrowing from relatives and friends is another typical technique to secure a loan for a small business. Keep in mind, family or friends will be hesitant to invest in a business that doesn’t have your “skin in the game” or your own funds invested into the startup. You can either provide regular payments to your family member or friend or you might offer equity or a share in your business. Thankfully, there are now tools that can assist you in managing a Friends and Family loan, making all of your documentation and duties obvious.

Advice on approaching friends and family for funding your small business start-up:
Approaching friends and family in the same way you would a formal lender is a good idea:

  1. Make sure you’re clear about your personal expectations and how long you’ll need the loan.
  2. Make a repayment schedule and how much you can afford to pay back.
  3. If you decide to give equity in the business, indicate the number of shares or profit your family or friend will get, as well as when any returns will be paid.
  4. Determine whether the investor will be responsible for any financial obligations arising from your company’s operations.
  5. Write a formal written contract to solidify your mutual agreement.

3. Local Bank or Credit Union Loan

Don’t be afraid to ask your friendly neighborhood banker for a loan to help you launch your small business startup. If you have a personal checking account and a credit card from your local bank, they will be interested in expanding their relationship with you as a small business owner. They may be able to open a business checking account, a credit card, or set you up with a line of credit. One thing to expect from this method of financing is that your business credit will be based on your good personal credit until you have a track record of paying as a business owner. Develop your relationship with your banker and let them know how your business is growing.

4. Nonprofit Micro-Lender Loans

If your banker isn’t able to help you because your credit isn’t terrific, your banking relationship hasn’t been established long enough, or the bank or credit union doesn’t handle business banking, don’t get discouraged. There are nonprofit lenders called “Micro-lenders” that will provide loans for a small business starting up. Micro-lenders get funding from charitable foundations and government agencies to loan to small business startups. Nonprofit micro-lenders are particularly helpful to those who may not be able to access personal funds, loans from friends or family, or traditional loans from banks. Low and moderate-income individuals, women, and people of color can rely on micro-lenders as a source of loans for small businesses starting up.

What follows is a list of Micro-lenders lending to small businesses:

These and other micro-lenders can be located on the Small Business Assistance Tool on the website.

5. Vendor Financing

Another way to get the financing you need to operate your startup without getting a formal loan is through vendors that provide supplies, inventory, equipment, and vehicles. Many vendors, even the big box stores, may open a separate account for your business supplies or equipment. Some vendors, even the smaller stores, will consider financing larger purchases. Like other lenders, if you don’t have any credit history as a business, they will rely on your personal good credit to open the account. In most cases, vendors will allow you thirty days to pay the account for supplies and inventory which will be long enough to get your customer to pay.

6. Use Free or Low-Cost Assistance to Help You Find and Secure a Loan for Your Small Business Start-Up

You may have barriers to getting a loan for your small business startup and need help to overcome those barriers. Poor credit history, lack of a business plan or marketing plan, lack of knowledge about finances, and bookkeeping are all obstacles that can be overcome with the right help.

Use the Small Business Assistance Tool to find a small business program that will provide you with workshops and counseling to help you get a loan for your small business start-up. Sign up for the weekly newsletter and access reliable training materials and resources. What’s more, you’ll receive weekly information about free to low-cost webinars and get an opportunity to connect with knowledgeable small business counselors.

7. Beware of Unscrupulous Online Lenders

There are many online lenders that offer a super easy application process and don’t care if your credit is bad. They promise to provide your much-needed loan for your small business startup, and then you find yourself locked into a high-interest rate you can never pay down. Many businesses have had to close down and declare bankruptcy because they were taken in by these bad lenders.

For guidance on how to consider an online lender, download this article:
Want to Get an Online Business Loan? 10 Questions to Ask Before Committing to One.

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