A great idea is one of many things you need to start a new business. And taking your business from startup to scale up often requires you to invest significant time and money.
Getting a startup business loan for a new venture is more challenging than borrowing for an established business, especially if you don’t have good personal credit or experience in the industry. However, many new founders have had success with different types of financing and funding.
Ahead, you’ll learn the top startup business loan and financing options available to fund your venture.
What is a startup business loan?
Startup business loans aren’t a specific type of loan. Rather, they are any type of loan used to open a new business. You might need this money to help develop a product or service, hire employees, lease space or equipment, invest in marketing, and buy inventory. Startup loans can also include funding for businesses that have opened their doors but are still in the earliest stages.
These small business loans generally don’t require business credit or high revenue—because lenders know they’re lending money to support a new idea. However, your personal credit and experience in the industry can affect your eligibility and loan terms. You can also use different types of financing to support your business. Shopify Capital, for example, offers fast, flexible financing for small businesses through loans and merchant cash advances for eligible merchants.
4 reasons to get a startup loan
There are many circumstances under which you might need financing via a startup business loan. Here are a handful of reasons to get one:
- Buying inventory: With a startup loan, you can keep bestsellers in stock, lock in bulk discounts, explore a new product line, and gain more control of your supply chain.
- Marketing: Startup loans are helpful if you want to optimize for SEO, collaborate with influencers, launch a rewards or referral program, or invest in paid marketing on social, search, and more.
- Product development: Bring product ideas to life with prototypes, invest in market research, and launch new products and collections with a financial boost.
- Talentacquisition: Bring on experts and contractors, compete for top candidates, promote your best employees, and explore new ways to foster your team’s professional growth.
12 startup business loans to consider
- Self-financing
- Financing from friends and family
- Small Business Administration loans
- Local business financing
- Crowdfunding
- Small business grants
- Asset-based financing
- Business line of credit
- Online term loans
- Equipment financing
- Invoice financing
- Business credit card
1. Self-financing
Many new small business owners take out personal loans or dip into their savings to finance their businesses. You may be able to do this with an unsecured loan, business credit cards, second mortgage, or by borrowing against your retirement accounts.
These options can be helpful if you’re having trouble qualifying for a business loan or you want to fully own your business rather than selling part of it to an investor. However, you may also be putting your personal assets and savings at risk.
2. Financing from friends and family
You could also try to raise money from friends and family members. In exchange, you could offer to repay them with an ownership interest, or let them buy a portion of your business and potentially profit if it succeeds.
Your friends and family might not require a credit check, and may offer you better terms than what you could receive from other lenders. But consider what can happen to your personal relationships if your business fails and you can’t repay the loan.
3. Small Business Administration loans
The US Small Business Administration (SBA) doesn’t offer most SBA loans directly, but it partially guarantees loans offered through participating lenders. You can apply for different types of SBA loans depending on your business and how you plan to use the funds.
Although the application and approval process can be lengthy, the guarantee can also make it easier to get a substantial loan on favorable terms, even if you don’t have great credit.
- The SBA 7(a) loan program is one of the most popular and offers up to $5 million in funding.
- The SBA 504 loan program could be a good option for buying real estate or equipment.
- The 7(a) Community Advantage loan program is for businesses in underserved markets.
- The SBA microloan program offers up to $50,000 to start or expand a business.
The SBA also offers a lender matching tool, which you can use to find participating lenders and compare loan offers based on your specific needs.
4. Local business financing
You could also look for traditional business loans from local credit unions, community banks, and nonprofits.
Although the rates, terms, and requirements can vary depending on the lender, you may find that smaller lenders are more open to working with you based on your personal experience than large banks or online lenders. Some lenders may also participate in local or statewide loan guarantee programs similar to the SBA programs.
5. Crowdfunding
Online crowdfunding platforms can help you organize a campaign and raise money from strangers and people you know. There are four common types of crowdfunding: debt, equity, donation, and rewards.
With equity, you’re raising money in exchange for a portion of your business, while with a loan or bond, you’re taking on debt that must be repaid with interest. Donor crowdfunding, like GoFundMe campaigns, isn’t often used by startups because you have little or nothing to offer in return.
However, you could consider a rewards-based campaign in which you offer donors one of your business’s products or services in exchange for their contributions.
6. Small business grants
There are corporate, local, state, and federal grants for small business owners, and these can be a great option because you don’t need to repay the money. However, your business will need to align with the grantor’s goals, and there may be a competitive application process.
Grants.gov is a good starting point for finding federal small business grants. You can also search for a local Small Business Development Center, which can provide personalized advice for finding grants, financing, and running your business successfully.
7. Asset-based financing
You can also use existing business assets as collateral for a loan. This type of lending is useful if you don’t have robust financials, but possess assets like real estate, accounts receivable, or inventory. The amount of the loan is often a percentage of the appraised value of the assets.
A lender, for example, could offer a loan amounting to 70% of the value of your equipment and 80% of your accounts receivable. You can use the funds to cover immediate operational costs and repay the loan as you fulfill orders.
8. Business line of credit
A business line of credit can give you continuing access to funding for your startup. Unlike with a loan, you won’t receive the entire amount upfront. Instead, you draw money from your line of credit, which will have a ceiling on how much you can borrow. You’ll also have more flexibility than you would with a term loan because you only pay interest on the amount you borrow.
9. Online term loans
Online business loans are often term loans, which means you receive the entire loan amount when you accept the loan and then make regular payments over a predefined term until the loan is repaid.
Online lenders may also have easier qualifications and a faster application process than traditional lenders, and they might use modern techniques (such as connecting to and analyzing your bank account) to determine who qualifies.
Several online lenders offer lines of credit to startups that have only been in business for six months and three months.
10. Equipment financing
Equipment financing is a type of loan specifically designed to help businesses acquire the equipment or machinery they need to operate.
The lender typically provides funds to purchase the equipment outright. The equipment itself then serves as collateral for the loan. So, if the borrower defaults, the lender can seize the equipment to recoup losses. This means startups can get assets without tying up working capital.
11. Invoice financing
Invoice financing, or accounts receivable financing, allows startups to access capital by leveraging their unpaid invoices. The lender advances a percentage of the value of outstanding invoices to the business upfront. Once the customer pays the invoice, the lender releases the remaining balance minus fees.
Repayment terms for invoice financing loans vary but are usually tied to the timing of customer payments. Once customers pay their invoices, the lender deducts the advanced amount, plus fees, from the total amount collected.
12. Business credit card
A business credit card operates similarly to a personal credit card but is simply intended for business use. Businesses can use a pay-in-full card like Shopify Credit to make purchases, track expenses, and access revolving credit lines to cover cash flow gaps.
Business credit cards make it easier to separate personal and business expenses, as well as take advantage of rewards programs tailored to business spending categories.
How to get a startup business loan
You may want or need multiple rounds of funding to get your idea off the ground, and the specifics will depend on the options you choose. However, the basic steps start with preparing your pitch, reviewing your qualifications, and seeing what you can qualify for at the time.
1. Create a business plan
Lenders want to see you’ve thought through the challenges and opportunities that will come with your new business. One great way to do this is with a business plan.
A business plan is a strategic document that outlines your company’s goals, strategies for accomplishing them, and the time frame you plan to accomplish them. Make sure to include any relevant information about your experience running a business or working in the industry.
Here’s a quick-hitting list of the sections your business plan should include, and you can also check out this guide to writing a business plan. Your plan should include the following:
- Executive summary
- Company description
- Market analysis
- Organization and management
- Product or service line
- Marketing and sales strategy
- Funding request
- Financial projections
2. Evaluate your personal credit
Your personal credit may be a factor in whether you qualify for financing and the rates and terms you receive. Many free apps and financial accounts let you check your credit scores for free. See where you stand and what you can do to improve your credit score.
If you see any inaccuracies or red flags on your credit report, take steps to correct them or mitigate their impact. Dispute errors, pay off debts, or negotiate settlements with creditors as needed. Moving forward, make sure to pay your bills on time, keep credit card balances low, and avoid opening unnecessary credit accounts.
3. Build business credit
Your business gets a credit profile, too. Establishing a separate credit profile for your business can enhance your credibility with lenders and improve your access to financing.
The first step is to register your business and get an employer identification number (EIN) to make it official. Then you can open bank accounts or get a credit card under your business name.
4. Compare different types of loans
Once you’ve narrowed down the types of funding from the options above, you’ll need to find lenders who offer your funding of choice. Consider how much money you need, when you need it, and how much you can afford to repay as you review the options and analyze your top potential lenders.
5. Apply for a startup loan
Now you’re ready to apply! It’s helpful to gather financial statements, tax returns, and business licenses so you have them handy for your applications.
Review the eligibility and application requirements and apply with several lenders or organizations. Compare the offers you receive to determine which will be the best fit. You can negotiate at this stage to ensure you get the best terms.
Startup business loans FAQ
How can I get a loan to open my own business?
Generally, these five actions can help you get a loan for your business:
- Create a business plan
- Evaluate your personal credit
- Build business credit
- Compare different types of loans
- Apply for a startup loan
Is it possible to get a loan for a startup business?
Yes, it’s possible to get a loan for a startup business. It might be challenging due to the lack of established credit history and track record, but there are numerous funding options available for startups. Options include traditional bank loans, SBA loans, alternative lenders, and investor funding.
Which loan is best for a startup business?
The best loan for a startup depends on the business’s industry, funding needs, credit history, and repayment ability. Options include SBA loans, which offer flexible terms and government-backed guarantees, or alternative lenders, which may provide faster funding with less stringent eligibility criteria.
Is it difficult to get a business startup loan?
It can be difficult to get a business startup loan for new ventures without a proven track record. Lenders typically assess factors such as the borrower’s credit history, business plan, collateral, and industry viability when evaluating loan applications—this can be limited for startups.
Which bank is best for startup business loans?
Some banks that are best for startup loans include:
- Wells Fargo
- PNC Bank
- Huntington National Bank
- Bank of America
- TD Bank Business
What credit score do you need for a startup business loan?
Generally, a good personal credit score above 670 can improve your chances of qualifying for favorable loan terms and rates. However, there are also alternative lenders and financing options available for borrowers with lower credit scores or limited credit history.
*Shopify Capital loans must be paid in full within 18 months, and two minimum payments apply within the first two 6 month periods.
This article is focused on industry standards and descriptions are not specific to Shopify’s lending products. To understand the features of Shopify’s Capital products, please visit shopify.com/lending.
Available in select countries. Offers to apply do not guarantee financing. All financing through Shopify Lending, including Shopify Capital, is issued by WebBank in the United States.
