Small Business Startup Loans: What You Need to Know

A comprehensive overview of the main types of small business loans you might run across as you’re figuring out the best option for financing your startup.

July 22nd, 2022   |    By: The Startups Team

What is a small business startup loan?

Small Business Startup Loans

A small business startup loan is any type of loan that helps businesses with little to no business history. It’s one of many financing options for founders who are looking to either get started or improve their young companies.

What types of small business startup loans are there?

Small business startup loan is an umbrella term under which a few different types of financing fall.

Here’s a general break down of the main types of small business startup loans you might run across as you’re figuring out the best option for financing your startup.

Each section gives a clear outline, with some links to more in-depth information if you’re interested in learning more.

1. SBA loans

An SBA small business loan is a loan that is backed by the Small Business Administration (SBA).

Founded in 1953, the SBA is a federal government program that provides support to small business owners in the form of mentorship, workshops, counseling, and small business loans.

While the loans are backed by the SBA, they don’t come directly from the SBA. You’ll have to find a local lender who provides SBA loans in order to access to the funding.

a. Who qualifies?

There are three main types of SBA small business loans:

  1. 7(a) Loan Program
  2. 504 Loan Program
  3. 7(m) Microloan Program.

Each type of SBA small business loan has slightly different requirements, but generally you have to qualify as a small business according to the SBA size requirements, be a for-profit business, operate within the United States, have good personal and business credit, and not have other financing options (like your own wealth).

b. Loan amounts

SBA loans have an upper limit of $5 million. Therefore, they’re a better option for small businesses and startups who need smaller amounts of capital, versus those who might need many millions of dollars.

c. Time to funds

The process for applying for a SBA loan can take up to six weeks, with some taking only a couple weeks. If you qualify for a SBA loan, you can expect your funds as soon as one week after qualifying.

d. Interest rates

As of May 2018, maximum interest rates on SBA loans range from 7% to 9.50%.

e. Pros of SBA loans

  1. The loan is backed by the federal government. That means banks are more likely to loan to riskier companies — like startups — than they might otherwise.
  2. The equity requirement is relatively low compared to other loans.
  3. SBA loans have a floating interest rate that’s tied to the Prime Rate. The maximum interest rate for these loans is Prime Rate plus 2.25 percent for loans maturing in 10 years or less, and Prime Rate plus 2.75 percent for loans maturing in 25 years.
  4. People and companies who don’t have access to other forms of capital might find it easier to qualify for a microloan than for a larger or more traditional loan type.

f. Cons of SBA loans

  1. SBA small business loans are relatively small. They have an upper limit of $5 million.
  2. These loans may require more paperwork than a traditional loan.
  3. Startups or founders with poor credit are unlike to qualify.

g. How to apply

If you’re interested in applying for a SBA loan, you can check out the SBA website to find a financial institution in your area that provides SBA loans. Here are some good tips on how to apply that you may want to read before you get started.

2. Credit cards

While not a traditional “loan,” business credit cards are a great option for very early stage startups who need help getting going.

Choose one with a 0% introductory APR, because that means that as long as you’re able to pay off the balance each month (or at least by the end of the first year, which is when most credit cards interest rates kick in), you’re basically getting a free loan.

However, beware of high interest rates — and don’t overestimate how quickly you’ll be able to pay back a credit card. Once that introductory period is over, any balance you’re carrying will likely come with a hefty interest rate.

a. Who qualifies?

Credit cards usually have very few requirements for qualification. Banks are in the business of profiting off of small businesses. (While, yes, helping them grow.)

However, people with bad personal credit will find it difficult to qualify for a business credit card, as most banks are going to look at your personal credit to determine whether or not they’re willing to give you a credit card for your new business or startup.

Most banks use the FICO scoring system, which is:

  • Excellent Credit: 750+
  • Good Credit: 700-749
  • Fair Credit: 650-699
  • Poor Credit: 600-649
  • Bad Credit: below 600

Check your credit rating with one of the big three credit agencies before starting the process of applying for a business loan.

b. Loan amounts

The loan amount — or credit line — that you can get with a credit business card depends totally on the type of card, your personal credit history, your business credit history (if you have any), and your business itself.

However, the highest business credit limit right now probably tops out around $50,000.

c. Time to funds

Unlike other sources of small business funding, credit cards are very quick to apply for. Once you’ve been approved, you can expect to have your card in hand within seven to 10 days.

d. Interest rates

Interest rates vary from card to card. As mentioned above, it’s a good idea to go for a card that has an initial 0% APR (annual percentage rate). That way you have a year without any interest whatsoever.

As of April 2018, the common APRs offered online for business credit cards was 14%, which is about 2.5 points lower than average for personal cards.

e. Pros of business credit cards

  1. They’re easier to get than other loans or lines of credit.
  2. They have higher credit limits than personal credit cards.
  3. They can help boost your credit rating.
  4. It’s easier to keep personal and professional expenses separate.
  5. You can build up points that can be used for travel and other perks.
  6. It’s easier to keep track of employee spending, if you have employees, and some even offer preset employee spending limits.
  7. It helps build credit history for your business.

f. Cons of business credit cards

  1. If you have trouble making payments, it may affect your personal credit.
  2. High interest rates, late fees, and annual fees can add up and be brutal.
  3. Many business cards don’t have purchase protection.
  4. Business credit cards often have a higher APR than personal cards.
  5. Interest rates can fluctuate.
  6. A business credit card may come with foreign transaction feeds.

g. How to apply for a business credit card

First, get your credit score so you can determine which business credit cards you even qualify for. You can get it from one of the big three credit agencies.

Once you have that, calculate your business’ annual revenue — the credit card agency is going to want to know that information.

Decide what kind of rewards program you want, and then go take a look at different business credit cards to see what’s the best fit.

Maybe make a spreadsheet of the factors most important to you — like APR, credit score needed, limits, rewards, signup bonuses, etc. — in order to do a side-by-side comparison.

Then, apply via the card’s website. That’s it! If you’re rejected for your first choice move on to the next. There are plenty of options out there.

Here are some of Credit Karma’s best recommendations for Business Credit Cards and Business Loans.

3. Short term loans

Short term loans relatively small amounts of money that have to be paid back within three to 18 months.

They’re often used as a stop-gap when a company is having cashflow problems, for emergencies, or to help companies take advantage of a business opportunity.

a. Who qualifies?

Short term loans are a good option for startups with good cash flow who have been in business for at least two years. If your startup has good cash flow, it may even override other factors like poor credit.

Companies who make between $25,000 and $150,000 yearly, with a credit score of at least 600, and who have been business for at least two years may consider this option.

b. Loan amounts

Short term loans are usually between $2,500 and $250,000.

c. Terms

The loan terms for short term loans are usually between three and 18 months.

d. Time to funds

The time to funds for short term loans is extremely fast! If you qualify, you can expect access to the funds as quickly as one day.

e. Interest rates

Interest rates start at 10%.

f. Pros of short term loans

  1. People with less-than-perfect credit may apply.
  2. There’s very little paperwork required.
  3. Short term loans come with a set payment structure.
  4. They can be used for a range of purposes, including FILL IN.

g. Cons of short term loans

  1. Payments have to be made weekly.
  2. May have higher annual costs than longer-term loans.

h. How to apply for a short term loan

Short term loan applications exist online only. You’ll need your driver’s license, a voided business check, proof of ownership of your company, bank statements, your credit score (business and personal), and your personal tax returns.

Check out NerdWallet’s list of options for companies that offer short term loans.

4. Small business grants

Small business grants are offered by the government and some private interests to promote small business growth. They don’t have to be repaid, which can make them an appealing option for startups and small businesses that qualify.

a. Who qualifies?

Most small businesses probably won’t qualify for a small business grant, as they’re tied directly to US government agencies that have specific goals. However, research and development companies often do well, as do some high tech companies.

State level grants are also tied to the direct economic or social needs and many of them are matching grants. That means that you’re expected to match the amount you’re loaned with your funds.

Finally, there are local small business grants that are usually less competitive than federal or state grants, but are often for less money. If your startup is clearly helping your local community, this could be a good avenue for getting some funding.

b. Loan amounts

Small business grants can be as low as a couple thousand dollars and as high as a few hundred thousand. They are generally a lower amount of money than other financing options.

c. Terms

The terms of each grant depends entirely on the grant.

d. Time to funds

Small business grants take a long time to get. You can expect at least a year from the beginning of the process — and three to six months after applying — to get funding, if you qualify.

e. Interest rates

There is no interest with a small business grant, because you don’t have to pay anything back!

f. Pros of small business grants

  1. You don’t have to pay anything back.
  2. No interest, because it’s not a loan.

g. Cons of small business grants

  1. They’re difficult to qualify for.
  2. The provisions for how you use the money are very specific.
  3. They’re difficult to find.
  4. They can’t be used to start a business.
  5. They can’t be used to pay off debt.
  6. They can’t be used to cover operational expenses.

h. How to apply

Check out the following for updated lists of available small business grants:

Fundera: Want Free Money? Check Out This List of 106 Small Business Grants

NerdWallet: Small-Business Grants: Where to Find Free Money

5. Friends and family

Getting money — in the form of loans or investment — from family and friends is another one that doesn’t fall under traditional “small business startup loans.” But it’s a common way for startup founders to get money to either start their companies or get help along the way.

Friends and family are a great source of early investment or loans — but it can be a tricky relationship to navigate. It’s common for people to feel like they can be casual and personal with these types of investments because their relationships with the investors are personal. That’s a mistake.

You should a treat investment or loan from friends and family as a professional addition to your existing personal relationship. It’s a good idea to get a written contract stipulating the terms of the investment or loan and also to make it clear that it’s very, very likely they won’t get their money back if it’s an investment.

a. Who qualifies?

Anyone with family and friends who have the money and are willing to lend or give it qualifies!

b. Advantages of working with friends and family

The biggest advantage of borrowing money from friends and family lies in the fact that you already have an established, trusting relationship with these people. That means they’re easier to get a meeting with, more inclined to say “yes,” and are more likely to be flexible with their expectations and timeline.

The structure of the loan will also likely be simpler than the structure of an loan obtained through more formal means. When you borrow from friends and family, you don’t have to worry about long, complicated applications.

c. Disadvantages of working with friends and family

  1. Introducing large sums of money into a relationship that was previously entirely personal has the potential to ruin that relationship. That’s a particularly big risk if a startup fails — as most do — and investors lose all of their investment or you’re not able to pay back a loan. It’s important for you to be very clear about the potential for loss with investment money or loans from friends and family.
  2. Friends and family members also may not be able to add value to a company in the same way that more formal, established investors can. Venture capitalists, for example, typically invest in startups in fields that they are familiar with. Having that kind of knowledge on board is a huge advantage for any new company.

Other startup financing options

But small business startup loans are just one option for startups and small businesses looking for financing. Check out our guides below:

  1. Series Seed Funding: A, B, C, D, E
  2. Crowdfunding
  3. Small Business Loans
  4. Small Business Grants
  5. Private Investors
  6. Angel Investors
  7. Stay tuned for future guides!

About the Author

The Startups Team

Startups is the world's largest startup platform, helping over 1 million startup companies find customers, funding, mentors, and world-class education.

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