There are five main types of business loans that are relevant for startups: SBA small business loans, business credit lines, short term loans, invoice financing, and merchant cash advances. Let’s take a closer look at each one.
A 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 the funding.
There are three main types of SBA small business loans:
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).
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.
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.
As of May 2018, maximum interest rates on SBA loans range from 7% to 9.50%.
Pros of SBA loans
Cons of SBA loans
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. You can also learn more about SBA loans in our full guide.
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:
Check your credit rating with one of the big three credit agencies before starting the process of applying for a first time 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
f. Cons of business credit cards
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.
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 cash flow 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. Therefore, a short term loan might be a good first time business loan option for founders with poor credit.
Companies who make between $25,000 and $150,000 yearly, with a credit score of at least 600, and who have been in business for at least two years may consider this option.
b. Loan amounts
Short term loans are usually between $2,500 and $250,000.
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
g. Cons of short 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.
Invoice financing is a type of business loan that uses your outstanding invoices as collateral for a loan. The company applies for a cash advance on a percentage of payments owed, then pays it back when they get paid.
Who qualifies? Invoice financing is a great option for B2B companies with outstanding invoices. It’s not an option for B2C companies that don’t have invoices to leverage.
b. Loan amounts The loan amounts for invoice financing vary depending on the amount of money owed your company. However, the bank will usually offer about 85 percent of the amount owed, with the option to receive the final 15 percent later. Many institutions will also take the applicant’s credit into account when determining how much they will loan.
c. Terms The money needs to be repaid once the customer with the outstanding invoice makes their payment.
d. Time to funds Funds can be available in as little as one day.
e. Interest rates Invoice financing doesn’t use interest rates, but instead charges fees for loaning you the money. Most institutions will charge a processing fee of 3 percent, as well as a “factor fee,” which is a weekly percentage owed. For example, many institutions charge a 1 percent factor fee, which means they take 1 percent out your loan out of the 15 percent held in reserve every week until the total is paid.
f. Pros of invoice financing
g. Cons of invoice financing
Equipment financing is a popular type of business loan for startups and companies that need to purchase major pieces of equipment. It’s fast, relatively easy, and a good option for startup founders or new business owners, as the equipment itself stands in for collateral for the loan.
Who qualifies? Most businesses qualify for equipment financing, because the equipment stands as collateral. That means if you don’t pay back the loan, the financial institution has the right to take the piece of equipment back from you.
Founders with some revenue and less than perfect credit (over 630) can still apply.
b. Loan amounts Loan amounts can be up to 100 percent of the cost of new equipment.
c. Terms The loan terms for equipment financing are usually the expected life of the equipment.
d. Time to funds Equipment financing funds can be available in as little as two days.
e. Interest rates Interest rates for equipment financing range from 8 to 30 percent.
f. Pros of equipment financing
g. Cons of equipment financing
h. How to apply for equipment financing In order to apply for equipment financing, you’ll need your credit score, as well as financial documents (like tax returns and bank statements) showing that your business is in good financial standing. You’ll also need your driver’s license, a voided check, and an equipment quote showing how much the piece of equipment you’re trying to buy is worth.
Who qualifies? A merchant cash advance is a good option for a startup or small business that needs cash now and also has customers that pay via credit card. In this type of loan, a financial institution gives a cash advance in exchange for a percentage of daily credit card transactions, plus a fee.
b. Loan amounts Merchant cash advances range from $2,500 to $250,000.
c. Time to funds It’s possible to receive funds in as little as two days.
d. Interest rates Merchant cash advances have factor fees of 1.14 to 1.18. That means
e. Pros of merchant cash advance
f. Cons of merchant cash advance
h. How to apply for merchant cash advance Merchant cash advances are almost always given online. The institution will look at your credit card processing statements and some will also ask for your credit score and banking documents.
Don’t miss our guides to the full range of startup funding options, below.