Top 10 Startup Business Loan Options
Do Funding Options for startups Really Exist? Yes!
If a business has been up and running for over five years, it has multiple options to secure capital for the business, especially considering the growing alternative lending industry. But where can startups turn for funding?
“Startup” doesn’t necessarily mean the next billion-dollar company coming out of Silicon Valley; it also can mean the next local business. Think of the dry cleaner, the restaurant, the mechanic, the yoga studio, the home-based internet business, or even the new college graduate looking to launch a dental practice. Whether you want to start your own trucking business or open a bakery, you’ll find that startups of all shapes and sizes have unique financing needs.
Among the more than 600,000 new businesses created each year in the United States, lack of capital is one of the main reasons why business fail. Appreciating how critical capital is, Seek Capital has put together a comprehensive guide for startup business owners on how to get the much-needed funds required to launch and grow a business.
Compare The Best Startup Business Loan Options
|Funding Source||Best For||Take Action|
|SBA Startup Loans||Low Interest Rates and Long Term||Get more info|
|Business Credit Cards||Low Interest Rates, Speed of Funding and Flexibility of Funds||Get more info|
|Equipment Financing||Purchasing specific equipment||Get more info|
|Friends and Family||Flexibility of Funds and Speed of Funding||Get more info|
|Angel Investors||Funding Range||Get more info|
|401k Rollover||Funding Range and Flexibility of Funds||Get more info|
|Crowdfunding||Funding Range and Flexibility of Funds||Get more info|
SBA Startup Loans
Best for Low Interest Rates and Long Term
Small Business Administration (SBA) loans are great for low rates and long terms. These loans are ideal for a business owner who is patient and meets the strict SBA guidelines. For a startup business, the business owner will usually be required to make a 20-30 percent capital contribution alongside the lending bank.
How Does It Work?
Getting an SBA startup loan can be difficult, but it’s worthwhile if you meet the criteria. The funding ranges between $25,000 to $350,000. Keep in mind that you can only use these funds on approved expenses, and it takes about three to six months to get the funding if you are able to pass all the strict requirements.
How Do I Get Approved?
In order to get approved for an SBA startup business loan, you will need the following business documents:
- Business plan
- Two- to five-year financial projections
- Profit and loss statement
- Balance sheet
- Personal financial statement
You are also required to be in business for more than six months, unlike using credit cards, which don’t require a business to have actually started operating.
How Much Does It Cost?
The biggest challenge with SBA small business startup loans is that they require the owner to contribute 20-30 percent to the loan. If you are able to do so, however, you can get $25,000 to $350,000 for a highly competitive rate. For example, 7(a) loan interest rate guidelines are the base rate plus 2.75-4.75 percent, depending on the loan amount and maturity terms. Moreover, origination fees are prohibited for this loan type.
The SBA is a U.S. government agency that provides support for entrepreneurs and small businesses. SBA loans are made through banks, credit unions and other lenders that partner with the SBA. The SBA provides a government-backed guarantee on part of the loan.
The Inside Scoop on How SBA Startup Loans Work
At the simplest level, the SBA works with approved lenders by guaranteeing a certain percentage of the loan in case of default if the lender provides the loan under the SBA’s preset conditions. That means the lender is guaranteed, not the entrepreneur. Because the SBA is guaranteeing the loan, it requires the loan to be low risk. The SBA and lender will consider the following factors when assessing a loan applicant:
- Personal investment
- Years of industry experience
- Time in business
- Business plan
- Financial forecasting
They want to ensure they are truly lending to businesses that have a proven track record and the ability to continue to grow and repay the loan
According to the SBA, when you use the microloan program you can qualify for up to $50,000. The SBA has a lending program known as 7(a), which can also be used to start businesses. The SBA’s 7(a) loans have a maximum loan amount of $5 million. It does not set a minimum loan amount. The average 7(a) loan amount in fiscal year 2015 was $371,628
The Challenge of Using SBA Loans to Start a Business
The challenge with SBA loans is that, in order to qualify, you’ll typically have to provide collateral or a 20 percent capital contribution. Meaning, for every $1 you borrow, you must be able to contribute $0.20. For example, if you want to borrow $100,000, the SBA will require you to contribute $20,000 of your own startup capital. Pulling this kind of capital together can be difficult for some new business owners.
SBA startup loans have strict qualification criteria as the federal government will ultimately be insuring them. For this reason, lenders perform substantial due diligence, including an extensive application process and specific document requirements. The application process is thorough and has no guarantees of approval. For the right business and applicant, however, the SBA route can be ideal as the SBA’s rates are typically competitive and come with long terms to ensure the monthly payment is manageable for the startup business owner.
What You Should Do Next
Find out if you meet the SBA’s loan applicant criteria. While not a perfect fit for all business owners, SBA loans maybe the idea funding choice for your startup business if you meet the criteria, can make the capital contribution and are patient enough to go through the process. Funding in a timely manner is usually integral to the survival of a business.
Business Credit Cards
Best for Low Interest Rates, Speed of Funding and Flexibility of Funds
Business credit cards are the most popular form of business funding because they have multiple advantages and perks. Business credit cards should at least play a part in every startup business funding plan. Funding from business cards can range between $5,000 and $150,000 and can grow with good payment history. It is not uncommon to start with a $10,000-limit business credit card and within 12 months see that limit climb to as high as $100,000 because of strong usage and payment history.
One of the top benefits of business credit cards is that there are no restrictions on how you can use the money. Another advantage is that the speed of the funding is extremely fast: You can get the money in five business days.
How Does It Work?
The documentation required for startup business funding with credit cards is minimal, depending on which bank you use. You just need the business registration documents, federal tax identification number (EIN) and articles of incorporation. Time in business can be zero with a strong personal credit score, so credit cards are generally recognized as the best funding option for startup businesses that have been operating for less than 6 months. There is no need to contribute any money to get this type of startup funding, unlike with SBA startup loans or equipment financing, both of which require a significant contribution on the borrower’s part.
How Much Does It Cost?
Business credit card rates can be great. You can get a 0 percent annual percentage rate (APR) on some credit cards for up to 15 months. You can also take advantage of rewards programs to travel for free or earn cash back. Unlike small business loans, business credit cards have absolutely no origination fee for funding a startup, so you should use credit cards as at least part of your startup funding plan.
Most people don’t immediately think of credit cards as a way to get a startup business loan but using business credit is one of the most common ways for new businesses to get off the ground. Keep reading for Seek Capital’s tips on smart ways to make business credit cards part of your funding plan.
Most businesses use business credit cards as a source of working capital, but that also means a lot of business owners are still using their non-business, standard credit cards for their businesses, too. Using a personal credit card works well if you have a card specifically assigned for business or if you keep great records. It is generally recommended to avoid using the same card for your business and your personal expenses.
Why Should I Consider Credit Cards?
Credit cards are one of the fastest and easiest methods to access capital. Each bank has their own criteria, but typically they are looking for applicants to have credit scores of 680+ for FICO8 and have a current credit card with a credit limit of $5,000 that has been maintained for a minimum of three years.
Credit cards operate in the same manner as an unsecured line of credit, meaning, you can use the funds, pay them back, and then draw down again and continue to repay and draw down. For this reason, credit cards are ideal for monthly expenses, such as inventory, rent and other frequent bills. Credit cards provide the business owner with the ability to make the payments for their regular expenses, enjoy the payment terms — typically net 30 — and if need be, carry a balance. So, think of it like this: Let’s say you purchase $10,000 worth of inventory on your credit card. You will usually have monthly net 15 on monthly net 30 terms on that. This now gives you the ability to purchase the inventory, put it on the shelves, sell the inventory for $15,000, for example, and make the payment for the inventory after you have already sold it. This flexibility means that potentially none of that inventory would have to be paid for out of pocket. Now that is a nice way to run a business!
Beyond just the payment terms, many business credit cards offer huge rewards. In fact, Seek Capital credit card experts recommend that you try to run every single transaction through the credit card to earn points. It is quite easy to earn enough points to get a free annual vacation for yourself and your family.
Before jumping in blind with a random business credit card, however, it’s important to understand which one is best for you, your requirements and your eligibility. There is a large selection of different types of credit cards with various advantages and disadvantages, and each business owner has their own unique needs.
Seek Capital’s Top Credit Card Tip for You
Don’t think you have to limit yourself to just one business credit card. The majority of small business owners have multiple business credit cards.
Why Multiple Cards?
There are several reasons why you might want to have multiple business credit cards. With multiple cards, you can:
Access to Additional Capital
If you receive a $10,000-limit business credit card, that simply may not be enough for your business needs. If that’s the case, having a second or third card could be beneficial.
Maximize Cash Flow
As a startup business owner, you will have both one-time, initial setup costs as well as ongoing monthly costs. You can put these expenses on cards with the best terms for them. For example, some business credit cards provide 0 percent interest for the first nine or 12 months, which many business owners will take advantage of for a major purchase that they can pay down each month. If you buy a $12,000 piece of machinery on a credit card that has 0 percent for the first 12 months, you can pay $1,000 per month, taking a full year to pay for the machinery and never paying a penny in interest. Not a bad deal at all! If you have a second or third card, you can use those for monthly expenses that you and repay in full or partially each month.
Every credit card has a different rewards program. If you are mindful, you can increase your benefits quite a bit by having multiple credit cards and using the right credit card at the right time.
If you travel a lot, for example, you might use an airline credit card. If you book all your flights through that kind of card, you get to enjoy multiple benefits, such as increased airline status, bonus miles based on preferred status, no luggage fees, priority boarding, exclusive airport lounge access and free on-board food — all because you spent the same money you would have spent but you used the most suitable credit card.
With all the airline miles that you’ll accumulate, you can get free flights. To provide some context, a cross-country flight is around 40,000 miles. If you spend $10,000 per month on your business travel credit card for months, you could earn enough miles for a free trip across the country.
Hotel credit cards such as the Hyatt Credit Card from Chase or the Radisson Rewards Visa Card also offer rewards. Like with airline credit cards, if you pay for all your hotel visits and other expenses on this type of card, you can get free room upgrades, elite status, bonus miles, free meals and a slew of other benefits.
The next major category is cash back cards. A standard cash back offer is when you receive 1 percent or 1.5 percent back on everything you spend. Meaning, if you spend $10,000 per month, you’ll receive $100 cash back per month. You can get that money as either a statement credit or you can just have a check sent to you and use it for whatever you want. Cash back is pretty good, but some of these cards also have exciting bonus categories. These are specific categories in which you receive bonus cash back. For example, some business credit cards provide 1 percent cash back on most purchases but also give 3-5 percent cash back on purchases in various categories, such as:
- Hotel stays
- Car rentals
- Gas stations
- Computer hardware
- U.S. office supply stores
- Wireless telephone service
You can see that by simply being mindful of which card you use, it’s easy to rack up a massive amount of points and cash back. Having one business credit card is nice but having a few diverse business credit cards can really help you take advantage of credit card perks.
Maximize Signup Bonuses
You can gain even more advantages by maximizing credit card signup bonuses. For example, some business credit cards will give you tens of thousands of points after you spend a specified amount of money in the first three months. That’s on top of other perks such as airline fee credits, baggage fee credits and points on purchases.
Another great option is to choose one of the Chase Ink business credit cards: Unlimited, Cash or Preferred. If you’re a new cardmember, you can get 80,000 bonus points after you spend $5,000 in the first three months. You also can get cash back as well as earn points on every purchase.
Build Rainy Day Capital
As your business grows, so too will your capital needs. In most businesses, particularly if you sell physical products, you will find that the more your business grows, the more working capital you will need. For example, if you are a restaurant and each day you have 50 customers, you have to purchase enough food to serve 50 people. Now business is great, your restaurant becomes a popular lunch spot for a few local businesses, and you receive 150 customers per day. That means you must purchase enough food to serve 150 people, which is a lot more to pay upfront for inventory. With working capital requirements like these, having a “rainy day” credit card can be a life saver.
A “rainy day” card is a business credit card that you get with no intention of using it, except perhaps just to get the signup bonus. After that, you keep it in your draw in case of a rainy day.
The Ultimate Guide to Understanding Credit Card Perks
If credit cards are right for you, the next question becomes which credit card or cards to get. Every business owner is unique and needs to choose the cards that suit their individual needs. The most common factors to consider when selecting a credit card include:
Business Credit Cards Vs. Standard Credit Cards
When starting a business, it is natural to simply start using the credit card that is in your wallet to pay for business-related expenses. The challenge with this is that it becomes incredibly difficult to track business-related expenses unless you have a good bookkeeping system or bookkeeper. The second issue is that, due to poor tracking, it becomes overwhelming and difficult at tax time to know which expenses were for business and which were for personal use. Looking back six months, do you really think you’ll be able to remember which receipt is for a business-related meal and which was you buying dinner with a friend?
A couple of other helpful features of business credit cards is that they give you the ability to have additional cards for your staff, which is great if you have a finance person, assistant or even a spouse who handles a lot of the purchasing for the business.
Except for a few banks, the majority of business credit card issuers do not report to your personal credit profile each month. This separation of reporting is helpful to maintain a good credit score so that, even when you are carrying large balances in the business, they aren’t reflected in your personal credit score. Business credit cards do report if you don’t make payments and are in default, however, so make sure you are making your monthly payments on time, even if it’s just the minimum.
Credit Card Approval Limits
One of the best ways to fund your business is with 0% APR introductory credit cards. There are certain times when having more than one credit card is suitable for your business. If you need $20,000 and each card gives you $10,000, for example, by simply having two credit cards, you achieve your funding goal.
Be mindful that if you are taking on more credit, it’s advisable to have a smart plan for how you are going to use those funds and how you are going to repay them. One example is to have a plan to repay the funds within less than two years. This time frame will give you one year at 0% APR interest and another year at the usual interest rate.
Credit Card Rewards
It is not uncommon for business owners to redeem credit card rewards for their personal use, though Seek Capital recommends you speak to your accountant for legal and accounting advice before you do so. Seek Capital experts hear all the time about business owners who take their family on vacation using the points they accumulated from business expenditures. Imagine how sweet it is to work all year and then take a hard-earned vacation at the end of the year with flights and accommodations fully covered by credit card rewards. What could be better than that?
Types of Credit Card Rewards
Cash Back Credit Cards
Each time you use your credit card, you earn a percentage of that money back. The most common is 1 percent or 1.5 percent of everything you spend. Where it gets exciting is when you have bonus categories for where you can earn 2 percent, 3 percent or even 5 percent cash back. To learn more and see the full review of each card, go to Seek Capital’s Best-Rated Cash Back Card Guide.
Airline Miles Credit Cards
If you travel a lot, a card that gives you airline miles might be perfect for you. Each time you use your credit card, you accrue miles either with a particular airline or on a generic travel card that you can use with several airlines. To learn more and see the full review of each card, go to Seek Capital’s Best Airline Rewards Credit Card Guide.
Hotel Rewards Credit Cards
If you are a road warrior and spend time in hotels, a hotel rewards card could be perfect for you. Each time you use your credit card, you accrue points. A specific hotel branded card earns you points for that particular hotel chain, and a generic travel card earns you points that you can use with different hotels. Because the hotel industry has consolidated so much, the major chains have a variety of hotels in their groups. For example, The Hilton Group has everything from DoubleTree to Hilton and Conrad to Waldorf Astoria. In fact, they have 14 different brands that you can earn and redeem the points with. To learn more and see the full review of various hotel cards, go to Seek Capital’s Best-Rated Hotel Rewards Credit Card Guide.
Generic Travel Rewards Credit Cards
There are specialist rewards cards such as the United Airlines MileagePlus card, but there are also more versatile cards that allow you to accrue points with your spending to use across multiple airlines and hotels. Generic travel rewards cards not only offer versatile rewards that you can use across multiple travel companies but also offer additional premium benefits such as the following perks — just be sure to check the card’s most up to date terms and conditions:
Airport Lounge Access
Several business credit cards offer free access to thousands of airport lounges in more than 100 countries around the world.
Bonus Points Based on Spend
Each card has bonus categories that allow you to earn points for each dollar spent in select categories. The Chase Ink Business Preferred Card offers 3 points per $1 spent up to the first $150,000 spent each year in select business categories.
Purchase and Return Protection
Several cards offer a purchase protection warranty for theft, accidental damage or loss. This coverage provides peace of mind, especially for major purchases affecting your business.
No Foreign Transaction Fees
If you travel abroad, these cards provide a huge value add in that they don’t charge you additional foreign transaction fees. You’ll still pay the currency conversion rates, but you’ll avoid the foreign transaction fees, which are usually 1-4 percent of each purchase. These savings can be a huge benefit when traveling. Chase Ink Business Preferred is one of multiple cards that provides this benefit.
Extended Warranty on Purchases
Credit cards that offer extended warranties can give you added coverage on eligible products. For example, if an item has a warranty of less than five years, your credit card might offer you an additional two-year warranty after the original manufacturer’s warranty expires.
Some of the top travel cards offer concierge services, which are a great service you shouldn’t undervalue. A concierge service can organize anything for you — you’re only responsible for the purchases, fees and shipping charges. It’s like having a personal assistant for free. Examples of concierge services include:
- Hotel, flight and rental car bookings
- Restaurant bookings, including for special events
- Acquiring sporting event and concert tickets
- Expert gift advice
- Travel documentation assistance, such as facilitating passport-related questions with an embassy
- Airport Lounge Access
Fuel Rewards Credit Cards
Credit cards that offer gas rewards are ideal for any business that spends a large amount of money on auto fuel. Truck drivers and delivery service providers are obvious examples of people who benefit from this type of card, but food truck owners, traveling sales people or anyone else who spends money on fuel also could reap these rewards.
0% APR Credit Cards
If favorable payment terms are your priority, then 0% APR credit cards are probably going to be your preference. With a 0% APR business credit card, the credit card company is giving you money for a period of time, usually 12 months, and not charging you a penny in interest. Why do they offer this kind of deal? It’s simple: Banks think long-term. They are willing to sacrifice some revenue today to be able to create a long-term client and revenue stream in the form of interest and fees later. If you carry a balance on the card after the introductory 0 percent rate term is over, then you’ll start paying interest on that balance.
Banks aim to provide a good customer experience to entice you to sign up for other financial services with them, such as a checking account, mortgage, car loan, retirement account or investment account.
One of the most popular ways business owners use 0% APR introductory cards is as a business loan. Let’s say you want to buy a piece of equipment, such as commercial cooking equipment for your new restaurant, and this equipment costs $12,000. If you don’t want to part with $12,000 as you start your business, you can put it on your credit card that has an introductory 0% APR for 12 months. This kind of card gives you the ability to purchase the equipment for $12,000 and then pay $1,000 per month for the next 12 months, fully paying it off in a year without paying a penny in interest.
Alternatively, you can use the 0 percent card as a regular credit card and simply enjoy knowing that in the first 12 months, if you ever need to carry a balance for a month or two or even 12, so long as you don’t have a balance at the end of the introductory 12-month period, you won’t be paying any interest.
- Cash Back Credit Cards
How Do I Decide Which Perks Are Most Important?
Here’s what Seek Capital’s credit card experts believe is the easiest way to evaluate which business credit card features are most important:
First, understand what is most important to you: credit limit, perks or rates. If you are like most people, it’s usually a combination of a couple of those factors.
These experts recommend choosing the business credit card that is going to be your most commonly used card first and then adding another one to three cards to round out your business funding. Use them wisely and maximize the credit limits, best rates and credit card perks to make the most of your company’s budget.
What's the Bottom Line?
Here's the bottom line, credit cards a great way of getting your startup business going. They are fast, easy and have a ton of perks. One of the other things Seek Capital’s experts like about credit card funding how easily any business owner who has a credit profile of 680+ FICO can use credit cards in conjunction with other funding sources. If you get a business loan, equipment financing, an SBA loan, or borrow from friends and family, you can still use credit cards to supplement those funding sources.
For business models that require equipment to operate, equipment financing is a solid type of startup business loan. You can get between $10,000 and $150,000 in equipment financing. Unlike credit cards, equipment financing has no flexibility of funds — you must use the funding to purchase the equipment you specified in the loan application.
How Does It Work?
Equipment financing companies can supply funds relatively quickly, such as in 30 to 90 days. You will need the following documents to apply for an equipment loan: bank statements, financial projections, balance sheets and an approved purchase order. You must be in business for more than six months to qualify, so you might also require startup financing in the form of other business loans or business credit cards to get your business up and running.
How Much Does It Cost?
Equipment financing also usually requires that the owner contribute more than 20% to the equipment similar to SBA startup business loans. The rates on equipment financing usually range from between 10% to 40% and the origination fees range from between 1% to 5% of the amount your are borrowing.
If your desired startup business funding is strictly for a specific piece of equipment, equipment financing might be the ideal funding method for you. Equipment financing is typically specified for any piece of physical equipment that is used to generate revenue. Examples include many types of equipment, such as:
- Commercial kitchen equipment such as a restaurant loan
- Manufacturing machinery
- Construction equipment, such as for new construction or renovations performed by real estate or house-flipping startups also relying on fix-and-flip financing
- Vehicles such as short- or long-haul trucks
- Heavy machinery
Although not a definitive rule, many equipment leasing and financing firms do not provide financing for office or information technology equipment due to rapid depreciation rates. With that said, there are specialty firms that do offer loans for those expenses.
Two Main Categories of Equipment Financing
Equipment leasing allows you to lease equipment for a monthly fee for a set number of months. When you lease, you don’t purchase or own the equipment, just like with auto leasing. This option allows a business owner to turn in the equipment at the end of the lease or, alternatively, if they want to keep it, they can pay a large balloon payment and take full ownership.
In choosing to finance equipment instead of leasing it, a business owner has to make some tough decisions. For example, the monthly payment could be higher with financing as opposed to leasing, but ownership could give the business owner more flexibility in how to use the equipment. The business owner has to decide which factors are more important: ownership versus leasing or higher monthly payment versus lower monthly payment
Why would a business owner choose to finance instead of lease equipment? The main scenarios in which this makes sense are:
No Eligible Leasing Options
There aren’t always leasing options available, so sometimes financing is the only way to go. If this is the case, then the decision has already been made.
Very few, if any, leasing companies in your industry will provide leasing options for pre-owned equipment as it may not be covered by warranty. Lenders can’t always easily determine the true condition and value of pre-owned equipment the way they can new equipment.
You should always evaluate the entire package. In some cases, a pre-owned piece of equipment might be the better deal; however, in other cases, you might be able to lease a new vehicle for less per month than you would spend making monthly payments on an older pre-owned model. Consider both the cost of the item and the cost of the financing. If you aren’t sure, don’t be afraid to reach out to an accountant who can help guide you through this impactful financial decision.
Desire to Make Modifications
If you are leasing a piece of equipment, at the end of that lease term, you are required to return the equipment in the same condition, minus normal wear and tear. If you are planning on making any modifications to the equipment, then leasing isn’t the best option for you as you will be in breach of the lease agreement. Breaching a lease can result in high penalties, which could include the balloon payment and losing any return options.
Long Term Ownership
If you plan on using the same piece of equipment for a long time, financing might be a better option than leasing. With leasing, you pay a lower monthly payment, but you are always making a payment every month. If you decide to finance the equipment, you might have to pay higher monthly payments for that same period, but once that period is over, you will then own the equipment with no more monthly payments due. Buying is ideal if you will continue to use the equipment long after the financing period is over, especially if the cost to maintain the equipment after that would be lower than a monthly lease payment.
- No Eligible Leasing Options
Assessing Risk of Equipment Financing and Leasing Options Available to Startups
Equipment financing companies have the security of being able to legally repossess the equipment and recoup any losses if you fail to make payments. For example, if you have a piece of equipment that is worth $20,000, make payments of $5,000 and then stop, then the lender would have to repossess the equipment and try to sell it for over $15,000. Factoring in depreciation, this becomes a risky proposition for them. To help mitigate the risk, they usually require the business owner to pay a down payment, usually 20 percent of the purchase price. If you pay $4,000 — 20 percent of the $20,000 — then the lender is only providing financing for $16,000, which immediately reduces their risk exposure.
Now let’s assume the same scenario that you made payments of $5,000 and then stopped, the financing company would now have $11,000 in the equipment, so if they had to repossess and sell it, they would only need to be able to sell it for $11,000 to break even, which is likely a lot less than the value of the equipment, so they could potentially sell it for a profit.
Processing a repossession can be costly to the lender in terms of time and resources, however, so they’d typically much rather you make your monthly payments. Lenders can ultimately make more when both parties agree to the financing terms. If you are having an issue making your payments, reach out to your lender to request a new payment structure. Repossessing is truly a last resort. In fact, the default rates on equipment financing are some of the lowest out of all business funding types, mainly because the machinery is being put to work making money.
Friends and Family
Best for Flexibility of Funds and Speed of Funding
One of the best and easiest ways to get money to start a business is to turn to friends and family. Getting a loan from friends and family is one of the fastest and most flexible sources of funding an entrepreneur can pursue. For a successful lending and borrowing arrangement, Seek Capital strongly recommends you have a detailed business plan and financial projections so your friends and family can see what investing in and how much they are lending you.
With respect to funding range, the average amount of funding that people usually get is between $5,000 and $500,000, according to Seek Capital’s experts. The funds are flexible because you can use them for anything that you want for your business, in contrast with SBA startup loans that require you to only use the funds for approved expenses.
How Does It Work?
There is no minimum or maximum on how long it takes to get a startup business loan from friends and family. You could get funds in just one day under the right circumstances. The only required documents to get startup business financing from friends and family members is a business plan and a legal agreement of what they will get in exchange for the money they lend to you.
How Much Does It Cost?
The typical rate on a startup business loan from friends and family members is either 10 percent to 30 percent interest or 5 percent to 30 percent equity. These small business startup loans typically do not come with any origination fees, which can make them more attractive than SBA startup loans, 401k rollovers and equipment financing.
Everything You Need to Know About Getting Startup Business Loans from Friends and Family
Turning to friends and family is one of the most common methods for funding a startup business. Whereas financial institutions might not feel comfortable investing in your business, the people closest to you — your friends and family — might be more willing to take a chance on you. The biggest difference here is that friends and family know you personally, so they are really investing in you.
A bank, on the other hand, only looks at hard numbers to assess the risk of lending you money. For many startups, hard numbers are hard to come by. You might look high-risk to a bank, but your friends and family will assess you, your character and your passion. They see firsthand how committed you are to your business, how excited you are, the late nights you put in, and all the other sacrifices you are willing to make to ensure your business is successful.
Benefits of Friends and Family Small Business Startup Loans
One benefit of getting startup funding from friends or family is that they don’t have the rigorous approval process banks do, so you’re more likely to get the loan. Even if they review your financial reports, credit score and other factors, they might have lower requirements than a bank.
Friends and family also can come in many forms that banks might be unable or unwilling to provide. For example, your friends or family might supply resources instead of cash, such as free rent for office or garage space, tables and chairs, or other equipment or services.
Another benefit of getting startup loans from your inner circle is that it can help you grow into a more attractive borrower to lenders or opportunity to investors. If your friends or family members have business experience, they also might be able to offer advice on how to succeed and introduce you to other people who can lend or invest.
How to Approach Friends and Family About Lending You Money for Your Business
Like in any other financial arrangement, make sure both parties understand and agree to the terms. Good communication is the simplest way to avoid conflict. Be sure they understand the risks and the rewards so that everyone’s interests and expectations are well managed.
How to ‘Qualify’ for Friends and Family Funding
Terms for qualifying for loans from friends and family are subjective, but here are a few pointers on what you should do to make yourself an attractive borrower to them:
Make a Commitment
People want to know what you, as the entrepreneur, are committed. You can demonstrate commitment by investing your own money in your business, investing your time such as by leaving a well-paying job to focus on the business, or selling property to gain capital for your business. Showing some kind of sacrifice can go a long way in convincing a potential investor to commit to your business.
Present Your Business Plan
Your business plan doesn’t need to be a 50-page document, but it does need to spell out the basics:
- What your business is
- What makes you unique in your industry or field
- Why you will be successful
- A SWOT (strengths, weaknesses, opportunities, threats) analysis
Know Your — and Their — Budget
Have a three-year budget broken down by month showing how you will spend the startup business loan and what your projected income will be. This exercise is beneficial for you and can be a powerful tool to help your friends and family understand how their money will be used.
Know How to Ask
Be specific. Outline exactly how much money you need to borrow or what resources you need and how the loan or resources will be used. Be professional and be prepared to answer all their questions.
Best for Funding Range
Startups that are thinking big might seek an angel investor. Angel investors provide loans or investments in the tens of thousands to millions of dollars for certain types of businesses.
How Does It Work?
To get an angel investor and have flexibility of spending, you need to get an annual budget approved. Once approved by investors, you know the game plan for an entire year in terms of how you will spend the money. The time to get funding can be a lot longer than getting a business credit card approved or getting equipment financing, for example, because the loan or investment amount is larger. It can take up 6 months to a year, for example, to get the funding.
The documentation required to get startup business financing from angel investors includes a business plan, financial projections, profit and loss statements, balance sheets, and personal financial statements. Angel investors typically like to see traction in a startup, which means you have been doing well for six months or more.
How Much Does It Cost?
As the owner, when you get angel funding you do not need to contribute any of your own money, unlike with equipment financing and SBA startup financing. However, you are usually going to be required to give up between 20-60% of equity in your business. With angel investors, there are also no origination fees.
How to Make Your Startup Appeal to Angel Investors
Angel investment is the investment of money into a business by high net worth individuals who are looking to make a return on their money. They are usually looking for a minimum of a ten-fold return on their investment within three to five years. For this reason, expect they will look for a sizable equity component to the deal.
If you believe an angel investor would be a good option for you, the first step is to create a strong pitch that you can use to present your business, the merits of the business, the potential revenue and your team. You can find many templates and advice for creating an effective business investment proposal online. This will be the first and one of the most important documents that you create for your business as it’s designed to show why your business is an attractive investment opportunity.
To gain access to angel investors, you’ll want to leverage your business network and referrals. Keep in mind you are asking someone to invest their money into you and your business, which requires a huge amount of trust that you and your business will do what you are promising.
One way investors can minimize their risk when investing in startups is to invest in things that come with personal recommendations. In many cases, they are investing more in you as a business operator than they are in the actual business idea. If you ask any investor if they would rather invest in a great idea with a bad team or invest in a weak idea with a great team, they will most likely choose the weaker idea with the stronger team. Why? Because bad teams can ruin great ideas, but great teams can improve weak ideas. Great teams work hard, make good decisions and change directions if necessary. They can attract other high-caliber talent and resources to help grow the business.
Your track record, integrity and relationships are extremely valuable. There is no single way to develop these kinds of business relationships, but it’s a good idea to start by putting yourself in the same professional and recreational circles as those who can be influential in your business life. Start with industry functions, trade associations or simply networking with current colleagues who could be supportive when the time comes for you to take the leap and start your own business.
There is no one-size-fits-all approach to funding a startup business. Your business is special. It reflects your love and your hard work. Seek Capital’s experts genuinely desire to help you make successful financing decisions for your startup. Don’t be intimidated, overwhelmed or deterred. Take one step at a time, and before you know it, your business could be achieving great success.
Best for Funding Rates
Using your 401k to fund a startup business can be a good idea if you follow the rules carefully. The funding people usually pull from a 401k account is between $50,000 and $300,000. In general, there are minimal legal restrictions on how you can use a 401k loan or withdrawal to start your business. It takes between 30 and 90 days to get the money out of your 401k.
How Does It Work?
In order to use your 401k as a small business startup loan, you need the following documents: business plan, financial projections, profit and loss statements, balance sheets, and personal financial statements. There is no minimum amount of time you have to be in business to apply for a 401k loan.
How Much Does It Cost?
The owner contribution is 100 percent because you are using your own 401k to fund the business. In other words, there is more of a risk to using your 401k as you might lose your hard-earned cash.
The rates are also amazing because you usually pay only a $140 per month account fee rather than any interest rate. Fees, however, can be higher than other startup business loan options. A 401k loan can cost around $5,000 in some cases.
You are entitled to invest your personal retirement funds in a business such as your own business without paying early withdrawal penalties or income tax. This startup business financing option is known as rollover as business startups (ROBS). ROBS is not a loan against your retirement account but rather your retirement account buying shares in your new business entity.
If you have worked hard for years and contributed to a 401k, you may be able to use these funds to start a business. It is not as easy as just writing yourself a check from your 401k account, however. You must follow the legal process carefully as there are significant penalties for improperly using your 401k.
The best way to invest your 401k in a startup business is by rolling the money into a corporate retirement account and then investing the money from the retirement account into the business. Although this can be a good option for starting a business if you have the funds available, Seek Capital strongly recommends speaking to a qualified financial advisor before acting. First and foremost, you want to ensure you are following all laws, and secondly, you want to make sure you aren’t overpaying in taxes and penalties. You also might need to consult financial advisor to discuss revising your retirement plan.
Using your 401k as a startup business loan usually only makes sense if you have a minimum of $50,000 in your retirement account that you are willing to invest into your own business. If you are confident in your business and yourself, then it may make sense for you to invest your retirement savings into your business. The question becomes, would you prefer to invest your retirement savings in your business or in publicly traded companies that you have no control over? If you are confident in your startup, then this funding option is worth exploring.
Best for Funding Range and Flexibility of Funds
Crowdfunding has become an increasingly popular way to get startup business loans and funding. In terms of the funding range, most crowdfunding campaigns strive to get between $5,000 and $500,000, although some campaigns have raised millions. The funding is extremely flexible: You can use the funds however you want as long as you deliver on what you promised when you were raising the money. The speed as funding may not be as fast as credit cards or friends and family, but you can still get the money in about 30 to 120 days, depending on the crowdfunding platform.
How Does It Work?
The documentation you need to get startup loans or investment through crowdfunding is the most difficult part. You will need a business plan, term sheet, business registration documents and compelling marketing materials such as a video sales pitch. Similar to getting business credit cards, you do not need to have even really started operating as a business yet to launch a crowdfunding campaign so long as you have business documents.
How Much Does It Cost?
The owner contribution is also nothing, meaning you do not have to match the funds that people give to your campaign. Some forms of crowdfunding require you to provide the investors with a product, however. If you are doing equity crowdfunding, the rates can be favorable and negotiable, falling somewhere between 8 percent and 10 percent to fund your startup. There are also no origination fees with crowdfunding like there are with some startup business loans.
Over the last 10 years or so, crowdfunding sites have experienced explosive growth. At first it seemed like a fad, but it has far exceeded a fad to become a go-to funding option for many businesses.
Why would individual strangers or other third parties give money to a business owner to help launch a startup? It’s simple: They want to get in on the next big thing at the ground level. They may get to be part of a movement they believe in, get early access to the product or service, or believe they’re investing in something that will have a big payoff. They want to receive either rewards, interest on their money or equity in the venture.
The Rewards model is by far the most popular form of crowdfunding for startups. This model is quite simple for everyone to understand: In exchange for donating money, the business will provide a reward, usually an early version of the product, to the investors. This model is popular for unique and exciting products that people want to get behind.
The Debt model is when investors donate money in exchange for an agreed-upon return on that capital. It usually goes like this: If you donate $100, the business will return $120 to you. This arrangement might or might not be tied to a due date or another contingent action, such as raising additional funds or launching the product within a specific time frame.
The Equity Rewards model is when investors donate their money in exchange for a percentage ownership stake in the business. This gives you, the business owner, the ability to raise money quickly with no obligation to return that money until you are profitable or have a sale of the business, partial or whole.
Crowdfunding is a great option, but like all other funding methods, it is not going to be suitable for all businesses. Crowdfunding is a suitable startup business loan or funding option if you believe you can rally a community around your business idea or if you have an exciting product that people want to get behind. For example, people might be inspired to crowdfund a startup that they believe will be beneficial to their community. It could be something that addresses a community need or provides a product or service to a group of people who need it. In some cases, a startup might incentivize crowdfunding by attaching a promise of some sort to their business, such as outlining a plan to donate a portion of every sale to a charity or other organization.
One of the most critical elements to a successful crowdfunding campaign is your startup’s story. If you decide to go down this avenue, be sure to work on your story. People are often moved to contribute to a crowdfunding campaign based on an emotional response to a story rather than an intellectual reason to invest. Spend time developing, testing and refining your story just like you would a pitch for investors or a business plan for a bank. Your story needs to be compelling, and at its core, it should identify a type of person who will benefit from your startup launching, other than just yourself. You will likely have more success with a business pitch that aims to solve a problem, make life better or connect people beyond just making a profit.
Some of the most popular crowdfunding sites include:
Fundable Specializing in launching businesses via crowdfunding, Fundable is a platform for both private citizens and investors.
KickstarterKickstarter showcases projects that are unique and that might focus more on creating cultural experiences than on generating high profit margins.
IndieGogoTargeting people interested in innovation, IndieGogo offers opportunities for people to invest in cutting-edge products before they go mainstream.
Frequently Asked Questions
- Startup Business Loans vs. New Business Loans
“Startup business loans” and “new business loans” are terms with somewhat loose definitions, depending on the lender. Understanding how the terms are difference can help you find the best way to search for loans for your business.
The phrase “new business loan” refers to a business that has not yet started. There is a common misconception that if a business has not started yet, it is not eligible for funding. This is not true!
Seek Capital specializes in getting new business loans for companies pre-revenue. Seek Capital’s pre-approval is based on personal credit score. Revenue and other factors can come into play, but the bottom line is that if you have a FICO score of 680 or higher, you will likely qualify for a new business loan.
A “startup business loan” can refer to a loan for a company that is still in the startup stage. Startups can include pre-revenue companies like new businesses but also can include companies that have progressed to filing for an LLC or corporation. Startup businesses are a little further along in the launch and growth process than owners seeking new business loans.
Either way, if you have a FICO of 680+, there are real and substantial options to get the funding that you need to take your business to the next level.
- How Do I Finance a Startup Business?
You can pursue several funding options for your startup business before the company has any revenue or time in business. One way to do so is to use personal or business credit cards.
The banks are only looking at your personal credit score in such cases. If you have a 680+ FICO score, you should be able to get some money in the form of an unsecured line of credit. You can also earn amazing credit card rewards for travel or cash back.
Other ways to finance a startup business include, but are not limited to, getting money from friends and family, running a crowdfunding campaign, or getting equipment financing.
Here are the seven best ways to finance a startup business:
• SBA Loans
• Business Credit Cards
• Friends and Family
• Angel Investors
• 401k Rollovers
• Equipment Financing
Any good startup business funding plan will use a combination of these different methods to launch their company. For example, if your primary method of funding is going to be friends and family, you could also use credit cards. Maybe your friends and family are going to give you cash to put in the bank to run the business, but you can leverage business credit cards to turn business expenses into rewards such as free flights and hotel upgrades, or you can make smart business purchases using a 0 percent interest card.
- Do Banks Offer Loans for Startups?
It can be difficult to get a personal loan from a bank or a traditional business loan for a new business. Banks have strict criteria for getting approved for a traditional loan. For example, many banks require time in business to be at least six months to two years or more. This means if you have not yet started your business or if you have been operating for less than two years, you have little to no chance that you will qualify for a traditional bank loan.
The most you are likely to get from a bank at the pre-revenue stage is a credit card. You can get approved for credit cards quickly if you have a FICO score of 680 or more. The documentation to get approved for credit cards is minimal. You will just need business registration documents and an employer identification number (EIN). As long as you have good credit, you will be able to qualify for some business credit cards.
So, the answer to this question of whether banks offer startup business loans is “not really.” You may be able to get some money out of the bank in the form of an unsecured line of credit or credit cards, however. If you are going to carry a balance, you will want a 0 percent interest credit card. With these types of cards, you only pay back the principal balance until the 0% APR period is over. After that, interest will kick in on any remaining balance.
This kind of business credit card offers a lot of flexibility. By not having to spend money on interest, you can take advantage of the promotional 0 percent rate by making the minimum payment on the credit card for a few months in a row and then make a much larger payment when you have more income.
- How Do I Qualify for a Startup Business Loan?
The best way to qualify for a startup business loan is to have and maintain good credit. With a FICO score of 680+, you should be able to qualify for between $5,000 and $100,000 based on just your personal credit.
Let’s break down how to qualify for each type of startup business loan:
When you are trying to raise startup business funding through friends and family, it does not take much more than trust to qualify. Even though you are getting the money from friends or family, however, you will still want a well-thought-out business plan. You will also want a clearly defined agreement so the terms under which you are required to pay back the money are very clear.
Qualifying for an SBA startup loan is much more difficult. The documentation alone is significant. You will need a business plan, financial projections, a profit and loss statement, a balance sheet, personal financial statement, and business financial statements. The process usually takes more than six months. If you have 20 percent to 30 percent to contribute, however, you can likely get approved for an SBA startup loan.
Business credit cards can be a helpful part of any startup business funding plan because qualifying is relatively easy, and you can get 0 percent interest and rewards on many cards. In order to qualify for business credit cards, you will need business registration documents, an EIN and articles of incorporation. WIth these documents on hand, the only other thing that you need to qualify for business credit cards is a FICO score of 680+. With a FICO of 680+, you can potentially qualify for multiple 0 percent interest credit cards. Equipped with these cards, you can make purchases for your business and just pay back the principal amount without interest before the 0 percent rate period ends.
In order to qualify for crowdfunding, you will need a lot of documentation as well as marketing materials to get people to invest in your business. In particular, you will need a business plan, a compelling pitch and business registration documents. You do not need any time in business to do a crowdfunding campaign. You just need to put together a strong marketing plan to get people to invest in your idea or company. Social media marketing should be a substantial part of any successful crowdfunding campaign.
To qualify for a 401k startup business loan, you must first have money in a 401k or other qualifying savings account. If you do have a well-funded 401k, then you just need to follow all loan or withdrawal application processes carefully. You will need a business plan, financial projections, a profit and loss statement, a balance sheet, and personal financial statement. As long as you have the money in your 401k and follow all of the laws, you should be able to access that money to start your business.
Equipment financing has different requirements than other startup business loan options. In terms of documentation, you will need bank statements, financial projections, balance sheets and an approved purchase order. The key is the approved purchase order. This document allows the equipment financing company to understand exactly how the money is going to be spent and it can include the terms outlining what will happen in the event you default on the loan. In order to qualify for equipment financing, you also have to have been operating for more than six months.
In addition to types of financing and business loans, startups can attract angel investors. These investors require documentation such as a business plan, financial projections, a profit and loss statement, and personal financial statements. If you have all of this documentation, there is no minimum time in business requirement. With this type of funding, you do not repay a loan but instead give the investors equity in your company.
- What Documentation Do I Need to Get a Startup Business Loan?
For most small business startup loans, you will need the following documentation:
• EIN number
• Articles of incorporation
• Personal financial statements
• Business financial statements, if available
• Profit and loss statements
• Balance sheets
• Cash flow statements
• Tax returns
• Personal credit information
Startup business financing companies and lenders require different documents depending on the type of loan you are applying for and the terms of the loan or funding type. For example, to get business credit cards, you only need your EIN and other personal information for the bank to assess your credit score and issue you a card. For equipment financing, on the other hand, you need to present a lot more documentation.
Loans through friends and family can have much more flexible requirements. An agreement is necessary, but you might only need a business plan for your friends or family to approve the loan. The agreement should clearly explain what the friends and family members will get in exchange for the money they are lending.
Much more documentation is required to get a startup SBA loan. For starters, you will need to have a thorough business plan outlining exactly how the funds will be used. In addition, you will need to have financial projections in the plan as well as a profit and loss statement. You will also need a personal and business financial statements. The lender will want to see that your personal finances are in good shape before approving the loan. You also will need to make an owner’s contribution, typically around 20 percent. That means if you are getting a loan for $1 million from the SBA, you will need to come up with around $200,000 yourself.
One of the main reasons why Seek Capital recommends using business credit cards as part of any startup business funding plan is because the documentation to apply for the credit cards are not as stringent as other forms of startup financing. In order to get business credit cards, you will need business registration documents, such as your articles of incorporation and an EIN number, which is also known as a federal tax ID number. You don’t really need to show that the company has been operating or has any prior income yet. As long as your FICO score is above 680, you should be able to qualify for several types of business credit cards. The next big question you need to ask yourself then is what do you need most for your business? A 0% APR period or travel rewards points? The answer to that question will determine which credit card you choose.
To raise money for your startup through crowdfunding, you will need a business plan that explains everything you are doing. In addition, you will need to provide financial projections for the company demonstrating how you plan to grow the company. The most important documentation, however, is going to be the marketing materials. You are going to need a strong story in the form of a pitch or in a presentation video, for example, to get people to want to invest in your campaign.
If you want to invest your own money in your startup, you can consider a 401k business loan. First, you are going to need a business plan just like you need for most other startup business loan avenues. In addition to a business plan, you are going to need financial projections, a profit and loss statement, and a balance sheet. Finally, you will need personal and business financial statements if the company has already been started. In addition to these documents, Seek Capital strongly suggests that you consult an accountant, tax advisor, retirement advisor or a lawyer before taking money from your retirement account to start a business because retirement accounts are protected by strict legal procedures and terms.
Equipment financing is another great way to get the money you need to start the business of your dreams. To get this type of loan, you first need to supply bank statements. The lender is going to want to verify your cash flow. Next you are going to need financial projections and a balance sheet. The most important document that you will have to supply, however, is an approved purchase order. If you default on the loan, the lender can take ownership of the equipment.
Angel investors are another way to attract startup business funding. Angel investors will first want to see your business plan. This business plan should include a financial model. You are also going to need to provide financial projections to show the investors how much money they could make by investing in your startup. You are also going to need to show a balance sheet and profit and loss statement if the business has already been operating. Finally, you are going to need personal and business financial statements. They want to see that you are financially sound and capable of delivering a return on their investment.
- How Much Money Do I Have to Put Down to Get a Startup Business Loan?
The amount of money that you have to put down in order to get a startup business loan depends on the type of loan you are applying for, where it is coming from and the loan terms.
When you get a startup business loan through friends and family you do not have to put any money down. This is because you are lending money from your friends and your family. There are also not any specific payback terms. You can come up with any pay back terms you want. However, to keep things as clean as possible we would suggest making sure this is all settled in an agreement before you take the money.
When you get a startup business loan through friends and family, for example, you might not have to put any money down. Payback terms are entirely up to you and your lender. To keep things as clear as possible — and to protect your relationship — Seek Capital’s experts suggest making sure that all terms are settled in a written agreement before you take any money.
When you get an SBA startup loan, you are required to put a relatively large amount of money down. Usually 20-30 percent of the total loan is required. So, if you are taking $1 million from an SBA loan, you are going to have to put down $200,000 to $300,000. The logic behind requiring a large down payment for these loans in simple: skin in the game. Your large down payment mitigates the lender’s risk. People are not going to get government-backed loans with attractive interest rates unless they are very serious about the business.
One of the best parts about getting startup financing through business credit cards is that you do not have to put anything down. Instead of putting money down, you just make the minimum credit card payment every month so that your credit score stays strong. You can use up to the full line of credit for which you have been approved. For example, if you are approved for $50,000 in credit cards, you can access that money without putting any cash down. If you get 0 percent interest credit cards, you will also never pay a dollar more than the amount which you are using so long as you pay back the money within the 0 percent interest period. Note that there are also no loan origination fees with credit cards.
Crowdfunding also does not require a down payment like a loan, but there might be some expenses or fees associated with running a successful campaign. To run a strong crowdfunding campaign, you will need to do a lot of work upfront to attract investors or donors. For example, you will need strong marketing and sales materials that tell your story and showcase your product or service. You might also have to invest some of your money into social media or online advertising in order to help people find out about your campaign.
- What Are My Funding Options If I Have Time in Business or Revenue?
When you have time in business, revenue or both, you might qualify for a small business loans instead of a startup business loan. Once your business is more established, your loan options can increase significantly. For example, you might qualify for a business line of creditif you have been in business for over a year with average annual revenue over $180,000 and a credit score of 630+.
Another example involves getting invoice financing. If you have open accounts receivable, you could qualify for invoice financing. The stronger your business profile is, the more money you can borrow at a better interest rate.
You might also want to consider short term loans to get capital for your company. In order to qualify for short-term loans, you typically need to be in business for about three months and have some revenue.