Acquiring loans as a startup is no easy task. There are so many loan options available that it is easy to take out the wrong loan and get stuck with the wrong rates. Rates aside, there are many loan options which are not suitable for certain startups, as well as alternative kinds of finance which might easily be a better fit. Below are 7 of the best financial solutions for a startup, depending on the unique circumstances of the company.
- The Term Loan – The term loan is the most well-known financing option. There are short, medium, and long-term loans available and each will have specific terms and conditions depending on who you go to for the loan. The SBA (7)(a) is one of the most common kinds of startup loans available to small businesses in the USA. But despite its generous rates, the application process is incredibly difficult to complete.
- The Business Line of Credit – The business line of credit is one of the most useful kinds of loan options available to startups. This is because the loan can be drawn upon as needed, and you only pay interest on what you take out. Additionally, the funds can be in the account very rapidly. For these reasons, it is one of the most flexible kinds of loans.
- The Equipment Finance Loan – Equipment financing (sometimes called asset financing) is where you take out a loan for the purposes of buying equipment for your new business, such as computers for an IT company or machinery for a construction company. It often works similarly to a term-loan, except you are using the funds specifically to buy company equipment as opposed to more generic needs such as wages or utilities.
- The Business Credit Card – A business credit card is similar in many ways to a business line of credit. They are flexible and no collateral is required for their use. The qualifying criteria is also quite low and frequent use and repayment of credit card purchases is one of the best ways to increase your credit score. This is because credit card repayments are reported to business credit bureau agencies, not just personal credit agencies.
- Invoice Financing – Invoice financing is a form of financing where invoices are taken by a third party. It is not technically a loan, though the invoice collection companies will often advance about 75% of the cash within as little as 24 hours. The companies will take between 2 – 8 % of the total invoice as a fee. This is very useful in situations where revenue is needed and it takes a long time to collect on invoices.
- Venture Capitalism – It is always possible to attain financing through venture capitalism. This is generally better for startups who have a unique and novel business idea and really want to get started as soon as possible. But these startup owners need to understand that they are going to be giving away a significant slice of their businesses.
- ROBS – Rollover for business startups (ROBS) is an alternative way to get funding for a startup. It allows startup owners to invest funds from a 401K or individual retirement account into a startup. This allows people to avoid the standard early withdrawal penalties. According to multiple studies, businesses that use ROBS enjoy more success compared to startups that use traditional financing. However, ROBS can be quite complicated to carry out and you definitely need to consult an expert in order to see if its a fit for your business.
Best Loan Providers For Startups
Identifying the kind of loan that works the best for you is only the first step. Different loan providers offer different terms and conditions, and you will need to get in touch with a variety of loan providers to determine which one is right for you. Below are 4 of the best online loan providers in the market.
Ondeck are probably one of the most well-known and reputable lending providers for startups. They have a 9.8 rating on TrustPilot, have an A+ rating with the Better Business Bureau (BBB), and have facilitated over $10 Billion in loans to over 80,000 startups. So what makes this loan provider stand out?
Like many online loan providers, OnDeck provides a hassle-free application process. The application process takes less than 10 minutes and the funds can be transferred into your bank account in as little as 24 hours. The customer service support team at Ondeck is a little ahead of the rest, with specialists who are polite, responsive, and friendly to all applicants. They are thoroughly professional. Ondeck offers term loans up to $500,000 with rates that go as low as 9.99% (though the lowest rates may not always be available). The terms are between 3-36 months. It also provides business lines of credit up to $100,000.
The only disadvantage with Ondeck is that the requirements are a little higher in comparison to other online loan facilitators, though they are still far less stringent compared to banks. Still, some startups may not be able to meet them. The requirements are:
- At least one year in business
- $100,000 in gross annual revenue
- A personal credit score of at least 600
Kabbage is another excellent option when it comes to startup financing. The requirements for Kabbage are quite easy to satisfy for nearly all startups. For the purposes of attaining a loan, Kabbage only requires:
- 12 months in business
- $50,000 in annual revenue
The majority of startups should be able to meet these criteria. Even for startups that do not meet the $50,000 in annual revenue, $4,200 per month over the last 3 months is enough for the purposes of qualification. Kabbage is also excellent for startups looking for a business line of credit. A $250,000 line of credit can be applied for in as little as 10 minutes, with a term length of 6,12, or 18 months. This line of credit also comes with a business credit card for ease of use.
Kabbage only offers the line of credit, and this is what it specializes in. But the dashboard, application, and attached credit card make is one of the smoothest, most flexible, and most intuitive lines of credit out there. It makes it easy for startups to track and manage their capital. The funds can transferred to a bank account within 1-3 days or to a connected PayPal account within minutes.
Lending Club is a peer to peer lending marketplace that is disrupting the traditional lending model in many respects. This is because the rates are far lower than many bank loans. At the same time, investors can still earn good returns on their loans. Startups who are looking for a small business loan can get a lump sum of up to $300,000.
As a peer to peer lending marketplace, Lending Club is much different from online loan providers such as Ondeck and Kabbage. Borrowers are evaluated based on their credit score and annual revenue, while investors also have to meet requirements. Loan applicants are assigned a score depending on how good their credit history is. The better the score, the lower the rate.
All Lending Club loans are term loans, and they can be taken out for a variety of different uses, such as working capital or equipment purchasing. The loan application process can be completed in under 10 minutes and the funds can be in your account within 1 – 3 days depending on your bank. Lending Club do not advertised their loan qualifying criteria. However, a minimum credit score of 600 is typically required. No collateral is required for loans less than $100,000, which is an added advantage.
Fundbox provides 3 types of loan – the small business term loan, the business line of credit, and invoice financing. Fundbox is perfect for startups without significant collateral, with a low annual revenue, or with a low credit score. The qualifying criteria for Fundbox are:
- $50,000 in annual revenue
- 3 months activity in accounting software
There are no credit score requirements and the maximum loan amount is up to $100,000. This makes it perfect for new startups who need access to small sums of money to get going initially. Fundbox is also one of the few loan providers that offer invoice financing. Startups in the trade industry, professional services, manufacturers, and distributors are ones that can benefit from invoice financing, where invoices can take a long time to come in.
The only disadvantages with Fundbox are that the rates can be a little higher in comparison to other online lenders and that the accounting software must be compatible with the platform (QuickBooks, FreshBooks, Harvest, Xero Clio, Sage One, Kashoo, Jobber or InvoiceASAP). However, fees decrease the more that the Fundbox platform is used. Like most online providers, signup is quick and easy.
Just What Is a “startup” Anyway?
A startup is often defined as a new business with limited revenue but the potential for explosive growth. The term startup is often synonymous with technology firms for this very reason. Startups often look for funding from venture capitalists in return for an equity stake. However, many people use the term to mean any business that is just getting started. It is quite possible that you have a new idea, not in the technology space and are not looking for venture capital funding. You are just “getting started”. But startups still comprise businesses that look to make an impact with huge growth in their early years, as opposed to brick and mortar businesses that are looking to establish a physical outlet for the long-term.
How Can I Get Money to Finance My New Business Idea/Startup?
The best way is often to get no-hassle funding from an online lender. You can have the funding within 48 hours and the eligibility criteria are extremely low. In other words, you have high chances of approval and can get the cash flow that you need. For higher cash amounts and expertise from industry lenders, you will want to look into the niche field of venture capital. This is not easy, though the rewards can be quite high. Grant options are also available for many startups, especially with diverse leadership models.
Is It Hard to Get a Startup Business Loan?
In many ways, it has never been easy to gain access to a startup business loan. It is the growth and expansion phase that really kills startups. Getting capital is easy, with many grants and online loan options. Repaying these loans over the long term, growing the business, scaling the business, taking on new employees, hiring managers, working with partners, budgeting, marketing – juggling all of these simultaneously is far harder than acquiring a loan in the modern age.
What Loan Amount Can a Startup Business Get?
This really depends on the credit history and annual revenue. If you have an annual revenue of $100,000 and a credit score above 560, then you can get a loan of around $250,000 relatively easy. For new businesses without any of these, a microloan or grant option below $50,000 might be more appropriate.
Why Are Online Lenders a Better Solution for the Majority of Startups in Comparison to Banks?
Because startups will find it impossible to get a loan from banks! Banks want you to have a history of at least 2 years with a credit score of 600 and above. You need to supply a lot of documentation and meet a representative in person. For a mobile startup that wants to have the cash at hand as soon as possible, banks are the worst possible option. In contrast, the online loan market is perfectly suited to startups as they are fast and flexible.
What Loan Options Are Available to Startups?
The same loan options that are available to other businesses. The most common loan options are the business term loan and the business line of credit. Merchant Cash Advances and Invoice Factoring are not really suitable for startups. Startups do have a large number of grant and venture capital options available to them, but it is not easy to qualify for either. It takes a lot of work in comparison to online lenders. The SBA (7)(a) is not suited for startups. However, the SBA(7)(a) Microloan program might be suitable, as well as all other microloans.
How to Get a Loan to Start a Business If You Have Bad Credit?
If you happen to have bad credit, there is no need to despair. There are so many online loan providers that cater to businesses with poor or non-existent credit. And these are not sharks. You just need to show them that you have some annual revenue and supply the relevant documentation. Bear in mind you won’t get the best loan. But what do you expect? Fair is fair. The worse your circumstances, the higher your interest rate will be.