Startup Loan

What is a Startup Loan and How Does it Actually Work?

In the life of a business, few seasons are as exciting as the startup phase. It’s those early days where you’re working tirelessly to bring your vision to life. It takes a ton of dedication, but it’s incredibly rewarding to see your business finally get off the ground.

That liftoff isn’t solely the product of hard work, though. You also need a lot of cash.

According to research from Shopify, the average small business owner spent $40,000 over their first year in business just to get it running. That’s an average, and costs can vary wildly depending on the type of business you’re starting. Some startups only need a few thousand dollars up front; others need hundreds of thousands. It all depends on the costs of your products, business operations, marketing, and more. 

The point is, unless you have a big stash of your own money to put into the business, you’ll need some upfront funds to help you get started. And startup loans are one way to get the cash you need. Let’s look at how these loans work, what you can do with them, and whether they’re right for your startup.

How can small business owners benefit from a startup loan?

A startup loan offers great flexibility for new business owners. You can use them for virtually any need your business might have in the early days, and you don’t have to share ownership or equity to get that flexibility.

Maybe you need a few key pieces of equipment or inventory to start your business operations. Perhaps you need the funds to buy a warehouse for production. Or maybe you need working capital to cover the basic costs of payroll and overhead for the first few months. A startup loan can help you with all of these necessities.

Startup loans can be as small as $500 or as large as $750,000. Similarly, terms can range from a few months to 25 years, and interest rates will vary significantly depending on your credit, the financial state of your business, and the collateral you provide. The timeframe for funding is also workable for most startups—you can usually close within two to four weeks.

This versatility makes startup loans an attractive option for many entrepreneurs, though they’re by no means the only way to secure quick, short-term funding for your new business. Business owners use credit cards, crowdfunding, microloans, and even borrow from friends and family for similar purposes.

Qualifications for a startup loan

How to qualify for a startup loan

Qualifying for a startup loan will first depend on the specific type of lender you use. You can secure startup loans through some traditional banks, SBA-certified lenders, and various microlenders and nonprofits.

When you apply for a business loan, a lender will typically look at your personal and business credit ratings. As a startup, you may not have a business credit score yet, which will make your personal credit score that much more important. An excellent score—over 750—will probably secure you the best rates, but many lenders can work with you if your score is 680 or higher.

Although startup loans are flexible, how you use the loan will affect your rates and the strictness of your lender’s requirements. A loan to cover payroll is unsecured (not tied to an asset), so you’ll likely have a higher interest rate, and you may need a stronger credit score to get the loan. You might even have to put up some of your personal assets as collateral in case you default on the loan. Conversely, if you use the loan to purchase equipment, you can offer the equipment as collateral and secure a lower rate.

Other factors your lender will consider include:

• The riskiness of your particular business and industry
• The strength of your business plan and financial projections
• Your experience in this type of business

You can demonstrate your experience with a thorough business plan and professional resume. Some lenders may also prefer that you have already been operating for a few months to show that your business is stable and viable.

Pros and cons of a startup loan.

Wondering whether a startup loan is the best choice for your business? Here are a few pros and cons to help you decide.

Our take on a startup loan

Is a startup loan right for you? It ultimately depends on your business and financial needs. But if you’re looking for a relatively small amount of money that you can use flexibly to launch your business, these loans are worth considering. In some cases, they’re the best option for businesses without much history or proven success.

That being said, there are lots of options for funding your startup, and you should compare everything before you sign off on a startup loan. You definitely pay for the flexibility these loans provide. If you apply for a more specific type of loan, such as one for equipment financing, you might be able to get a much larger loan at a much lower interest rate—all in as little as 24 hours. Lendesca can help you explore your full range of options to find the loan that’s right for your business.