To find the right funding for startups, it’s important to do complete research and compare different options.
Luckily for you, there are many financing alternatives. But, at the same time, it can be stressful to try and figure out which one is the best and which you should avoid.
In this article, we’ll provide you with the options and advice you need to raise your business’s money to grow and thrive.
What is Startup Financing?
Startup financing is when you raise capital to fund a new business venture. You can do this through various means, such as venture capital, friends and family, or angel investors.
The right financing mix will depend on the type of business, the management team, and the growth prospects.
Each option has its own benefits and drawbacks, so choosing the right method for your specific needs is important.
Where to Find Funding For Startups: 19 Funding Options For Startups
Below you’ll find a list of new companies’ most common types of funding for startups.
These loans are specific to the unique situation and needs of entrepreneurs. There are a lot of really great features of these loans to start a business. Some lenders will have lower application and qualification requirements.
One excellent option is to apply for a Camino Financial loan.
Our loan is an excellent alternative for smaller businesses just starting and don’t have the history or means of other more well-established companies. You can also use it if you’re just planning to open a business.
To qualify, you just need to be current with your outstanding debt, have at least $1,500 in monthly income, and have a bank account that’s been active for at least six months.
The loan size ranges from $1,500 to $7,500, and the repayment period can last between 12 and 36 months. Plus, the fixed APR can fall between 33% and 35%.
This is an excellent option for entrepreneurs who need some financing to get their new project off the ground. With very low requirements, it’s one of the best startup loans for small businesses.
The Small Business Administration offers some great loans to finance a starting business.
Private lenders offer these SBA loans, but the SBA guarantees up to 85% of the loan.
You can qualify for a loan of up to $5 million through the SBA 7(a) program, their most common program. Any loan of up to $25,000 does not require any collateral. Loans of greater than $350,000 do require collateral, though.
The SBA caps the interest rate at Prime rate plus 2.25% for loans of seven years or fewer and Prime rate plus 2.75% for seven years or more.
Another type of government loan is microloans, which are very popular. These loans offer up to $50,000, but the average loan is roughly $13,000.
The rates of these microloans can vary but are generally between 8% and 13%.
The downside is that the application process for SBA can be pretty extensive.
You’ll have to provide financial statements, background, personal borrower information, income tax returns, business history and overview, a copy of your business lease, and potentially even more information.
You’ll also need a minimum personal credit score close to 700 and a clean business credit history.
Venture capital firms are private equity financing provided by firms or funds to small, early-stage, high-potential growth companies.
They aim to make money by investing in and owning equity in these companies.
The benefits of this option are that you don’t have to give up control of your company nor repay the money if your business fails.
On the other hand, it can be difficult to find venture capitalists willing to invest in your company. And when you do, they will want a say in how you run your company.
So, research and identify the best for your business. Then, prepare for venture capital investments with a clear business model, a strong management team, and significant traction.
Finally, put together a killer pitch deck to convince VCs to invest in your company.
Venture capital financing is usually a better option for businesses in the information technology, communications, and biotechnology industries.
A startup incubator is a program that helps early-stage startups develop and grow.
These programs typically provide office space, mentorship, and access to funding. Plus, you can access resources that would otherwise be unavailable to you.
The most attractive feature of incubators is that you can benefit from the experience and expertise of those who run the incubator.
Unfortunately, the application process can be competitive, and there may be strict requirements that you must meet to participate in the program.
If this sounds like something, you’d like to try, research the different available programs and find a program that is a good fit for your company. Then apply to the program.
Microloans For Startup Businesses
Microloans are very similar to regular business loans. But, as the name implies, they’re micro: they offer smaller amounts of money.
These are great alternatives for business owners who need more startup capital than a personal loan offers but don’t need massive amounts. They’re perfect for entrepreneurs that are just starting.
Microloans can be easier to apply for because they offer smaller amounts. In other words, the lender might have fewer requirements or be more open to lending to people with bad credit scores.
Depending on the lender, you can expect to receive amounts from $5,000 to $75,000 (compared to regular business loans that can advance up to $400,000 or more).
At Camino Financial, we can offer you a microloan with fixed rates, 24 to 36 months to pay, and annual interest rates starting at 31.55%.
Business Credit Cards
Credit cards are one of the most common forms of financing available globally.
They are relatively easy to qualify for, and financial institutions that provide them offer quick and straightforward application processes, which you can complete in minutes online.
A business owner may use a personal or business credit card to fund a startup, which has some benefits.
You don’t have to take out a large amount of money upfront. Instead, you can just tap into your available credit line whenever you need it to pay for any expenses.
You’ll only repay the amount you’ve used on the business or personal credit card.
Personal credit cards are generally easier to qualify for. They typically just require a credit check, and that’s it. You won’t need to provide detailed background information or business documents.
The flip side is that a personal credit card often charges very high-interest rates. And companies that provide startup credit cards require a decent personal credit history and score.
With this type of loan, you will receive the amount of money in the current business’ outstanding invoices instead of borrowing in clumps or one lump sum.
A lender that offers this financing will essentially purchase the business’ outstanding invoices. That company will then be responsible for collecting the due amount.
The business benefits because they don’t have to collect the invoices and get their money fast.
You won’t need a credit check because the outstanding invoices will give you the financing.
The downside is that the lenders charge a high fee for doing so. For example, the lender may only pay 70% of the value of the outstanding invoices. These rates mean you will leave a lot of money on the table.
In addition, this isn’t a great alternative to business loans for startup businesses because you’ll need to have actual outstanding invoices to qualify.
Line of Credit
A startup business line of credit works very similarly to a credit card.
A lender will approve you for a set credit limit, and you can draw down on that limit whenever you need it to pay for whatever you need. The interest you will receive it’s linked to the money your use.
The flexibility in what you draw down and what you must repay are some of the most significant benefits of this credit for startup businesses.
The downside is that you are often limited in how much you can draw at any time.
Even if the lender approves you for a credit limit of $50,000, you may only be able to draw down $2,000 at a time, for example. These amounts severely limit what you can do with this financing.
The typical repayment period for a business line of credit is 12 to 36 months, and the interest rates can be pretty high—as much as 25% or more.
Personal Loan For Business Use
Another option is to take out a personal loan for a small business startup loan. It’s a viable option for entrepreneurs who want to finance a business venture independently.
Instead of relying on the business’ credit, time in operation, or financial statements, the lender will give personal loans on the merits of the entrepreneur.
Many just beginning a new venture will go this route for startup business loans.
Typical personal credit will offer as little as $2,000 and as much as $50,000. They generally provide decent repayment options that could last anywhere from two to five years. Many offer fixed interest rates as well, which is a nice feature.
The positive aspect of personal loans is that it relies only on the individual’s financial situation and nothing about the business. The downside is that many don’t have very high borrowing limits.
Interest rates for most personal financing will start at 10% but could go as high as 30%, depending on several factors. This is especially true if you need your money fast and don’t have a great credit score.
Small Business Grants
A grant is a sum of money an organization gives to a person, company, or project that will benefit the public somehow.
What makes grants unique is that you don’t have to repay them: it’s free money, and you can use them for various business purposes.
For that same reason, the application process can be competitive, and the organizations that offer them usually have strict requirements.
There are many different grants available. Many are industry or minority-specific grants.
Use grants.gov to find the one that better suits your needs.
Peer-to-peer lending is where people borrow and lend money to each other without going through a traditional financial institution.
This means you can get a loan even if you have bad credit. Although, the process can be slow.
Loans from peer-to-peer lenders tend to have lower interest rates than a traditional business loan, but finding a lender willing to lend you the money you need can be challenging.
To get a loan from a peer-to-peer lender, you should carefully research different online lenders to find one with reasonable rates and a strong reputation.
Then, choose a lender willing to lend you the amount of money you need. Finally, apply for a loan.
Many startup companies are turning to alternative funding sources such as crowdfunding. This will search for private people to help find funding for startups.
People can invest in businesses on popular crowdfunding sites online, and they will receive something in return. Most of the time, they will own a piece of the company.
The benefit of this type of financing is that it does not have an interest charge. Instead of paying interest in return for the money, the entrepreneur will give up part of the ownership in the company in exchange.
This can also be a downside, though. Giving up an ownership stake in the company before it even starts can cost an entrepreneur more money down the line than interest charges.
There is no official approval or application process for this startup funding. Instead, entrepreneurs will set up a page on a crowdfunding site and tell their story about who they are, what they’re doing, and why they need the money.
They will then be responsible for marketing the page so that people will go to it and, hopefully, decide to invest.
Angel investors work similarly to crowdfunding because it’s money from private people investing in your company.
The main difference is that these angel investors are typically single individuals—or a small group of individuals—. These are the type of people who has experience in funding startup businesses.
Angel investors are typically very picky about which companies they choose. Also, they don’t usually invest in conceptual ideas or startup companies without some proven track record of success.
Again, there’s no limit to the amount you can obtain this way, nor a typical application process. Instead, you’ll have to give a pitch presentation to a potential angel investor, hoping one of them shows interest in you.
They will probably also require you to submit documents about the business and maybe yourself.
There’s no repayment here, as this is investment money. However, you’ll most likely be giving up part ownership in your company in exchange for the funding.
A bank loan refers to a financial institution that lends money to a borrower for a business purpose.
The process is relatively straightforward, and, sometimes, depending on the bank, you can get a loan even if you have bad credit.
That said, the interest rates on bank loans are often high. They may even require you to put up collateral.
To get a bank loan, research the different banks that are available and their requirements. Then, decide on a bank willing to lend you the amount of money you need. Finally, apply for the loan that best meets your needs.
Community Development Financial Institutions are institutions to help small businesses and entrepreneurs in underbanked communities.
Advantages of CDFI loans:
- Interest rates are often lower than other types of loans.
- You may be able to get a loan even if you have bad credit.
To get a loan from a CDFI, you should do the following:
- Research available CDFIs.
- Choose a CDFI willing to lend you the amount of money you need.
- Apply for the loan, carefully following all requirements.
Camino Financial is the first-ever Neo-CDFI. This means we use AI’s power to help underserved business owners.
Merchant Cash Advances
A merchant cash advance (MCA) is a type of financing that gives business owners an influx of cash in exchange for a percentage of their daily credit card sales.
MCAs are often more favorable than traditional loans, as they don’t require a personal guarantee or collateral.
Many MCA providers are out there, so it’s essential to do your research and compare rates and terms before selecting one. Be sure to read the fine print, as some providers may have hidden fees or high-interest rates.
A merchant cash advance may be the right option if you’re looking for fast and easy financing for your startup business.
Trade credit (also called vendor financing) is when a supplier extends credit to a buyer to purchase goods or services. The buyer then has a certain period to pay back the debt.
With this type of credit, you can’t fund business investments, but you can get the goods or services you need without paying for them immediately. You may even get a discount if you pay back the debt early.
But if you don’t pay back the debt, your supplier may refuse to do business with you in the future, which could hurt your new business. Plus, the interest rates on trade credit can be high.
To get trade credit, ask all your suppliers if they are willing to extend credit to you and their requirements. Then you just have to purchase the goods or services and pay back the debt within the agreed-upon time.
Strategic Partner Financing
Strategic partner financing is when a company finances the purchase of goods or services from another company in exchange for equity in the business.
This means you can get the goods or services you need without paying for them immediately.
Your company also gains the expertise and experience of your strategic partner, which helps you grow your business.
But having partners is not for everyone. For example, your strategic partner may have a different business culture than your company. This can make it difficult to adjust and can lead to friction.
If strategic partner financing sounds like a great financing option for your business, carefully research companies that may be willing to enter a strategic partnership with you.
Then choose a company willing to finance your purchase in exchange for equity. Finally, enter into a strategic partnership agreement with that company.
Friends and Family, or Savings
You can also borrow money from friends and family or have them invest in your company.
This alternative can work as a loan (with a repayment period and terms) or an investment. There are usually no application and approval processes since the people involved are your friends and family.
Your friends and family may charge interest if it’s a loan, and you will negotiate with them directly. On the other hand, if it’s an investment, you’ll be giving up ownership of your company.
Another option would be to take money out of your savings.
Using personal savings might not be viable for everyone, depending on how much financing you need and how much you have. It also could be risky, as you may have no other money to fall back on if you need some for your personal life.
How to Choose the Right Type of Business Startup Funding
Choosing appropriate ways for startup business funding will depend on a few factors, such as the amount of money you need, the stage of your business, your business idea, etc.
- You may want to consider a startup loan if you are just starting.
- Alternatively, if you need money to purchase equipment, you may want to consider an equipment loan.
- On the other hand, if you’ve been in business for a while and have pending invoices, you may want to consider invoice financing.
Shopping around and comparing different types of loans before deciding is essential. Before signing any agreements, you should also understand the terms and conditions.
How to Get a Business Loan for Startups
Here are the steps you need to follow to get a loan:
- Choose the type of loan that will work for you.
- Know how much money you need and what you’ll use it for.
- Create a business plan. At Camino Financial, we won’t ask you to show a business plan, but other lenders will.
- Complete an application.
- If approved, sign a loan agreement.
- Make your payments on time.
If you apply with a lender requiring a business plan, ensure this document is well-thought-out.
Your business plan should include financial projections and a detailed explanation of your company’s products or services. Some things that lenders will want to see in your business plan include:
- An estimate of the total amount of financing you will need
- A description of your target market
- A history of your personal and professional financial experiences
- An explanation of how you will use the loan proceed
At Camino Financial, we won’t ask you to show a business plan.
Startup Business Loan Requirements
Lenders vary in their requirements, with some being more strict than others. They need enough financial information to determine the lending risk of a potential borrower. To be eligible for a loan, you must be able to repay the loan.
You won’t have a business credit score as a startup business; that’s why the lender will review your personal score and tax returns.
Since you haven’t established a business credit score, the lender might ask you to sign a personal guarantee indicating you will repay the loan should your business fail.
Lenders will verify that you’re current with creditors and do not have outstanding financial debts. They will also want business documents such as business registration and license copies.
In general, you will have to provide any lender with basic personal information and information about the business you own or are starting.
You may need to provide documentation proving that you own the business, have been in operation for a certain amount of time, and have been successful in your endeavor.
Some of the documents that could help prove this are:
- Articles of incorporation
- Profit and loss statements
- Bank records (personal and business)
- Tax returns (personal and business)
- Detailed business plan
The application process is typically relatively quick, and you can complete some online. The significant difference in the process for startup business loans is in the discovery and document phase.
How to Manage Finances in a Startup Company
Here are some helpful tips that’ll help you manage your finances in your startup company:
- Track your expenses and income carefully. This will give you a good idea of where your money is going and where you can cut back.
- Create a budget and stick to it. This will help you stay on track with your spending.
- Pay yourself first. Make sure you take care of your financial needs before reinvesting all your profits into the business.
- Save for a rainy day. Setting aside some savings is important in case something unexpected comes up.
- Invest in accounting software. This will help you keep track of your finances and ensure that you are staying on track.
- Hire a financial consultant. If you are having trouble managing your finances, hiring someone to help you get your finances in order may be helpful.
Business Loans for Startups, Is the Right Choice?
Considering your various funding for startups, you will undoubtedly question whether a startup loan is right for your business.
Many people would like to avoid taking on debt if they have to, especially as they start a new venture.
But, at the same time, many people don’t have the available cash on hand that’s necessary to fund a new business out of their savings. And friends and family aren’t always a great option, either.
As you’re considering getting a loan to start a business or enhance your startup, you should ask yourself whether you can afford them on your own or through the help of private people you know.
If no grants are available, and crowdfunding isn’t an option—or didn’t work—then startup business loans might be your only option.
But don’t get discouraged if this is the case for you. In fact, small business startup loans are good and can be highly beneficial to your new business.
Obtaining financing through startup loans for business can allow you to grow your own business instead of forcing you to get significant returns right away.
This freedom is truly great and can help you take advantage of other prime opportunities as they arise.
Pros and Cons of Small Business Loans for Startups
- Having money to invest boosts your business and can help you improve your profits.
- As you make timely payments, you build credit to qualify for more credit in the future.
- And don’t forget that a commercial loan enables you to use cash to purchase inventory and equipment or set aside an amount for emergency expenses.
- Loan proceeds also help business owners regulate cash flow as they grow their businesses.
- Some lenders may require startups to provide collateral such as a vehicle or a cash deposit to secure the small business loan. However, most new business owners don’t have assets to offer.
Fortunately, Camino Financial loans don’t require collateral.
Finding the Best Business Startup Loans
Now you know how to finance a startup business.
Startup business loans are a great option when an entrepreneur needs funds to get a new project. It can allow you to grow your company over time without worrying about draining your savings in the meantime.
In fact, most new small businesses fail because they don’t have enough funds. This is why a Camino Financial business startup loan is such a great option.
We build this financial product specifically to the needs of entrepreneurs to help support their new business ventures.
We even accept applicants with an ITIN (if they don’t have an SSN) because we know how hard it is for immigrants to get the necessary funding to start a new business.
Apply for a loan with us today to help your new business venture get off the ground and succeed for years.
How can a startup business loan grow your small business?
Startup business loans are a great way to allow you to grow over time and put in the necessary investments into your business.
Businesses take time to grow, and they take money to help them get there.
Unless you have a lot of money in your savings, you won’t have a reliable way to obtain this money without startup loans for business.
Do banks give loans to startups?
Banks will lend to startups (also credit unions). However, they often have higher qualification requirements and force borrowers to undergo a demanding application process to determine their qualifications.
If you plan to go with a traditional bank for startup loans for business, you will have to provide many documents to prove you’re worthy.
What do I need for a startup business loan?
To qualify for a startup business loan, you’ll typically need to provide the lender with basic information about your business, including your business plan, financial projections, and personal financial statement.
The lender will also want to see that you have a solid understanding of your industry and the competitive landscape. In addition, the lender will want to know what collateral you can offer as security for the loan.
Do I need to have a credit score to get startup business loans?
It depends on the lender.
Some lenders do not require a credit score; instead, they will use your personal and business income, debt levels, and credit history to determine your eligibility for a loan. Other lenders may require a minimum credit score to qualify for a startup loan.
Can I get a loan to start a new business?
It depends. You may qualify for a bank or credit union loan if you have good credit. However, if you are just starting, you may not qualify for a traditional lender.
Consider alternatives such as working capital loans, equipment financing, small business loan, invoice financing, factoring, MCAs, etc.
How easy is it to get a business startup loan?
It depends on various factors such as your credit history, the amount of money you need, the stage of your business, your business type, etc.
How much of a loan can a startup business get?
There is no specific answer to this question since it will depend on the type of loan, your credit history, the amount of money you need, the stage of your business, the type of business you have, etc.
That said, startups usually get smaller loans, up to $20,000.