6 small business startup loans to boost cash flow
Small business owners often pride themselves on what they build themselves. But nearly every new business or startup needs help at some point, especially when it comes to finances. Startup business loans exist for a reason — to help new businesses get the working capital they need to launch or grow.
While the right small business loans are a boon for your business, the wrong one could cost you thousands of dollars, or even sink your business. Fortunately, there are several types of small business startup loans and funding that will help you get the cash flow you need.
6 types of small business startup loans
Each startup business loan comes with its own set of pros and cons, as well as ideal use cases. Be diligent in your research and consider your specific business — and current situation — before moving forward with any startup financing. Here the six most popular types of small business startup loans:
1. Traditional business loan
A traditional business loan, or bank loan, is all-purpose funding provided by a financial institution. Business loans require a good credit score for your business, with higher scores resulting in lower interest rates. A bad business credit score won't necessarily disqualify you. But you might need a higher personal credit score to compensate for your business score, which puts your personal credit score on the line. (More on this later.)
Traditional loans are ideal for most businesses, as there are typically no use terms beyond interest rates and set payment terms. If you're interested in a traditional business loan, look at local banks and credit unions, as well as online financial institutions. If you prioritize an in-person experience, find a local bank. If you're comfortable doing things online, your options are wide open.
2. SBA loans
The Small Business Administration (SBA) is an official agency of the U.S. government that offers resources, loans, and other financial aid for small businesses. SBA loans are provided through the SBA's partnership with various online lenders, and are guaranteed by the government.
You can use the SBA “Lender Match” tool to review various online lenders and find a loan that matches your needs, credit history, and preferred interest. Using this free online tool helps ensure you get a loan that you're capable of paying off.
If you're interested in an SBA loan, go to the organization’s site and read over your options. Your credit score, both personal and business, are still factored into the SBA loan process.
A microloan is a specific type of funding with a loan amount under $50,000. Unlike traditional loans, microloans are typically offered by peers, microloan programs through government agencies, or nonprofits. The SBA microloan is a great example of a government-sponsored loan.
Because microloans are typically offered by nonprofits or agencies, they tend to have very niche loan terms. For example, some microloans may require you only use the funds for expansions or business equipment. While these requirements limit the microloan's usefulness, it also limits the number of interested parties, driving down competition and interest rates.
Microloans aren't the best route for those needing general funding. However, if you need funds for a very specific purpose, look for a microlender that aligns with your goals.
4. Personal loans
A personal loan is provided by a bank, credit union, or other financial institution. Despite having "personal" in the name, these loans may be used for business purposes. That said, many personal loans have smaller limits, as they're not often intended for business-size purchases.
The other caveat with personal loans is that they rely on your personal credit score. This means failure to pay a personal loan, even one used for business purposes, will impact your personal credit history.
5. Equipment financing
Equipment financing is a loan specifically geared toward funding purchases for any necessary tools or equipment for your business.
Equipment financing comes with strict terms that the loan can only be used for business equipment. This type of financing also uses the purchased equipment as collateral, which is particularly useful for businesses with limited funding and collateral.
If your business needs to buy specific hardware, equipment, or even vehicles, equipment financing is a great option. Look for financial institutions online or in your area that specify they offer equipment financing. From there, find the best interest rate you can.
6. Business grants
Business grants don't need to be paid back, so they're technically not loans. But it would be remiss to leave them out as a primary source of funding.
Business grants are offered by organizations, individuals, nonprofits, and many other groups. A business grant is a sum of money awarded to a business based on any number of preset criteria.
Because business grants don't have to be repaid, they're highly competitive. (It is free money, after all.) Like microloans, business grants tend to have certain use cases that come with them. It's also not uncommon for business grants to be available to a certain group. For example, a restaurant chain offering a grant may only accept startups in the food industry.
Look online for business grants before pursuing any other types of funding. Sure, business grants are competitive and often difficult to get, but they can benefit your business with virtually no cons.
Alternative sources of business funding
There are numerous alternative business funding sources, each one fit for a different type of company or stage of growth:
- Crowdfunding: Crowdfunding is a group-based type of business financing in which a company raises money for a pre-release product or service. The investors, commonly known as backers, typically receive the product or service once it's completed. This funding method is useful for startups with a product or service on the way, but also runs the risk of damaging one's reputation if the launch fails.
- Angel investors: Angel investors are individuals who invest their personal money in a startup. Angel investors typically expect a return on their investment, but don’t always expect a board role or piece of your actual business. Angel investors are hesitant to invest in companies that are anything but professional and tidy. If you want an angel investor, keep your finances in order and consider having a business plan at the least.
- Startup accelerator: A startup accelerator is a comprehensive startup resource that provides guidance, funding, and networking for aspiring businesses. Accelerators are generally interested in very new startups with a solid business plan and foundation in place.
- Business credit cards: A business credit card offers the ability to spread out spending and make money go further. A quality line of credit with a low interest rate and appropriate credit limit will help you maintain a healthy cash flow while buying necessary equipment, onboarding new hires, or marketing your product. For instance, the Brex 30 Card allows you to earn rewards on most purchases, giving you money for simply using the card.
While traditional financing routes are a great fit for some, there's a chance one of the above alternative sources of business funding will work for you. Whether you were turned down for a traditional loan or you’re simply looking for an alternative small business startup loan, weigh all your options and be thorough in your research.
The right business loans for your startup
Every startup success story is filled with tales of gumption, know-how, and persistence. Your business will likely need a loan at some point to help you improve operations, buy equipment or inventory, or free up your everyday cash flow.
Remember that each funding type is different: business loans are universal, but require an established credit history; microloans can be niche; and grants are tough to come by. You know your business better than anyone, so keep your business goals in mind when looking at each funding type.
The search may take some time, but in the end you'll narrow it down to the right small business startup loan that can take your business to the next level.