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A startup business loan is any loan that helps get a new business off the ground. These loans require lenders to assume a greater amount of risk, but you can still find both traditional banks and online lenders who are willing to take a chance.
The best startup business loans will fund projects for companies with little time in business and limited credit history. In return, you can expect additional requirements like significant collateral or a higher interest rate.
How a startup business loan works
Startup loans ultimately work like any other business loan: You apply for funding, a lender assesses your creditworthiness and if your loan is approved, you repay the funds with interest.
Startup loans may offer more lenient requirements in some respects, such as accepting borrowers with low revenue streams. But because many new small businesses fail, you may have to meet other requirements to offset lenders’ increased risks. You may have to provide greater collateral for approval, sign a personal guarantee or pay a higher interest rate.
Getting a startup loan is often easier if you launch your business before you apply for funding. You’ll also want to improve your credit. Small business lenders tend to prioritize your personal credit above your business credit.
Finally, limit your debt service coverage ratio. That is, try not to take on too much other debt before you apply for your startup loan.
Startup loan vs. conventional loan
Startup loans are often offered by the same lenders as conventional loans. They may be marketed as startup loans or simply small business loans.
| Startup business loans | Conventional business loans | |
| Who offers them | SBA, banks, online lenders, nonprofits | SBA, banks, online lenders |
| Time in business requirement | As little as 0-3 months | Typically at least 2 years |
| Personal credit score requirement | Minimum score as low as 500-560 for some loans | Minimum score of 600 or higher for most loans |
| Business credit score requirement | 155 on the SBSS scale is recommended; lenders may not require this | 155 on the SBSS scale is recommended |
| Amounts | Most lenders cap loans at $1 million or less | Most lenders cap loans at $5 million or less |
| Interest rates | Typically higher | Typically lower |
| Collateral required | Typically yes, plus a personal guarantee in most cases | Depends on the lender |
Types of startup loans
Types of business loans that may interest startups include the following:
- SBA loans: These loans are backed by the government, and startups may apply for microloans up to $50,000.
- Term loans and lines of credit: Term loans disburse funds all at once, while lines of credit give you a revolving account that you can take money from as needed up to a certain limit.
- Invoice factoring and financing: Invoice factoring and financing allow you to sell the value of unpaid invoices to a third party to access funds quickly.
- Private loans. You may also be able to get a direct loan from an investor, peer-to-peer lending or family and friends.
The bottom line
You’ll have the best chance of getting approved for a startup loan if you have at least six months in business and an established business credit score. Start by comparing lenders and figuring out how much you need. Requesting too much funding could result in a rejection.
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