Starting a new business can be difficult. New ventures require a great deal of time, effort, and capital to establish and grow in a reasonable timeframe. However, obtaining finance for a startup business is often its own obstacle.

Startup businesses are a clean slate, with no substantial financial history, if any at all. This lack of history makes it quite challenging to make a successful application to most of the usual forms of business finance.

One of the key exceptions to this is startup business loans. This category of finance specifically caters to startup businesses, providing them a means of raising capital despite not having a solid financial history. In this article, we will be breaking down this form of finance, explaining how it works, and giving some examples of startup business loans. Let’s get started.

What are startup business loans?

As the name suggests, startup business loans are a category of loans tailored to newly created businesses. It is an umbrella term, referring to a range of different forms of finance, each with its own advantages and disadvantages. Although each specific loan differs, the common theme is that startup business loans allow new businesses to raise the capital required to grow, something ordinarily quite difficult for most startups.

How do startup business loans work?

As there are many different types of startup business loans, there isn’t a single ruleset that this form of finance must follow. Depending on the nature of your startup and its needs, you might find some types of startup business loans are much more suitable than others.

For example, your business might have high-value assets, such as equipment or vehicles. You might find that secured loans are the most suitable. They allow you to take advantage of your assets’ value. Alternatively, if your new business has a stable cash flow, you might prefer to opt for the tried and tested forms of traditional finance. This would allow you to simply take out a loan. Then repay it in installments with a bit of added interest.

Whichever startup business loan you choose, you can expect it to work a little differently from the rest. While this might make it more difficult to select a loan at first, it has the benefit of ensuring your chosen loan is the most suitable for your business, and able to meet your specific needs and financial constraints.

How to obtain a startup business loan

As we’ve mentioned, there are many different types of startup business loans. As such, there isn’t a single method to obtain them; each loan will have its own criteria you must meet in order to acquire it. Secondly, the amount of capital you need and what you intend to do with it will also play a part. While these variables make it impossible to pin down an exact approach, there are a few general points to keep in mind.

As your business is new, your first port of call is to check if a prospective lender will consider lending to a startup business. In cases where lenders are hesitant to lend to new businesses, you could consider discussing taking out a secured loan. This will involve using one or more of your assets as collateral. Something that often makes lenders more likely to offer a loan due to the lessened risk.

Next, you’ll want to make sure your personal credit score is high. While there are loans for poor credit scores, these often come at a high cost to offset the risk assumed by lenders. To choose from the best and most cost-effective loans, you will need a high personal credit score. If you need time to improve your personal credit score, you will find that more options are made available to you as your business ages. In as little as six months, you will likely find plenty of lenders willing to fund your startup business. Even if your credit score isn’t ideal.

With the above handled, all that’s left is documentation. Any loan will require some degree of paperwork, usually including credit ratings, business plans, business accounts, and personal information. If you would rather take out a secured loan, you can cut out a lot of the usual process. Secured loan lenders are mostly concerned with the value of assets. With your documents at the ready, you should have a fairly easy time obtaining your loan of choice.

Examples of startup business loans

We’ve discussed startup business loans as a whole up to this point, so let’s take a look at a few specific examples:

Personal loans

Personal loans can be one of the only loans available to a completely new business. Rather than taking out a loan in the business name, a personal loan involves you assuming the debt as an individual. Naturally, this type of loan exposes you to risks that business loans don’t. They are a cheaper approach, one often easy to acquire if your personal finances are up to scratch. If you don’t have any previous business experience, obtaining any other loan will be a challenge.

If you can afford to assume the debt yourself, a personal loan can be an excellent way to raise a small amount of capital to get your business moving. However, if you overinvest in your business and it fails, you will still be held personally liable for the debt. It is a loan that should only be taken if you know you can pay it back with your personal finances.

Secured loans

If you would prefer not to risk your personal finances, but your business has assets of a decent value, a secured loan might be most suitable. Secured loans, or asset-based financing, involves securing a loan against an asset. This asset could be anything from equipment to property, and even to invoices. This makes secured loans flexible and easy to obtain, something very helpful to startup businesses.

Though comparatively easy to take out, secured loans do expose you to some risk. If you fail to repay the loan, your collateral assets can be taken and sold by your lender as a means to recover their money. As such, you should only take out a secured loan if you know you can repay it.

Business credit cards

Business credit cards are ideal for raising limited amounts of capital on a monthly basis. They don’t require collateral, nor will they put your personal finances at risk. Moreover, you are free to use them as you please, tapping into them extensively one month, and not at all another. For a flexible, recurring source of finance, a business credit card could be perfect for your startup business.

Though there are significant advantages, business credit cards aren’t without their downsides. Most notably are the high-interest rates, should you fail to repay your balance every month. These interest rates can make it very expensive in the long run. However, some cards come with an introductory period, offering 0% APR. This can be ideal for large expenses. Though take care to pay off your balance before the introductory period expires, or be saddled with a large amount of interest.

Conclusion

There is a range of startup business loans, each with its own set of pros and cons. As such, startup business loans as a category of finance can be an excellent source of capital for startup businesses. One that can be tailored to the specific needs of any individual business. Though it will take due diligence on your part to find a suitable loan, you can rest assured that it matches your business’s needs once you do.