Finding the Best Small Business Loans for Your Startup

You’re in a fantastic place. You’ve got a brilliant idea for a startup, talented people who are ready to start working for you, and the willpower to see it through. 

The only thing you’re missing now is money, and, unfortunately, convincing others to fund your dream venture can be a challenging task. Securing small business loans is likely the only viable option.

However, you may not be content to find just any old small business loan. Naturally, you are going to want to find the best small business loans.

Unfortunately, banks and credit providers like to see some numbers and history; your detailed plan, while helpful, may not be enough for them to want to fund your vision with low interest business startup loans. In their eyes, you’re a risk, and the rates you receive on startup business loans are likely to reflect that trepidation.

Luckily, for all of the budding entrepreneurs out there, there are alternatives to specific business startup loans.

Instead of banging your head against the wall because you can’t find startup business loans that fit your needs, you can get creative when it comes to finding the funding for your vision. And this article is here to help you.

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What You Need to Do Before Searching for Business Startup Loans

It can be tempting to get excited and start searching for startup business loans. However, as a future business owner, you need to have the discipline to self-assess before looking for small business startup loans. Ask yourself: Am I really prepared to start a business?

startup business loans

Image Source: Pixabay

 “Yes!” you may exclaim, but take a moment to step back and appreciate the bigger picture. Sure, your vision for your company may be illustrated in vibrant colors in your mind, but on paper it may be dull, lackluster, and unconvincing.

If you do get lucky enough to be sitting before someone who is willing to consider providing your company with startup business loans, he or she is going to want to see numbers, statistics, and details before giving you any small business startup loans.

What to Think About Before Applying for Small Business Startup Loans

Assess Your Personal Credit

If this is your first time starting a business, new business loans lenders will definitely be taking more than a peek at your personal credit. Since you are the one starting this company, at the moment, you and you alone represent this company.

So, if your personal cash flow and credit history are poor, this will give them an idea of how effectively you will use the small business financing they give you.

Consider What You’re Willing to Put up as Collateral

If you’re seeking new business loans for a startup and this is your first business, you don’t have much proof to show the bank that your business can handle it. Banks often prefer extending business loans to people who have been in business for a couple of years and can prove it’s been profitable.

As a result, they are going to want some collateral for their small business financing, and if your business does not have any hard assets, they are going to look to your personal assets.

Just because they are small business startup loans doesn’t mean banks can’t ask you to put personal assets, like your home, up for collateral. You can refuse, but that means you’ll be refusing their startup business loans as well.

If you are willing to put up what they want, you may be able to secure the best small business loans for your situation. This is also a good litmus test for how prepared you feel about your company.

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Do You Have a Business Plan?

“It’s all in my head” is not good enough for someone who may give you thousands of dollars in small business financing. A few notes you’ve jotted down are not good enough for new business loans either, for that matter. The people you go to for small business startup loans, whether it’s a commercial bank or a private party, are going to want to see a business plan. And that business plan will need to include financial projections since, as a startup, you won’t yet have financial statements.

This is only the tip of the iceberg when it comes to how prepared you can be when applying to get the best small business loans. Fail to prepare and you might as well prepare to fail. Have all your ducks in a row and do some research on what technical details you may need to prepare.

One of the best ways to direct your preparation and your Googling of what you need to have ready is to ask yourself, “If someone were trying to get a business loan from me, what would I ask that person for?”

Chances are you would probably obsessively research to figure out what questions you should be asking that you aren’t already. Think of things from the perspective of the person who will be putting skin in the game in the form of small business financing to be as ready as possible to win them over.

It’s hard convincing banks to give you the best small business loans when you haven’t made any revenue yet. That’s why we have provided four possible options for getting small business financing.

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Comparison Review List

  • Personal loans
  • Line of credit or home equity line of credit
  • Small Business Administration microloan
  • Friends & family (personal networks)

High-Level Comparison Table

Business Loans



Personal LoansUnsecured loanYou need excellent credit to get a useful amount
Home Equity Line of CreditLower interest ratePotential to lose your home if the business fails
SBA MicroloanLow ratesApplication processing times can be long
Friends & Family (Personal Networks)Low interest, cheaperCan sour relationships if you are unable to pay back the money

Using Personal Loans as Business Loans for Startups

If you are finding it difficult to get a business loan, you may be considering a personal loan instead. Using a personal loan, if you can’t secure business loans for a startup, is definitely an option. Here are the things you should consider about using personal loans as startup small business loans, including the pros and cons.

What Is a Personal Loan?

This information should prove helpful for those looking to secure small business financing through a personal loan. A personal loan is an unsecured loan that you can use for pretty much anything. Oftentimes, consumers use personal loans as a way to consolidate their debt.

Pros of Using Personal Loans as Startup Small Business Loans

No Collateral Required: Unlike startup small business loans, personal loans are unsecured which means you won’t be required to put anything up as collateral. Many new small business loan providers expect borrowers to put up something, like their house, as collateral for the loan out of fear that the business won’t take off as expected.

Your Good Personal Credit Can Help a Lot: This could technically be a con as well, depending on how healthy your credit is. Personal loans are often extended to those with very good credit. Creditworthiness also determines how much the lender is willing to give you and at what rate. If you have a great personal credit score, you could get a personal loan and use it in place of official business loans for startups.

Cons of Using Personal Loans as Business Loans for Startups

If you can’t get a business loan and choose to use personal loans, there are some potential drawbacks.

Higher Rates: Yes, with good personal credit you can secure a competitive interest rate on a personal loan, but it is competitive in relation to other consumer forms of credit like credit cards. However, the interest rate on business loans is lower. As a result, if you use personal loans in place of new small business loans, you may find yourself paying interest rates that are not helpful to your business’s bottom line.

Lower Loan Amounts: Personal loans are normally in the tens of thousands, but your business is likely looking for money in the hundreds of thousands. If you choose to use personal loans instead of new small business loans, you will not get as much money as you would with a traditional business loan.

At the end of the day, a personal loan may be your only option if you are not lucky enough to get approved for new small business loans. In fact, your willingness to take on the risk associated with a small business loan startup that uses personal loans instead may give you a good indication of how prepared you are to start a company.

Related: How to Get Online Loans for Bad Credit with No Credit Check

Small Business Loan Startup Funded by a Home Equity Line of Credit

A small business loan startup funded by a home equity line of credit can work, but it takes some thought and strategizing.

If you have built up a significant amount of equity in your home (the amount you own versus the amount of the mortgage you have yet to pay off), then you can use that to receive a low-interest line of credit from your bank. Since your house has a lot of equity in it, you will likely receive a high limit line of credit from the bank, and you can use that in place of startup business loans if you wish.

On the other hand, a home equity line of credit needs to be paid back, and if you fail to do so, you risk losing your home. Again, this is a good litmus test for how much confidence you actually have in your home. Are you willing to put your home at risk in order to get small business startup loans? If the answer is no, you may want to rethink your business idea.

Entrepreneur lists a few things to consider before using a home equity line of credit as the best small business loans:

  • Is the economy good? Are there stable interest rates and rising home values?
  • Will you get a higher after-tax return through your investment (or your company, if you are using this in place of startup business loans) than the cost of borrowing?
  • How will this loan work for your financial situation in terms of taxes? Unless you are using the money to renovate a home, that interest is not tax-deductible.
  • Home equity lines of credit are usually reserved for an emergency. If you tap into it now to use in place of small business startup loans, you won’t have that equity later for an urgent situation.
  • How will this affect your company (and your personal) cash flow? Will you be able to make regular repayments?

Take a look at your financial situation (including your existing debt) before choosing to use a home equity line of credit as a source of small business startup loans.

Using the Small Business Administration as a Source for the Best Small Business Loans

In most cases, the Small Business Administration does not directly lend small business loans. Instead, it makes it less risky for banks and other lenders to provide business startup loans to others by guaranteeing part of the loan. The problem is that many of these new small business loans still require some business history for the lenders to go off, meaning they are not very helpful for startups.

There is one program through the Small Business Administration, the Microloan Program, which provides startup business loans to businesses with short-term goals that need funding.

The funds are given by the SBA to intermediary nonprofit organizations with experience dealing with the technical side of approving small business startup loans. This intermediary makes the final decision, and all business startup loan applications are sent to the intermediary.

Those looking for the best small business loans and startup business loans can browse the Small Business Administration’s list of those intermediaries.

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Can Friends and Family Be the Source for the Best Small Business Loans?

Going to your friends and family, hat in hand, to ask for startup business loans may feel awkward. But if you can’t convince the people closest to you that your idea is worth investing in, how do you think you’re going to get small business startup loans from strangers?

small business startup loans

Image Source: Pixabay

The upside of going to your personal networks to get a business loan is that you can usually secure a very low interest rate. Additionally, you can negotiate a repayment plan that is more forgiving than the kind you would establish with a conventional lender.

The downside to borrowing business loans for startups from your family and friends is that if your business goes south and you are unable to pay them back, you could potentially sour relationships that are very dear to you.

The best way to avoid this is to treat the money part of your personal relationship with the kind of commitment, seriousness, and communication you would with a conventional lender:

  • Come to your friend or family member with a detailed business plan that demonstrates exactly how you plan to earn money back to repay them for the new business loans.
  • Set up a detailed repayment plan. This can help avoid any awkwardness if they notice you doing well but you still have not paid back the loan. Setting up a schedule with a timeline and interest rates, if applicable, means that they can have some peace of mind knowing they are receiving regular payments.
  • Understand the possible tax implications. You may get lucky and have a family member or friend who really believes in your idea and wants to provide you with a small business startup loan interest-free. You’re getting what’s arguably the best small business loan deal. As such, be honest and don’t take advantage of this offer. Extending interest-free startup business loans to you may cause complications for them at tax time – more complications than charging even a little interest may have. This MarketWatch article provides additional information about the tax considerations you should make when receiving (or extending) startup business loans.

Conclusion – Finding the Best Small Business Loans Takes Preparation and Perseverance

The best small business loans don’t just fall out of the sky and into your lap. You face an uphill battle in finding small business startup loans since banks and lenders are hesitant to provide small business financing to a business that hasn’t even started yet! As a result, you have to be exceptionally prepared and demonstrate significant perseverance.

Being prepared means having all the information to convince a potential startup business loans provider that you have your situation figured out and know exactly how you will spend and repay the money. It also takes the perseverance to consider creative small business financing alternatives and to keep improving your business idea so that it is more attractive to those providing business loans for startups.

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