Loan for start up: Fund Your Dream

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Loan for a startup is one of the crucial decisions in funding your small company. Properly selecting the sources of loans could help your startups and better your finances. 

As a new entrepreneur, it is natural to face difficulty in finding the best loan for your small business. Your mind may have many questions but not find the appropriate answers.

Do you have an entrepreneurial spirit? Have a dream to establish a startup in Silicon Valley? If the answer is yes, this article could be a blessing.

This blog post will guide you on startup loans, especially what you should know before selecting a loan for your startup. 

Let’s start with the following.   

Key takeaways:

  • No fixed type of loan could be suitable for all types of startups.
  • You need a good credit history, but some lenders can give loans with limited credit scores.
  • Your family or friends could be a good source for startup loans.
  • Estimate the cost of money before taking a debt or bridge loan.
  • Some lenders could give you a loan if they find your startup is unique & has the potential to succeed.  

What is a start-up loan?

A startup loan is a type of financing for a new business. In the U.S., most lenders want a minimum of 2 years of successful business run before lending any loan. Still, if your business falls into a trending industry or has enough potential to grow, then after six months, you can get startup loans.

However, the typical startup loans in the U.S. are term or SBA, credit cards, or asset-backed financing

A startup loan helps new businesses to meet working capital, i.e., provides cash to pay short-term obligations such as operating expenses, staff salary, product marketing & more.

Let’s consider a startup scenario,

Dorothy is an ex-Twitter engineer & wants to start an A.I. company in California. She makes a strategic business plan about products, services, market, projected sales & operating expenses. She collected funds from her savings, family, and friends but still needed $100,000. 

After analyzing different financial loan providers, Dorothy decides to take a five-year loan from Bluevine Bank.

Other details,

  • Interest rate=7%
  • Credit score=600
  • Loan amount= $100,000
  • Loan term= 5 years

Let’s see how much Dorothy needs to pay monthly for $100,000.

Loan payment

Dorothy must pay an extra $41,800 in 5 years as an interest.    

Inventory financing for startups?

Inventory financing for startups is an asset-backed lending where the company uses inventory as a loan security. Usually, lenders provide loans based on the appraisal value of inventory & charge annual fixed interest with monthly payments.

Let’s see a real scenario,

Sarah wants to give an EdTech company in Taxus after retirement from their teaching job. She has $100,000 worth of furniture & equipment & looking for inventory financing. One investor likes Sarah’s startup ideas & agrees to pay a 70% loan of the total inventory value with 7% interest. 

So, loan amount=$70,000 (70% of $1,00,000)

  Annual interest= $70,000×7%

                           =$4,900

Monthly interest= $4900÷12

                          =$408.34

So, after one year, Sarah has to pay $74,900 & throughout the loan term, the inventory remains a collateral asset. 

If EdTech becomes successful & Sarah repays loans, she will retain full ownership. If Sarah fails, the lenders will take possession of the inventory to recover the loan.  

What is debt financing for startups?

Debt financing for startups is borrowing or raising funds from financial institutions without selling equity. You have to pay scheduled installments with both interest & principal. For debt financing, you have to back some assets such as insurance, equipment, and accounts receivable for reassurance to pay debt money.

Equity financing?

Equity financing means raising funds from investors (such as angel investors, venture capitalists & equity crowdfunding) by selling a portion of the company stake. You don’t need to pay any interest or obligation to pay loan installments, but you must share future profits according to the stake ratio.

Do you need some clarification in understanding debt versus equity financing? Let’s see a mathematical scenario to understand it in detail. 

Equity or debt financing?

William wants to establish a streaming service-based startup in Denver, United States. To develop streaming products & services, he needs $100,000William has the following two financing options.

Equity or debt financing
  • Equity Financing

William decides to sell 20% of its equity to an angel investor named Daniel in exchange for $100,000. Say the total worth of the startups is $5,00,000; Daniel will get 20% ownership & William retain 80% ownership.

Say the startups of William become successful & eventually, equity money will be 8x, i.e., $8,00,000 ($100,000×8). So, William will get $640,000 (80%) & Daniel will get $160,000 (20%). 

  • Debt Financing

William takes a $100,000 loan from Axos Bank with 8% interest for 2-year repayment terms. 

So, debt financing cost,

Yearly interest=$100,000× 0.08

                       =$8,000

Monthly interest=$8,000÷12

                          =$666.67

Total interest after two years=$8,000×2

                                          =$16,000

So, William has to pay $116,000 after two years. 

How to get a startup business loan with no credit?

There are some sources from where you can get a startup business loan without a credit score. Usually, this type of loan is considered a startup business loan with no money or unsecured business startup loans. However, getting a startup business loan with no credit could be more costly & challenging

Let’s see a real-life scenario,

Sophia is a CPA & wants to establish a financial consulting startup in New York City. She has a good business plan but a zero credit score & looking for $150,000 start-up loans. 

How to get a startup business loan with no credit

So Sophia can collect loan forms,

1. Accion International

Accion is a nonprofit microlender that provides startup loans with limited credit scores. Accion usually focuses on startups’ vision, entrepreneurial spirit & probability of success.

2. LendingClub 

Lending Club is a peer-to-peer platform that connects borrowers with investors. They consider many startup factors with credit scores but are more forgiving than banks.

3. Online Lenders 

Sophia can consider SoFi or Upstart if she has a strong personal financial credit history. A personal loan is granted based on your credit clearing history, so it could be harmful to your finances. Before using a personal loan for your startup, you should analyze the details, i.e., terms & conditions. 

4. Friends & Family

The family or friends could be a startup financing source for Sophia. If Sophia has a unique startup idea that has a good chance of being successful, then they may give you startup loans without checking her credit history. The good side is no interest, i.e., cost of money.  

They will give a loan based on trust. The bad side is they may dislike your startup idea or even give they may indirectly impose many restrictions. Need some clarification? Let’s consider a scenario,

Sophia’s startup has become successful, but her friends or any family member (if the relationship is worse) may charge a business partnership, or they may be filing fake cases to take Sophia’s startup

You may be surprised, but in the world of business, nobody is your friend. So, be pragmatic before considering this type of startup loan.

5. Angel Investors

Some angel investors may be interested in investing their funds in Sophia’s startups. They mainly focus on startup ideas & success percentages without more emphasis on credit history.

6. VC Firms

VC firms will focus on the proven track record of Sophia’s startups, but some venture capital provides emphasis on new startups with promising growth. They don’t mainly emphasize credit history; instead, they consider the possibility of success for the startup.

7. Supplier loan

Some suppliers may be interested in Sophia’s startups & could offer financial support. They usually provide loans based on corporate relations while considering credit history. 

8. Government grants

Sometimes, the American government provides subsidies for start-up businesses, such as loans with the lowest interest for specific industries. So, Sophia can also collect loans from the government for her startups.

Types of loans for startup business?

There are no fixed types of loans for startups. Types of loan could vary depending on the startup’s nature, but below are some major types.     

Loan TypeWho QualifiesLoan range ($)Interest Rate (%)Repayment TermProsCons
Term LoansGood credit history, establish startups, have collateral assets25,000 to 500,0005 to 301 to 5 yearsFixed monthly payments, best for long-term investmentsHigh interest rates, slow approval process
Lines of CreditGood credit, Startups with steady cash flow 5,000 to 250,0008 to 24Revolving credit lineFlexibility, pay interest only on the amount usedShort repayment terms, variable interest rates/ Can lead to overspending, interest accrues on outstanding balance. 
SBA Loans (7(a))New startups with proven tack recordUp to $5 million5% – 11%Up to 25 yearsLower interest rateDifficult application approval process
MicroloansEarly-stage startupsMaximum 50,0008% – 16%Up to 6 yearsNot complex i.e., easy to qualifyHigher interest rate
Equipment LoansEarly-stage startups that are looking for equipment financingNot fixed i.e., could vary6% – 20%Depends on equipment useful lifeLimited option to use loan.Limited options for machinery purchase
Personal LoansEntrepreneurs who have good credit history  Depends on credit history5% – 36%VariesQuick access to loanHigh interest rates, personal risks
Invoice FinancingProven startups record with outstanding invoicesMaximum 80% of total invoice value1% – 5% of invoice value  VariesQuick access to loanFees can be high, dependence on customer payments.
CrowdfundingStartups with strong community and productVariesVariesVariesLower debt against big loanCould delay & possibility to not approve loan.
Types of loans for startup business

Bridge loan startup?

A bridge loan is a short-term financing for startups to meet immediate cash needs. A bridge loan helps startups fill current liquidity challenges while waiting for substantial funding or merger acquisition events. 

However, you must understand that due to its short-term nature, bridge loans charge a higher interest rate than traditional ones. A bridge loan is secured if you have to provide collateral or unsecured if they give you based on trust. 

Bridge loan startup

Do you need more clarification? Let’s see a startup scenario.

Emily is an ex-Tesla engineer who established an EV battery startup in Alaska. Due to the current selling crisis, Emily is looking into a bridge loan.

Other details,

Bridge Loan Amount: $200,000

Interest Rate: 10% per month

Repayment Time: 3 months

Expected Series A Funding: $5,00,000 (for 3 months)

So, monthly interest= $2,00,000 × 10%

=$20,000

Total interest= $20,000 × 3

                      = $60,000  

Total repayment after 3 months= $2,00,000 + $60,000

 = $260,000 

How does Emily repay bridge finance? 

· In the first months, Emily will receive $2,00,000. She has to pay $20,000 as interest & the remaining $1,80,000 ($2,00,000 -$20,000) will be used to meet current expenses.

· In the 2nd month, Emily will receive $160,000 after paying $20,000 as an interest. 

· In the 3rd month, Emily will receive $140,000 after paying $20,000 in interest money. 

After three months, Emily will exit the bridge loan by using series funding. 

Loan after bridge repayment= Series A funding – Repayment of bridge loan

= $5,00,000 – $2,60,000

                                               = $2,40,000

A startup uses a bridge loan only if it brings more than the cost of money, such as startups needing to expand the market & have the probability of success. Therefore, before considering a bridge loan, first estimate startup growth potential or what positivity brings it. 

Concluding Thought

Startups mean a combination of ideas & hard work. An innovative idea comes from real-world experience where funds help to accomplish it. Loan is a standard financing method to start a small business in America. 

However, many finance options can relieve you from the interest burden. Personal savings could be an excellent source to finance your startups. If you are a service holder & love to save a penny each month, then after 5 to 8 years, it could be a significant amount for startups.  

Long-term debt is not suitable for a company. Startups bear many risks &, naturally, only 3% become successful. So, remember this failure percentage before starting a new company. If everything goes well, your startup will take at least four years to be a reliable profit source

Therefore, prepare for four years of self-funding or make sources with minimum interest available.  

Frequently Asked questions (FAQ)

Working capital loans for startups?

A working capital loan is startup financing that helps the entrepreneur meet current expenses such as payroll, inventory, utilities, or any operating costs. Consider this type of loan only if you see your startup will succeed.  You may need clarification to understand the difference between Bridge & Working capital loans. Bridge loans only fill temporary funding gaps, while working capital could improve cash flow for the longer term, usually up to 5 years. Bridge finance will give you limited access to money, whereas working capital loans give you more flexibility to use funds. 

Disclaimer

The information provided in this article is author’s view & only for educational purposes. This is not a startups advice. This is not a sponsor post & not an investment advice. Do your research before making any important financial decision. Therefore, FinanceIdeas.org will not be liable for your financial loss.

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