Key takeaways

  • Startup business loans are typically available to businesses that have been generating revenue for at least six months
  • Startup business loans can be used to cover expenses from startup costs to day-to-day operations and even real estate purchases
  • Some startup business loans, such as SBA 7(a) loans, are more difficult to qualify for due to their stricter requirements, while others, like invoice factoring are more accessible

Startup business loans are designed to help small business owners get funding for early growth. Most lenders require businesses to be open and generating revenue for six months before being eligible. But some lenders and even some SBA loans can help you get your business up and running.

Here’s a look at some of the common ways you can use startup business loans.

Types of startup business loans

Startup loans take a variety of forms, and many are standard business loans geared toward businesses that are six to 12 months old. Because of this, you will need to determine the right type of startup business loan to fit your business’s financial needs.

Type of startup loan Description Best for
Term loans A single lump sum of cash that can cover almost any expense. Typically repaid in fixed monthly installments.
  • Startup costs
  • Inventory
  • Debt consolidation
  • Building credit
Business lines of credit Function like credit cards. Interest is only charged on the amount used.
  • Startup costs
  • Day-to-day operations
  • Inventory
  • Building credit
Equipment financing Covers the cost of business equipment. Interest rates can be lower than unsecured term loans.
  • Purchasing equipment
  • Businesses that don’t have assets to secure loans
SBA loans Loans guaranteed by the Small Business Administration (SBA).
  • Startup costs
  • Real estate
  • Businesses that don’t need fast funding
Microloans Small-term loans of $50,000 or less. Available through nonprofits and SBA.
  • Startup costs
  • Inventory
  • Building credit
Peer-to-peer lending Loans funded through crowdsourcing. They have less strict requirements than banks but may cost more.
  • Startup costs
  • Startup costs
  • Inventory
Invoice factoring You sell unpaid invoices and receive a lump sum for up to 90 percent of the invoice value.
  • Day-to-day operations
  • Cash shortfalls
Business credit cards Business credit cards offer various perks and bonuses to business owners looking for quick and flexible funding.
  • Startup costs
  • Day-to-day operations
  • Purchasing equipment
  • Inventory
  • Building credit
Merchant cash advances Receive an advance on credit card sales, which is then repaid plus a fee.
  • Emergencies
  • Cash shortfalls

Lightbulb
Bankrate insight

The SBA weekly lending report shows that the SBA helps a variety of businesses, including startups. So far in 2023, the SBA has provided over $4 billion in SBA 7(a) funds to businesses that were less than two years old and over $4 billion to businesses that have yet to open.

8 ways you can use a startup business loan

From initial startup concerns to purchasing equipment, inventory or real estate, startup business loans are designed to cover your expenses. And in many cases, your funding will likely be flexible enough to cover multiple types of expenses at once, which makes them useful for businesses that need to cover costs during their growth phase.

Startup costs

Any expenses associated with getting up off the ground — including marketing, advertising and supplies — fall within the umbrella of startup costs. In many cases, a term loan will be the best choice for a set expense you know your business will have the cash flow to repay.

For startup costs that aren’t set in stone, a line of credit or business credit card will be the best option. Lenders will likely require a personal guarantee no matter which route you take, so be prepared to demonstrate both your business’s financial well-being as well as the financial history of each owner.

Best types of loans to cover startup costs

  • Term loans
  • Business lines of credit
  • Microloans
  • Peer-to-peer lending
  • Business credit cards

Day-to-day operations

Like general startup costs, day-to-day operations can be covered by a line of credit or business credit card. But for businesses that may not be as established or business owners with bad credit, invoice factoring and merchant cash advances offer quick and accessible financing. Just be aware that they are more expensive and have higher fees than more traditional forms of financing.

Best types of loans to cover day-to-day operations

  • Business lines of credit
  • Invoice factoring
  • Business credit cards
  • Merchant cash advances

Purchase equipment

Equipment loans are one of the more accessible options for startups because the equipment acts as collateral, similar to a mortgage or car loan. Depending on the type of equipment your business needs, you may be able to finance directly through the seller. An SBA 504 loan can also be used for long-term equipment purchases, although like all SBA loans, it will take significantly longer to process your application and receive funding.

An unsecured loan can be used to purchase equipment as well. But the lack of business assets makes these loans more risky for lenders. That could result in a higher average interest rate on your loan.

Best types of loans to purchase equipment

  • SBA loans
  • Equipment financing

Inventory

Almost every type of business loan will cover the cost of inventory. Because there are various options, you may be eligible even if you have to turn to a bad credit business loan. The most important aspect is comparing lenders and getting a quote on potential rates.

A few tips: If your seller offers it, see if you can qualify for a discount for buying in bulk. The seller may have a volume discount depending on the quantity purchased, and for startups that need a significant amount of inventory, this can help cut down on costs. Similarly, discuss an early payment discount. If you are able to pay the invoice on your inventory purchase ahead of schedule, the vendor may cut some of the cost off your order.

Best types of loans to purchase inventory

  • Term loans
  • Business lines of credit
  • Microloans
  • Peer-to-peer lending
  • Business credit cards

Real estate

Qualifying for a commercial real estate loan may be difficult as a startup. Lenders will want to see that your business has sufficient income to cover payments. A high business credit and personal credit score are also a must.

That said, qualifying for real estate financing as a startup is not impossible. If your business needs space to grow and you have the revenue to afford it, there are lenders that work with startups. You will need to demonstrate your ability to repay and need for space in your application, and like all real estate loans, the process may take longer than other forms of financing — especially if you apply for an SBA 504 loan.

Best types of loans for commercial real estate

  • SBA loans
  • Commercial real estate loans

Debt consolidation

Debt from a previous business can be consolidated with a startup loan. If you are beginning a new venture but have taken on debt in the past, you may be able to qualify for a loan that allows you to consolidate it and put any leftover funds toward your new startup. This is especially handy if you have taken on small debts as a sole proprietor, contractor or gig worker and are looking to expand your business or head into a new industry.

To get the most out of business debt consolidation, try to get a lower average interest rate than your current loan has. Ideally, the monthly payments and total interest paid should be less. But it may be difficult if you also need to borrow more to cover the additional costs of a new startup on top of consolidating debt.

Best types of loans to consolidate debt

  • Term loans
  • Peer-to-peer loans

Buy an existing business

Gig economy workers ready to jump from temporary and part-time positions may want to consider buying an existing business. Taking over an existing business can have lower risk than starting a new business since the business already has an established brand, clients and customers. And if the business has a proven track record of attracting customers and bringing in revenue, it can be easier to get approved for a startup loan.

Best types of loans to buy an existing business

  • Term loans
  • SBA loans

Build credit

Small business startup loans can be used to build business credit and increase your chances for future financing.

To make the most out of a startup loan when you want to build credit, be patient. Just like with personal credit, it can take months to improve your score and build a positive history of payments. Always prioritize payments toward your loan and try to keep your credit utilization ratio low. You don’t need excellent business credit to qualify for most loans, but working on your credit will improve your chances of qualifying for lower rates.

Keep in mind that a business loan won’t help build your score if the lender does not report payments to credit bureaus. Ensure that your lender sends payment information to the Dun & Bradstreet (D&B) credit bureau, Experian and Equifax.

Best types of loans to build credit

  • Term loans
  • Business lines of credit
  • Business credit cards
  • Microloans

Lightbulb
Bankrate insight

If building credit is your priority, a business credit card is a better option than a business loan. Business credit cards typically have a grace period that lets you pay off your debt and not get charged interest.

What can’t you use a startup business loan for?

Startup business loans are designed to help you cover your business needs. Most lenders have a few restrictions on how funds can be used. Personal expenses are prohibited, and businesses in certain industries may struggle to find funding. These include:

  • Gambling
  • Investment and lending
  • Loan packaging
  • Real estatement investment firms
  • Adult entertainment
  • Cannabis or hemp

But generally, the primary restriction on how funds are used is based on why your business applied for funding. If you submit an application detailing your need for a large inventory purchase, then you may not be able to use your loan to fund the hiring process, for example. Your lender should outline any restrictions before you agree to borrow.

Bottom line

Startups are eligible for various loans, but you should always familiarize yourself with how to get approved for a startup business loan before you apply. When you’re ready, compare startup loans from top lenders to narrow your choices and find an option that works for your business.

Frequently asked questions

  • The SBA does not have a set minimum time in business, so startups may be eligible for SBA loans. But you must be a for-profit business with owner-invested equity. You will also need to exhaust other forms of funding before you turn to an SBA loan, according to requirements outlined by the SBA.
  • To qualify for a startup loan, you will need to prepare a few standard pieces of information. Documents to have on hand include the contact information for each owner, business license, business plan and any financial documents that show your ability to repay a loan.
  • While there are some banks that work with startups, most will require your business to be at least a year old to qualify for financing because the chance of default is higher. Online lenders, credit unions and smaller banks may be better options when your startup needs to borrow a loan.