Key takeaways

  • Startup loans are designed for businesses that have not been in operation for long or have little to no credit history
  • Consider all the different types of startup loans to determine which is best for your business
  • Alternatives to startup loans include grants, business credit cards, invoice factoring, merchant cash advances and special purpose credit programs

According to data from CB Insights, the main reason startups fail is due to running out of cash and failing to raise more capital.

That’s where startup business loans come in. These are designed for businesses that haven’t been in operation long or have little-to-no credit history, which can make it harder to qualify for traditional business loans.

Like all loans, startup loans can be risky; however, they offer a boost in capital that can lead to growth and expansion, making them a viable option. But, of course, it requires careful consideration of their pros and cons to choose the right one.

Here are all the different types of startup loans to consider.

SBA loans

There are many types of SBA loans, all backed by the U.S. Small Business Administration (SBA). These loans may be open to small businesses, as the SBA bases eligibility on factors like how you earn revenue and the character of ownership. But the SBA isn’t a direct lender, so you’ll also have to meet the eligibility requirements of the lender you work with. In most cases, this can often mean needing two or more years in business.

The SBA microloan program is ideal for small businesses in the startup phase as well as those with plans to expand. Loans up to $50,000 are administered through nonprofit, community-based organizations and can be used to cover various purchases, excluding real estate. Each lender has its requirements, but the SBA microloan often has eligibility requirements that are more relaxed than other types of SBA loans.


  • No application, processing, origination or brokerage fees
  • Capped interest rates
  • Flexible eligibility requirements


Bankrate insight
As of July 26, 2023, over $20 billion in 7(a) loans and over $5 billion in 504 loans has been approved. For additional insight into the 7(a) and 504 loan programs, review the SBA weekly lending report

Bank loans

Bank loans are typically harder to qualify for than other types of loans. Traditional banks like Bank of America and Capital One may require two or more years in business and annual revenue between $100,000 and $250,000.

But interest rates and terms are typically more favorable, so it’s worth looking into. Some banks offer certain loan products that startup business owners may be eligible for. For example, Wells Fargo’s Small Business Advantage line of credit is open to people who have been in business for less than two years.


  • Builds business credit
  • Low interest rates
  • Higher loan amounts compared to online lenders


  • Lengthy application process
  • Slower funding than alternative lenders
  • Lack of information on websites

Online business loans

Online lenders offer alternative business loans that are faster to fund and have more relaxed eligibility requirements compared to banks. The application process is completed online, and most lenders have a streamlined underwriting process, so once an applicant is approved, loans can be funded in a matter of hours or days rather than weeks.

Lending requirements are more flexible. A limited credit history, time in business and annual revenue likely won’t prevent you from securing funding. There are even options for business owners with bad credit, though some lenders may require a minimum of six months in operation.

The downside to online business loans is that they tend to come with higher interest rates, which can often soar well past 30 percent depending on your credit score.


  • Flexible lending requirements
  • Fast funding
  • Online application


  • High interest rates
  • Shorter repayment terms
  • Lower funds compared to traditional banks

Bankrate insight
According to the 2023 Firms in Focus Report, part of the 2022 Small Business Credit Survey, 42 percent of firms less than two years old sought funding from banks and online lenders over the past five years.


In addition to the SBA microloan program, microloans are available through non-profit lenders, microlenders and peer-to-peer lenders. These small loans are great for startups because eligibility requirements are not strict since lenders recognize traditional funding options are not always easy, especially for minorities and women.

The available loan amounts, interest rates and repayment terms vary from lender to lender. For example, Accion Opportunity Fund offers microloans from $5,000 to $100,000 with interest rates from 5.99 percent to 16.99 percent, with customizable repayment plans. Each qualifying business must have a minimum of three months in operation, but there is no minimum credit score required, and the annual revenue varies.


  • Low interest rates
  • Customizable repayment plans


  • Low borrowing limits
  • Restrictions on how loan funds can be used

Business lines of credit

Banks and online lenders offer business lines of credit. This specific type of funding option is a secured or unsecured revolving credit line that allows business owners to spend up to their approved credit limit and only pay interest on the amount they spend.

Like a business credit card, the available credit resets each time the borrowed amount is repaid, so business owners can continue to spend as needed. Typically, startups with little-to-no credit that have been in business for at least six months may be eligible for lines of credit from online lenders, but higher interest rates should be expected, and collateral may be required.


  • Improves business cash flow
  • Line of credit resets when the balance is paid
  • Only repay what you spend


  • High interest rates and fees
  • Low borrowing limits
  • May require collateral

Equipment financing

Equipment financing is an option when you need certain equipment to operate your business, such as vehicles or machinery. Similar to other types of business loans, equipment financing is offered through banks, credit unions, online lenders and the SBA, but you can also find equipment financing through direct lenders.

Most equipment loans can cover a range of options, from restaurant equipment to semi trucks.  A down payment is typically required since most financing only covers 80 to 90 percent of the value of the equipment. And when you factor in the interest rate and other fees, they can get expensive. But equipment loans still make the purchase more affordable than paying for the equipment outright.

If equipment financing seems like an expensive option, equipment leasing is less of a commitment because businesses can pay to rent equipment for a specified period rather than purchase it.


  • Tax deductible
  • Once the loan is repaid, the equipment is owned by the business
  • Increases business cash flow


  • Lender may require a down payment of at least 20%
  • Collateral or personal guarantee may be required by the lender
  • Equipment can be repossessed if payments aren’t made

Invoice financing

This is a short-term solution to cash-flow issues. Invoice financing uses the money owed to you by customers to secure the loan but typically caps the loan amount at 85 percent of the invoices. Your lender advances you a portion of the amount owed, and once your customers pay you, you repay your lender the advanced amount, plus fees.

Since the amount you borrow is based on customer invoices, this type of loan is often more accessible than other types of loans. The downsides include shorter repayment periods and higher interest rates.


  • Fast funding
  • Open to startups


  • Higher rates and fees than other loans
  • Decreased profits


Crowdfunding is a unique way business owners can raise capital through online fundraising campaigns. Using a funding platform, such as SeedInvest or GoFundMe, business owners launch their campaigns by providing fundraising details and setting a fundraising goal and timeframe. Once the campaign has launched, the business owner receives donations from people who want to invest in their company.

Most platforms feature sharing tools so business owners can share their fundraisers via social media, email and text, allowing them to reach a larger audience and increase donations. Once the fundraiser is complete, the money can be used to fund startup costs or a specific project, but depending on the type of crowdfunding campaign and platform, contributors receive rewards or equity in the company in exchange for their donations.


  • Money donated doesn’t need to be repaid
  • No application or underwriting process
  • Business owner controls when they receive donation funds


  • Doesn’t build business credit
  • Business owners may be required to offer contributors rewards or company equity
  • Crowdfunding platform fees
Bankrate insight

Here’s a brief look at four different types of crowdfunding:

  • Rewards. Funds are donated with the expectation of some tangible benefit in return.
  • Donation. Like a gift, people contribute funds with no expectation of anything in return.
  • Debt. Like a traditional loan, this type of crowdfunding must be repaid over time.
  • Equity. Funds are raised in exchange for partial ownership in the business.

Alternatives to startup business loans

If a business loan is too big of a commitment for your startup, consider these alternatives.


Business grants offer business owners free money to cover startup and operating costs. Unlike a loan, grants allow business owners to avoid taking on debt because they don’t need to be repaid.

Depending on the grant, you simply submit an application with details about your business and how the funds will be used, and you can get as little as a couple of hundred dollars to thousands.

Bankrate insight

Business credit cards

With business credit cards, business owners make short-term purchases up to a certain limit, pay their balance and spend again. Unlike business loans, credit cards have a grace period that lets you avoid paying interest if you pay your balance in full each month. This helps make business credit cards one of the most efficient ways to build business credit.

Interest rates vary: If you have great credit, a business line of credit may offer better rates. But if you’re receiving loan offers with APRs of 40 percent or more, a business credit card may be a better option.

Invoice factoring

Invoice factoring is another short-term solution. Instead of a loan, you sell your invoices to an invoice factoring company and receive a percentage of the total invoice amount. The remaining invoice amount, minus fees, will be sent to you once the loan is repaid.

Like invoice financing, factoring is an accessible option open to startups and business owners with bad credit.

Merchant cash advances

A merchant cash advance gives business owners the option to borrow based on business credit card sales. Similar to a loan, the borrower receives the cash in a lump sum, but the money is repaid using a portion of the credit card sales.

Funding is typically fast, but with the high interest rate and short repayment terms, this option makes the most sense for businesses that need short-term financing that can be repaid quickly.

Bankrate insight

Since merchant cash advances aren’t loans, they are not subject to usury laws, which restrict lenders from charging extreme interest rates. If you’re not careful, a merchant cash advance could end up having triple-digit rates.

Special purpose credit programs

Special purpose credit programs are designed to make borrowing possible for business owners of economically disadvantaged groups. According to the American Bankers Association, lenders can create a special purpose credit program to provide more favorable lending requirements, such as a lower credit score, less time in business or a lower down payment, making it easier for business owners to qualify for a loan.

In 2022, JPMorgan Chase made a $30 million commitment as part of the launch of its special purpose credit programs to increase access to credit for small business owners in underserved communities. Its program enhanced the lender’s loan application process, expanded the one-on-one coaching program and opened a new resource center where business owners have access to free advice.

Bottom line

Not all types of business loans are a good fit for someone just launching a small business. When you have little-to-no credit, low annual revenue and less than a year in business, a startup loan may be the perfect funding option. Many lenders offer startup business loans with flexible lending requirements, so you have a better chance of approval with this option than you would with traditional bank loans.

Frequently asked questions about startup business loans

  • To start a business, you need a loan with flexible eligibility requirements. This can include six months or less in business, as well as low annual revenue and credit score requirements. A viable loan option is a startup loan, which is available through various types of lenders, including the SBA, banks and online lenders.
  • Yes, you can take out a loan to start a business. But you may have fewer options due to your limited time in business, business credit score and annual revenue.
  • The credit score needed for a startup business depends on the lender. Traditional banks may require credit scores of 670 and above. But online lenders are more accessible, and you can find some lenders willing to work with business owners with credit scores in the mid-500s.