Running a startup can sometimes feel like one of those 10,000-piece jigsaws.
There are so many puzzle pieces to slot together—but you have to find the right ones first. You’ve got product development and marketing, hiring great employees, and even securing office space.
You can do none of that without the right finance. There are thankfully a lot more options for small business financing in 2022. Among the most common is a startup business loan.
In this startup guide, we’ll cover many loan options, mention some of the main lenders, and help you understand what to look for when evaluating your loan options.
To start, we’ll dive into what startup business loans are and give a quick primer on some of the most popular choices available. But for deeper dives into each, check out our articles on:
Startup business loans are designed specifically for new and small businesses that need funds for working capital, to fund expenses such as vendor invoices, payroll and taxes, SaaS subscriptions, marketing, and product sourcing and shipping.
New businesses have many operating costs, but they often have little to no credit history too.
Conventional lenders have shied away from such business borrowers because they decided the loans were too risky. But that doesn’t change the fact that entrepreneurs, founders, and small business owners have always needed working capital.
Startup business loans have emerged to close this gap and meet the demand.
Startup business loans have been created to serve a growing number of entrepreneurs who have previously been underserved by the traditional banking system.
More startup business loan options are emerging in recent years, and here are some of the different forms of financing available in 2022.
With invoice financing, lenders will let you borrow an amount equal to your outstanding invoices.
A loan like this can be helpful for startups with long or variable billing cycles.
Invoice factoring has the same central idea: your business uses your outstanding accounts receivables (AR) for working capital. That’s where the similarities end.
And the factoring company will also take on the collection of the payments from customers.
Sales-based credit is another option for startups and small businesses, especially those with a clear revenue stream.
Sales-based credit can be useful for online businesses, like ecommerce platforms, that do not have assets to use as collateral for conventional business bank loans.
This is when a vendor loans money to a customer to enable them to use the loan as capital to purchase their goods or services. Vendor financing — or trade credit, as it's sometimes known—can be a one-time payment or a credit line. Usually, you can negotiate the interest rate with your vendor, given you are not only the borrower but the customer too.
What if you think you need to borrow and repay the same amount quarter after quarter, or year after year? This is where a business line of credit (LOC) might be useful.
Grants from nonprofits and government agencies are a further option. For example, the Small Business Innovation Research program and the Small Business Technology Transfer support startups involved in scientific research and technological innovation. While grants normally don’t have to be repaid, some do have tax implications. The eligibility criteria can be rigorous too.
There are other government-backed finance schemes to consider too, such as Small Business Administration (SBA) loans. Under this scheme:
With crowdfunding, a startup can secure funding from a potential base of future customers.
Many young and emerging startups are funded by the founders’ personal credit cards.
But personal credit cards quickly hit the limits of their usefulness, once startup expenses, operations, and staff begin to grow.
Business credit cards tend to be a much better fit for most startups and small businesses, because they can offer more generous rewards, cashback, and customized card controls.
A merchant cash advance (also known as a merchant loan) is a loan based on future sales that serve as working capital while you establish your small business.
They should only be considered last-resort financing if your business cannot qualify for any other type of financing.
Lastly, your friends and family could be a source of a business loan too.
But most business and financial advisors caution this process can be fraught with risk. For example, non-payment can create rifts in important personal relationships and put your business in strife.
Startup owners need to have a clear picture of the business’s financial performance before they start talking to potential lenders. Having good reporting around current (and projected) cash flow is a good place to start.
Most lenders will want you to have specific (even measurable) plans for how funds will be used. Create a detailed budget, setting out how and where you plan to spend the loan. If you can pair this with a detailed business (and business continuity) plan, even better.
Here are three points to bear in mind while you research any startup loan requirements.
Lastly, be sure to check the following features when browsing lenders’ loans. Customize this checklist to your own needs by adding in your targets for the criteria. The more ‘ticks’ you can give a lender, the likelier they are to be a good fit for your startup.
There comes a point in every business when you need external cash.
Maybe everything at the business is plain sailing. Or maybe it needs a little help charting its path through some choppy economic waters.
While new startup business loans emerge each day, they’re not always the right fit. If you've explored startup business loans many times before, you might have experienced some frustration with the process. You may have felt:
Ramp’s corporate cards and finance automation are an alternative to startup loans. Paired with expense management tools and SMB financing opinions, our corporate cards give small businesses ways to manage costs, reduce wastage, and protect their bottom line.