A guide to startup business loan requirements in 2023

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't do any of that without the right finance. There are thankfully a lot more options for small business financing in 2023. 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 the most common startup business loan requirements.

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:

• Loan requirements
• The underwriting process
• Business loan vs line of credit
• Working capital financing
• Inventory financing
• Equity financing
• Accounts receivable financing‍

What are startup business loans?

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.

Why are startup business loans useful?

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.

Who uses startup business loans?

Startup business loans have been created to serve a growing number of entrepreneurs who have previously been underserved by the traditional banking system.

12 different startup business loans

More startup business loan options are emerging in recent years, and here are some of the different forms of financing available in 2023.

1. Invoice financing

With invoice financing, lenders will let you borrow an amount equal to your outstanding invoices.

• With this form of accounts receivable financing, your business still owns the invoice and still collects the payment from your customer.
• Invoicing financing providers typically charge a percentage fee on the principal for the duration of the outstanding invoice.

A loan like this can be helpful for startups with long or variable billing cycles.

2. Invoice factoring

Invoice factoring has the same central idea: your business uses your outstanding accounts receivables (AR) for working capital. That’s where the similarities end.

• Invoice factoring involves selling your outstanding invoices to the factoring provider.
• The amount you’re paid will be less than the amount you billed your customer.

And the factoring company will also take on the collection of the payments from customers.

3. Sales-based credit limits

Sales-based credit is another option for startups and small businesses, especially those with a clear revenue stream.

• For example, Ramp can assess your sales data from Shopify and Stripe to provide limits up to 30 times higher than other loans.
• These limits — and interest rates — are based on participating businesses’ actual performance instead of bank account balances.

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.

4. Vendor financing

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.

5. Business line of credit (LOC)

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.

• LOCs enable your business to borrow different amounts at different times that add up to a specific limit. You need to repay the money within a specific time frame.
• And once you do so on time and in full, you can borrow in the same way again, up to that same pre-agreed limit.

6. Startup business grants

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.

7. SBA loans

There are other government-backed finance schemes to consider too, such as Small Business Administration (SBA) loans. Under this scheme:

• Participating lenders must follow SBA guidelines for small business borrowers.
• Some loans do not require collateral, but the process can be long and rigorous.
• Some SBA loans include business education and counseling services for owners.

8. Micro-loans

• Microlending is when state and federal agencies, fintech platforms, and nonprofits lend to specific communities or demographic groups. These loans are typically less than $50,000.
• Micro-loans may come with more affordable interest rates and favorable loan terms, to support financial inclusion among businesses in various communities.

9. Crowdfunding

With crowdfunding, a startup can secure funding from a potential base of future customers.

• Startups can use popular platforms like Kickstarter to pitch their ideas to ‘micro investors,’ who can then fund the development of a product or service.
• This option is often best reserved for stealth-mode startups or beginner entrepreneurs looking to establish the viability of their idea.

10. Personal credit cards

Many young and emerging startups are funded by the founders’ personal credit cards.

• It’s an easy fit in the early days because the business can pay for all kinds of business expenses, with a continuous and regular source of credit.
• Founders can also tap into loyalty and reward programs, and make savings on travel, dining, and accommodation.

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.

11. Merchant cash advances

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.

• Small business borrowers must then share a portion of their regular revenue with the advance provider until the amount is returned in full.
• MCAs are an expensive form of credit that can put your business in an even worse financial position.

They should only be considered last-resort financing if your business cannot qualify for any other type of financing.

12. Startup loans from family or friends

Lastly, your friends and family could be a source of a business loan too.

• Initially, borrowing from a friend or relative is often simpler than going the bank route.
• You probably won’t face credit checks, and it’s less likely you’ll have forms to fill out. You might even pay zero interest.
• Repayment terms might be more flexible too, depending on the strength of the friendship or family bond.

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.

What do you need to get a business loan? [requirements + checklist]

One of the biggest requirements for a business loan is to have a clear picture of the business’s financial performance before you start talking to potential lenders. Having good reporting around current (and projected) cash flow is a good place to start.

Top startup business loan requirements

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 small business loan qualifications to bear in mind while you learn about how to qualify for a business loan and research any startup loan requirements.

• Revenue matters: Favorable interest rates on startup loans are usually reserved for businesses with strong revenue and a good credit score. lenders will want to see that your business has a steady revenue stream to confirm your business loan eligibility, supporting a positive cash flow. They may ask you for proof of sales and a detailed profile of your existing customer base.‍
• Collateral is key: Many lenders will require collateral in the form of personal assets or business equipment. Be sure you’re comfortable with any collateral you put forward for a loan, and bear in mind you could lose the asset if you're unable to repay the loan.‍
• Debt will be a factor: Make sure existing debt is at a reasonable level.Among the long list of new business loan requirements, most lenders will want to see a debt-to-income ratio of no more than 50%, which means your monthly repayments should be less than 50% of your monthly income.

Startup business loan checklist

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.

What if a startup business loan still doesn’t feel right?

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:

• Uncertain about what amount is needed
• Concerned about applications or eligibility
• Confused by lending terms and fees.

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.