Small Business Advice

A guide to loans for entrepreneurs

Are you looking to start your own business but don’t know where to get started? Here is a complete guide to the types of loans for entrepreneurs.

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Starting your own business is an exciting yet labor-intensive process. From hiring a team of like-minded entrepreneurs, market research to finalizing your business plan and meeting with various final institutions before submitting a loan application, it's essential that you know what types of business loans there are available to you.

Generally speaking, if you don’t have extensive amounts of working capital in your personal bank account, chances are you will need to borrow money from a lender to fund your startup. This is why we’ve put together a comprehensive list of loans for entrepreneurs. This way, you can make an informed decision about whether a personal loan or small business loan is right for you and your business needs before booking an appointment with lenders.

Therefore, keep reading if you want to learn more information about which loan to get.

The types of loans & funding for entrepreneurs

Contrary to popular belief, there are several different types of loans, and funding options lenders offer to entrepreneurs so they can successfully launch their business. Let's take a closer look at all the financing options you have available to you in the list below.

Non-Government Loans

Non-government loans are typically offered by financial institutions, online lenders, and credit unions in the form of small business loans and other funding options. Here is a closer look at these types of loans.

1.    Business Term Loan

A business term loan is also known as a long-term entrepreneur loan, where you receive a lump sum amount of money upfront. And depending on the terms of your agreement, you will be expected to make regular payments at a fixed interest rate for a period of time before your repayment is complete.

This is a good option for entrepreneurs who need to purchase inventory, a business location, equipment, and other large items required to begin business operations. However, there are often minor restrictions with these as to what you can allocate the money towards. Additionally, you will need a good credit history and credit score to qualify for a credit union or bank loan.

2.    Working Capital Loan

The next type of loan for entrepreneurs offered by non-government lenders is known as a working capital loan. This is a short-term loan for borrowers who require a little extra money to expand and grow their small businesses. You can also use a working capital loan for everyday expenses and payroll.

However, keep in mind that while working capital loans maysmall-term loans have lower interest rates, your eligibility will be determined on several terms, such as your monthly or annual sales and business credit. A silver lining to this is that if your business credit is high, financial institutions and credit unions are more likely to provide you with a lower interest rate.

3.    Business Line of Credit

AFurther, a business line of credit is similar to having a credit card. This means that it provides you with the flexibility to only pay interest on the amount you withdraw from your total available funds or credit limit.

In addition, you will only need to repay the borrowed money as you can without exceeding your credit limit. Thus, this is a good option for entrepreneurs who want to pay for inventory, have options available to them in case of an emergency, and manage cash flow.

4.    Accounts Receivable Factoring

Moreover, account receivable factoring is a type of business loan that allows you to obtain cash advances by selling your company's invoices. For example, if you invoice clients for services you provide, you may end up waiting for payment.

Therefore, if you can't wait to be paid, you would contact a factoring company and sell your invoice to them. This company would then provide you with a large percent of the invoice total upfront. Afterward, the factoring company would receive payment from your client and provide you with the final invoice amount, minus their fee.

5.    Merchant Cash Advance

The final non-government loan available for entrepreneurs is a merchant cash advance. This provides you with money upfront in exchange for a percentage of any future credit or debit card sales made by customers at your business.

While this provides you with money quickly, most merchant cash advances require you to pay high-interest rates. However, each business is equipped with a risk assessment beforehand to determine what rate you pay. Additionally, if you do not actare not responsiblye with usingfor cash advances, it can put your business further into a cycle of debt.

Government Loans for Entrepreneurs

Furthermore, in addition to loans offered by financial institutions and credit unions, borrowers can also submit a loan application through the U.S. Small Business Association. Here are some of the most common SBA loans applied for by entrepreneurs.

1.    SBA 7(a) Loan Program

An SBA 7(a) loan is the most straightforward loan program provided by the government. It provides you with the flexibility to use the money for diverse purposes and purchases, including:

·      Equipment and machinery

·      Construction

·      Renovations

·      New business real estate

·      Working capital

·      Furnishings for your current business location

·      The acquisition of another company

Moreover, the maximum loan amount for an SBA 7(a) loan is $5 million with fixed terms for up to 25 years.

2.    SBA Microloan Program

Next on our list is an SBA Microloan. With a maximum loan amount of $50,00, these small loans can be used for:

·      Working capital

·      Inventory

·      Furniture and fixtures

·      Equipment and machinery

However, a microloan program cannot be used to pay off any current business debt. Additionally, you will be unable to use an SBA microloan to purchase real estate. Further, the repayment term for this type of loan is 13 years and is typically used by nonprofit organizations.

3.    SBA 504 Loan Program

Moreover, a 504 loan is provided to entrepreneurs who intend to benefit their local communities –whether by creating jobs or fulfilling the need for in-demand products and services within the local market. This is a fixed rate, long-term loan with a maximum loan amount of $5 million.

However, the borrower must be able to provide 10% of the payment upfront for any down payments on real estate ventures. Additionally, there are several other eligibility qualifications a business must meet as well before being approved.

4.    SBA Disaster Loan Program

Lastly, an SBA disaster loan is a low-interest loan provided to businesses who need to:

·      Repair portions of their real estate

·      Equipment and machinery

·      Inventory

·      Damaged or destroyed business assets

Further, entrepreneurs can receive up to $2 million but must qualify for a declared disaster such as floods, hurricanes, and fires.

Alternative Funding Options

On the other hand, entrepreneurs and small businesses can also look into alternative funding options when launching their businesses. Let's take a closer look at some of these options below.

1.    Crowdfunding

Crowdfunding is a standard method used by entrepreneurs to collect startup funding from the public. Through the use of the internet, many entrepreneurs will launch websites and GoFundMe pages to receive donations from others. This is a valuable method of obtaining money without taking out debt for your business and an excellent way to market your business at the same time.

2.    Business Grants

Business grants are another way to receive a lump sum of money to start your business. However, business grants can be competitive and often come with strict requirements. Nonetheless, you will not have to repay the money you receive if you are lucky to collect a grant from someone who believes in your business vision.

3.    Friends and Family

Lastly, as an entrepreneur, you may have the opportunity to receive funding or a loan from friends and family members. However, it is essential to keep in mind that borrowing money from individuals you know may complicate relationships. Therefore, with various options available, it may be worth looking elsewhere before asking someone you know.

How to get a business loan

Moreover, now that you understand the different loans for entrepreneurs, you may be ready to begin the application process for small business financing. However, if you haven’t applied for a loan before, there is a chance you aren’t aware of the required elements needed to do so. Therefore, we have put together a step-by-step list of how to do so. Let’s take a closer look below.

1.    Determine why you need your loan

By determining the reasons why you need your loan as an entrepreneur, it will help you eliminate the ones that are not worth applying for.

2.    Decide which lender you want to use

Once you have collected your documents, narrow down your list of loans that apply to you, you can now shop around for which lender, governmental or non-governmental, will provide you with the best interest rate on your loan.

3.    Collect your documents

With every loan, and regardless of where you apply, lenders will ask you to meet specific requirements and provide documents. These can include:

·      Personal credit history and credit score

·      Your personal taxes

·      Personal financial statements

·      Copies of business license and registration  

·      List of collateral

·      Legal documents

·      Business forecast and plan

4.    Apply for your loan

Now comes the time to fill out and submit your loan application. Keep in mind that some loan applications for entrepreneurs take more time to approve than others. Therefore, while waiting, it is essential that you continue being responsible with your finances, such as:

·      Paying off any existing debt

·      Establishing your business credit

·      Expanding your business assets

·      Optimizing your income

5.    Launch your business

Lastly, once your loan has been approved, you can then officially launch your business and begin your everyday operations.

Frequently asked questions:

To provide you with further information regarding loans for entrepreneurs, here are some frequently asked questions you may also have.

Do entrepreneurs borrow money?

Yes, a good majority of entrepreneurs will borrow money from lenders in the form of loans to start their businesses. This is because while many of us have savings, it often requires thousands of dollars to launch a business.

Therefore, if you do not have any personal capital, chances are you will be required to apply for a loan to purchase real estate, equipment, inventory, pay employees, and more.

Do banks lend to startups?

Yes, it is possible that a financial institution will provide you with a bank loan to launch a startup. However, they will often require you to put forth collateral should your business fail and require you to indicate what your monthly finances are in order to be approved. This is because a large majority of startups fail.

So, banks will usually hold startups to a higher requirement level than other borrowers to ensure they manage any risk. Therefore, it is best to ensure you have a good credit history, credit score, and assets, whether it be financial, real estate, or a car, just in case.

How can I get a loan with bad credit?

Having good credit and responsible credit history is extremely important when applying for any loan. Therefore, the best thing you can do is begin improving your credit score as soon as possible. You can do so by applying for a credit card and ensuring you make monthly payments on time. Alternatively, many online lenders offer more flexibility to entrepreneurs looking for a loan. Further, you may have the opportunity to ask a friend or family member to co-sign on a loan if accepted by a lender.

Final Thoughts on Loans for Entrepreneurs

As you can see, there are several options available for entrepreneurs who are ready to launch their businesses. Therefore, by following the steps listed above, you can begin organizing your finances and preparing for a successful application. 

However, if you are still unsure about which business loans are suitable for you, it is always suggested that you book an appointment with a financial advisor as they can help guide you towards options that make economic sense for you and your business.

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