How Do Startup Business Loans Work?

By: Jilly Pretzel

It’s no secret that funding a new business can be confusing, complicated, and downright scary, especially for someone with little business experience. You’re out there, with a great idea and a ton of gusto and just as soon as you think your startup might really be going somewhere… you realize that you’re going to need more money. Enter, a startup business loan.

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Now, remember how we said that funding a new business could be confusing, complicated, and downright scary? Well, startup business loans are not a cut and dry one-stop-shop. In fact, they can come from different places and in all shapes and sizes. They can come in the form of Microloans, crowdfunding, small business grants, and more.

And while it might sound like there are a lot of opportunities for loans, securing a loan can actually be pretty tough because, with no business history, funding a startup can be risky.

Here are four different forms of startup loans, and how they work:

1. Microloans

Microloans are the go-to for many startups. The Small Business Administration’s program offers small businesses anywhere between $500 to $50k.

It can be a good amount of working capital to get a small business started, but these work like any other loans: there will be interest and the funds will need to be paid back at a fixed rate.

2. Crowdfunding

While microloans are safe and predictable, crowdfunding can be a creative and exciting way to raise money. You start with an online campaign (usually on a platform like Indiegogo or Kickstarter) and wait for interest.

This option is great because you don’t have to give away ownership in your business and you don’t have to pay interest to those who fund you. It’s a great way to raise money while also getting your product out there.

However, this doesn’t work for every type of business. Crowdfunding usually works best for a product-based business; so if you’re trying to fund your idea for a super innovative backpack, this could be the perfect place for your business. If you’re opening a restaurant, probably not.

3. Small Business Grant

While crowdfunding may not work for every business, anyone can appreciate a small business grant. I mean, who doesn’t like free money? And while a grant may sound like the perfect solution, there’s a catch: small business grants are very hard to get.

There are a limited number of grants and you better believe that every small business in the country is already applying to them. Business owners might as well apply, but most owners should expect to make a good back-up plan.

4. Business Credit Card

Another way to secure capital is to get a business credit card. This can be a great option, especially when a new company is VERY new (like less than a year). A business credit card will allow you to borrow when you need it. The best part? It won’t come with high interest rates and you won’t need to put down collateral.