Small Business Loans
Published October 28th, 2016 by

9 Options to Choose From When Applying for a Small Business Loan

9 Options to Choose From When Applying for a Small Business Loan

If you are thinking of starting a small business, a bank loan might not be the best choice for you. Fortunately, there are many other options if you don’t have the initial money for your startup. This article will talk about nine possible options for small business loans that you could look into if you want to borrow money to start your new business.

There are loan lenders that lend money specifically for small businesses. To know more about them, you should read Small Business Administration or SBA loan provider reviews.

Here we will talk about what option you can use to apply for a small business loan; how you can qualify; and what are the pros and cons of each specific loan.

Retirement Money

If you are looking into starting a small business but do not qualify for bank financing, you could tap into your retirement fund. You could use your 401(k) from when you were still employed or your traditional IRA or your Individual Retirement Account. Some financial experts would advise against borrowing from your retirement fund due to an uncertain market. But according to the CEO of Guidant, David Nilssen, 81% of small business owners, who have borrowed from their retirement money, are still operating their businesses four years after.

To qualify for this type of financing, you should have an appropriate retirement account like the ones mentioned above. And that your retirement account has at least $50,000 in it. Although the balance minimum would depend on the SBA loan providers, the standard money in the account should be at least $50,000.

The advantage of using this type of loan is that you could use your retirement funds without the withdrawal taxes and penalties. And given that this is actually your money, you won’t have any debts to pay off. This type of loan will also have bearing on your credit score.

The disadvantage of this type of loan is that you could be risking your entire retirement money. Especially if the business you are planning to do is not well thought out or has no probability tests done. On the other hand, if your business succeeds, you could be doubling or tripling your retirement money.

Personal Loan

A personal loan is when you borrow money to finance your current needs. With personal loans, you could borrow up to $40,000 with a 5-20% annual percentage rate. You could also use a personal loan to start your business.

Different loan providers have different requirements to qualify for a personal loan. But the basic qualifications are:

  1. A credit score of 650+,
  2. Of legal age,
  3. Has proof of steady income, and
  4. Citizenship to the country where you will borrow the money.

Here are the advantages of using this kind of loan:

  1. The requirements that lenders need are easy to meet.
  2. Most lenders can give you the money in as short as one day up to a week.
  3. There is no collateral.

Personal loans look easy and quick to do but it also has cons, which includes:

  1. It has a high-interest rate.
  2. It is limited to $40,000.

If you are really convinced to start a business, read the current trends in short term business loans that you must know.

Credit Cards

Use of bank loans is the cheapest way to start your small business. But if you are not qualified for an SBA bank loan, you could also use your credit card. According to the National Small Business Association’s 2011 Year-End Economic Report, credit card financing is the third most popular source of money for start-ups.

To qualify for this type of loan, you need:

  1. A federal tax ID number
  2. A credit score of 650+

Here are the advantages of using credit cards for starting your small business:

  1. This is easier to qualify for as compared to bank loans.
  2. This provides easy access to do purchases and do money withdrawals.
  3. You could get rewards for using the credit card and spending money.
  4. There is a possibility of 0% interest rate during promotions.
  5. You wouldn’t need to provide a collateral.
  6. You will receive a monthly report about your spending and the credit card provider will offer assistance for your bookkeeping.

Here are the disadvantages of using a business credit card:

  1. It has an interest rate of 10-20% and the interest rates are not fixed.
  2. There are extra fees that need to be paid.
  3. There is a personal liability agreement. Failure to pay in a timely manner may result in a bad credit score.
  4. Business credit cards have less protection than personal credit cards.

Family or Friend Loan

Family or friend loan is when money is loaned to family members or friends without the involvement of banks, unions and small business loan lenders. To qualify for this, you need to have a family member or friend who has the money and is willing to lend you to start your own business.

The main advantage to this is that, usually, there is no interest placed on the borrowed money. There are also no specific qualifications to meet. This kind of loan is all based on family ties, trust and respect that you will pay what you borrow. The disadvantage of this kind of loan is usually to the lender rather than the borrower. There is a risk that the lender might not be paid, depending on the borrower’s character and the success of the business he or she started.

Venture Capital

Venture capitalism is when money is invested in your startup by investors. The risk in this is with the investors. But most venture capitalists do a thorough research about a business before they put their money in them. This is not a loan but an investment. But you can still use this as an alternative to bank loans to start your business. Here are five things that you should consider before finding the right business loan.

To qualify for this, you need to have a business plan that has the potential to grow big and to grow rapidly. You need to show your investors that what they will invest in you can be returned to them in many folds.

The advantage to this is that the money is not borrowed so you have nothing to pay off. The downside to venture capital is that the investors will have a say in how you run your company because it is their money that you are using. And because it isn’t a loan, you can’t just pay them to get them off your back.

Home Equity Loan

Home equity loan is a kind of loan where you use your house as a collateral in case you are not able to make payments. These are usually used if you have a need for a large amount of money like medical bills, tuition fee or to start a business. This type of loan has a 3-8% annual percentage rate. With this type of loan, you could borrow up to 80-90% of the cost of your home.

To qualify, you need to have at least 20-30% equity of the house and a 650+ credit score.

The main advantage to this is that it has low-interest rates at only 3-8% yearly. The main disadvantage is that you could lose your home if you are unable to pay the loan. If you are very sure of the return of investment on your business plan. You could use this type of loan.


Microloans are loans from SBA loan providers to help start-ups and nonprofit agencies to expand their work. This is usually loaned by individuals or lenders rather than commercial banks and credit unions. With microloan, you could borrow up to $10,000 at 18-35% interest rate.

To qualify, you need to have:

  1. At least 575+ credit score.
  2. No history of foreclosures or declaration of bankruptcy.
  3. Great history with regards to paying rent and mortgage. No late payments.
  4. A proof of ability to pay the loan.

The advantage of this kind of loan is that you can borrow up to $10,000. The disadvantage is that you have to pay enormous rates and it takes 3-4 weeks to be approved.


Crowdfunding is a new way to fund businesses. The fund is raised by collecting money from individuals or small establishments through crowdfunding sites. With crowdfunding, there is no minimum or maximum amount that can be borrowed and there is no interest rate.

To qualify, you have to convince the members of the crowdfunding site that they should invest in your business. The advantage to this is that you have nothing to pay off since it isn’t really a loan. Essentially you are cyber begging, so the money was given to you and you don’t have to pay it back. The con is that it is not very easy to convince people to part with their money especially because they won’t be getting anything in return, just your gratitude.

SBA Loan

SBA loans are specifically created for startups and small business owners. They are offered by the top SBA loan providers. With this, you could borrow up to five million dollars at only 6-9% annual interest rate. Here are seven facts to help you know more about SBA loans.

To qualify, the basic requirements are:

  1. At least 680+ credit score.
  2. A 20% down payment.
  3. Experience in business management and the industry.

The main advantage of this is that you get very low-interest rates as compared to other types of loans. Different lenders will offer different loans so it is important that you read reviews of SBA loan providers to know the interest rate that they will charge you. The top SBA loan providers also give generous terms when you borrow from them. The disadvantage to this is that it is really hard to qualify for small business loans for startups; and if ever you are approved, it will take two to three months before you can get your money.

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