Small business funding options: How to secure a startup loan

Mitchell Tessier
Mitchell Tessier
 A man checks his credit card number while making a purchase on his phone.

So you’ve gone to bank after bank for a small business loan, and they’ve all said “no”—for a multitude of reasons, such as a poor credit score or a lack of verifiable credit history. Sound familiar? If so, you’re not alone. Many small business owners struggle to secure that initial source of funding through more traditional financing means, including banks, venture capital firms, and angel investors. 

In fact, 80% of Americans are unable to access equity or debt financing. And e-commerce businesses are often the worst off given they have few hard assets. So what are your options as a founder? That’s where microfinancing and other alternative means of startup and small business funding options come in. 

What is microfinancing? 

The origins of microfinancing came about as a solution for borrowers living in developing countries, typically because their lack of collateral, steady employment, or credit history excluded them from more traditional small business financing options. In the last decades, microloans have helped support entrepreneurship and small business growth across a number of developing nations. 

More recently, however, microfinancing and loans have been much more commonplace in North America. In fact, many private companies and nonprofits offer startup loans—usually up to around $35,000—to support startups and small business owners who normally wouldn’t qualify for bank financing. 

Why opt for microfinancing? 

For many individuals, securing that first $5K can be nearly as difficult as putting in a bid for $5M—especially if you have poor credit or no collateral. According to Intuit Canada, 58% of Canadian small business owners start out with less than $5K, and this figure shoots up to 77% with shops that are run by one individual. Clearly, microloans are in high demand; we’ve put together a few reasons why more and more business owners are considering this alternative small business funding option. 

  • The personal touch: Because microlenders tend to take on more risk, they usually spend more time getting to know the small business owner. 
  • Support from a group: Like crowdfunding, microloans rely on the support of a group. Business owners from many microlending institutions are there to support others, and in some cases are even financially responsible for each others’ loans. 
  • Making every dollar count: When you secure a startup loan, you’re dealing with a small sum in which you’ll need to manage every dime very carefully -- and sometimes that can be an advantage! Too often, businesses secure massive loans that they end up  spending too quickly and in the wrong way. With a smaller loan, you can focus on growth and productivity without stumbling into overexpansion.  

Examples of microlenders in the U.S

The Small Business Administration

Through the SBA you can apply for a Small Business Loan to a maximum of $50K. SBA microloans are term loans, maxing out at 72 months (the average is roughly 40 months). 

Accion USA

Loans ranging from $300 to $25K are available through Accion’s CDFI partners. Credit requirements tend to be more lenient, with many applicants able to receive financial assistance. 

Kiva

This is a debt-based crowdfunding platform in which small business owners are able to crowdfund loans of up to $15K. The goal of Kiva is to help struggling entrepreneurs by offering microlending options and the support of a network of like-minded lenders—particularly targeting individuals who have been unable to secure financing through other means. 

Examples of microlenders in Canada

In Canada, many microcredit institutions are location-based. Here’s a list of some Canadian microlenders that you can qualify to depending on where you reside: 

More small business financing options

Vendor financing

If you’re just starting out, many manufacturers and distributors are now willing to defer payments until inventory has been sold. This Buy Now Pay Later (BNPL) model is a great option for small business owners who need a little more time to get on their feet, particularly to increase cash flow. 

Equipment financing

Equipment loans, like more conventional loans, involve monthly repayment terms over a period of time. The difference, of course, is that your equipment or machinery is used as collateral for the loan. 

Invoice financing

Invoice financing provides businesses with working capital so that they can increase their immediate cash flow. It can be a convenient way to avoid cash flow problems caused by long invoice cycles; keep in mind, however, that it’s a fairly expensive method that requires some paperwork. 

Personal funding

This method does encompass a number of fairly risky financial options, but many business owners have opted for personal financing and found success. This includes personal credit cards (particularly for those who are unable to secure a business credit card), leveraging savings and home equity, and borrowing against a 401K. Finally, don’t forget your friends and family—your biggest cheerleaders are often found right in your backyard!