How To Pick A Loan For Your US Tech Startup

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Last updated on Nov 25, 2021, by Hong Zhuang Reading Time:10 min

To answer this question, you first find out if your startup is eligible for a business loan.

Why?

Unlike VC or angel investors, lenders have strict and clearly defined eligibilities: a startup must

1. be in the business for at least one year
2. Revenue (e.g., most US lenders require annual minimum revenue of $100,000)
3. Financial records
4. Credit history
5. Proof of business longevity

If you are not eligible, we recommend you check another blog to explore more financing options for your startup because lenders will either hardly bend the rules in your case or provide you with a high-interest loan.

Otherwise, keep reading.

The entire purpose of this blog is to help you determine the best loan option for your startup (hardware company or software company or hardware and software company) and prepare you to get the best loan you deserve.

Is A Business Loan Right For Your Startup

The answer depends on how your startup plans to turn its vision into reality and your market condition. Thus you should ask yourself the following four questions before answering this question.

What Is Your Vision For Your Startup?

If your vision is to become the market leader and go IPO, your startup needs to grow big and fast. Thus business loans are not suitable for you, and we recommend you to read our other blog to learn how angel investors or VC can fuel your dream.

Otherwise, you want to delay fundraising to minimize the equity dilution, bootstrap your startup’s growth and use business loans to keep healthy cash flow

How Competitive Is Your Market?

The biggest disadvantage with bootstrapping is slow growth. If your startup faces the following two situations, we suggest you not use business loans and seek other financial options; read our other blog for details.

1. In a competitive market, you should seek investors as soon as you confirm product-market fit to avoid get outcompeted.
2. Bootstrapping can’t support a high market demand. Surge in cash usage can be a blockage to cash flow, leading to run out of cash that will kill your startup.

Is Your Competitive Advantage Strong Enough?

To bootstrap your business, you must have a competitive advantage that would allow you to beat your competitors or new entrants for a more extended time.

How do you know if your startup has a strong competitive advantage?

Competitive advantages are things your competitors cannot easily replicate or imitate from you. You can conduct a competitive analysis comparing your startup with your competitors in the follows:

1. proprietary technology(intellectual property), 
2. effective distribution channel
3. loyal customers 
4. cost Advantage
5. differentiation

This analysis will help you determine if you can continue bootstrapping or seek outside investors to maintain your success.

Can You Afford A Business Loan?

Why is this question crucial?

A significant monthly repayment can kill your cash flow, driving your startup out of business.

You can get an estimation of how much your monthly repayment is by using this calculator, assuming 10% as the interest that is the standard loan interest rate.

How do you know if a business loan will endanger your business?

The debt-to-income ratio is a reliable risk assessment. It is how much of your business’s monthly earnings go to repaying your existing debts. 

For example,

• your gross monthly profits: $14,000
• total loan repayments: $4,500
• The debt-to-Income ratio: 32.14% ($4,500 / $14,000 X 100)

Keeping the ratio below 36% not only will maintain your financial health but also help you get approved for a loan easier because lenders prefer the debt-to-income ratio of 36 percent or less..  

The Advantages Of Business Loans   

Keep Full Control of Your Startup 

When seeking financing, startup founders mainly worry about whether investors will:

1. control of their startups
2. interfere on how to spend their funding 

Investors are the owners of startups and have their visions. If there are vision differences between investors and founders, the above founders’ worries will come true.

But loan lenders are different and only care about whether startups can repay their loans. Therefore, a business loan is a perfect solution for founders who seek both financing and full ownership. 

Tax Deduction

Interests in a business loan are tax deducible when you spend the loan for business purposes. But you can’t deduce the loan interest if you keep it in a bank because the government treats it as an investment.

The Disadvantages Of Business Loans

Loan Amount

Have you considered how much money you need to borrow?

Although lenders can offer up to 5 million loans, the average loan amount is $150,000 for startups.

Why?

After scrutinizing the business, financing history, and ability to repay the loan during the application process, lenders will decide how much money your startup can borrow, which can be most likely less than the amount of loan you want.

Burden On Growth

Lenders favor well-established companies with a good credit history and good growth prospects. They offer them low interest.

To migrate startup failure risks, lenders generally provide loans with much higher interests. A high monthly repayment will strain your cash flow. Since cash is like startup food, with less money, your starving startup will grow slow.

Lengthy Application Process

Three things can slow your application process.

First, deciding the right lender can be time-consuming because you have to shop around, talk with potential lenders, compare loan options, and select a loan you can afford.

Second, preparing for loan required documents eats up your time: writing a business plan for your loan, getting your financial history and forecasts, showing collateral, etc.

Lastly, the approval process can be slow depending on the loan amount because lenders scrutinize your business under a microscope and use many mathematic formulas to assess your repaying ability.

Business Loan Lenders

Lender Selection Criteria

How do you identify your ideal lender?

The rule of thumb is to look at the following criteria:

1. Simple application process. Your potential lender should have minimum documentation requirements to your time.
2. Fast funding. A lender should fund you fast so you can meet the market demand on time.
3. Loan term(interest rate, loan amount, and term length). The best lender should provide a loan tailored to your needs with low interest and a good loan term length.
4. Loan usage restriction. You should have the freedom to spend the loan.  
5. Loan approval rate. You should escrow those lenders with a low approval rate to avoid time waste.

Lender Types

Now you know your perfect lender, you can find a business loan from any of the following four types of lenders:

1. Traditional banks,
2. Credit unions. They are like banks but non-profit and operated by members,
3. Private lending institutions. They are investment companies that lend business loans they borrow from individual investors or banks.
4. alternative lenders, including:

• Online loan marketplaces offer you a loan from an individual bank or private institute or a combination of them.  
• Debt crowdfunding is where you raise a loan from individuals on an online platform.

Lender Type Comparison

Since there are four types of lenders, which one would be the right one for you?
The table below compares how they will match your ideal lender except for the loan term discussed in the loan option section.

	Application Process	Funding Speed	Loan Usage Limit	Loan Approval Rate	Why Choose This Lender
Traditional banks	Complex and long-Need many documents	take up to 6 months	Applicable to Some Banks	13.6%	– Offer all loan types – High loan amount – Long term length up to 20 years – Lowest loan interest
Credit unions	Complex – Need many documents	up to 3 months	no	20.7% -40%	– Founders are a member of a local credit union – Founders have bad credit scores – Reasonable loan interest -Suitable for equipment or commercial real estate loans
Private lending institutions	Quick and straightforward – need a few documents	24 hours – 3 days	no	66.1%	-Founders do not qualify for a bank loan – Founders have bad credit scores – Startups have enough collateral to back the loan – Loan amount $25k-$250k – Funding fast -high-interest rate – short-term loan up to 2 years
Alternative lenders	Quick and simple and Finish in minutes	24 hours – 3 days	No	56.3%	– One year in business – moderately good credit – Loan amount $25k-$500k -Startups have  $25,000 + annual revenue – Loan term length up to 5 years

What Are Business Loan Options For Startups?

How do you determine the correct type of loan for your startup?

Since there are numerous business loans types, we divide them into three categories to help you better understand your loan option:

1) software companies
2) Hardware companies
3) software and hardware companies.

We will dive into each category in the following three sections and suggest you jump straight into the section that fits your startup.

In general, the business line of credit is the best choice for any startup due to the following reasons:

1. Unlike any loan, you only apply once and renew every one or two years.
2. You can borrow anytime for any business use. 
3. There are no payments until you use your credit line, and you can pay interest only.

Loans for Software Startups

Loan Options

Software company’s significant spending is on human capital (i.e., building development and marketing team). In other words, a company needs funding quickly for increased payroll.

You can use two types of loans:

1. Short-term business loan: suitable for short-term payroll 
2. Business lines of credit: good for long-term payroll 

The table below provides the details about the above loans:

	SHORT-TERM BUSINESS LOAN	BUSINESS LINE OF CREDIT
Terms	– Loan amounts from $2,5000 to $250,000 – Repayment term lengths: 2 to 18 months – Interest rates starting at 10%	– Credit amount of $10,000 to $1 million – Repayment term lengths: 6 months to 5 years – Interest rates starting at 7%
Idea Startup Profile	– 2+ years in business – founders credit score => 630 – annual revenue >$150,000	– 1+ years in business – founders credit score => 630 – annual revenue >$180,000

Be cautious! Since both short-term loans and business lines of credit are expensive, we suggest using them only as a short-term solution.

Best Loan Lenders

Because short-term loans require a fast funding time, your bet should be either private lending institutions or alternative lenders.

Here are the top four 2021 business short-term and line of business leaders:

	Lender Type	Loan Option	Loan Requirments	Term
OnDeck	Online loan marketplace	Short-term loan	– 1+ years in business – founders credit score => 600 – annual revenue >$100,000	– Loan amounts from $50,000 to $250,000 – Repayment term lengths up to 2 years – Interest rates starting at 10%
Credibility Capital	Online loan marketplace	Short-term loan	– 2+ years in business – founders credit score => 650 – Strong revenue -business lien and may require a personal guarantee.	– Loan amounts from $50,000 to $500,000 –Repayment term lengths up to 5 years – Interest rates starting at 6.99%
Bluevine	Online loan marketplace	the business line of credit	– 6+ months in business – founders credit score => 600 – annual revenue >$100,000 .	– Loan amounts up to $250,000 –Repayment term lengths up to 18 months – Interest rates starting at 4.88%
Kabbage	Online loan marketplace	the business line of credit	– 1+ years in business – founders credit score => 640 – annual revenue >$50,000	– Loan amounts up to $150,000 –Repayment term lengths up to 18 months – Interest rates starting at 9%

Loans for Hardware Startups

Hardware is a capital-intensive business. It takes a significant amount of money to get products to the market and even more money to scale your company. Therefore the majority of funding for hardware startups should come from outside investors. 

However, cash flow is the lifeblood of hardware companies. Thus, startups often finance invoices or inventories between fundraisings. 

There are three types of loans that can meet the needs:

1. invoice loan
2. short-term loan for inventory financing
3. The business line of credit (either invoice or inventory) 

Loan Options

	INVOICE LOAN	SHORT-TERM BUSINESS LOAN	BUSINESS LINE OF CREDIT
Terms	– Loan amounts up to $5 million – Repayment term lengths: until your customers pay the invoice – processing fee 3% – weekly factor fee until the invoice is paid: 0.23% to 3% – cash advance: up to 85% of the value of your invoices	– Loan amounts from $2,5000 to $250,000 – Repayment term lengths: 2 to 18 months – Interest rates starting at 10% –	– Credit limits of $10,000 to $1 million – Repayment term lengths: 6 months to 5 years – Interest rates starting at 7%
Idea Startup Profile	– 2+ years in business – founders credit score => 600 – annual revenue >$100,000	– 2+ years in business – founders credit score => 630 – annual revenue >$150,000	– 1+ years in business – founders credit score => 630 – annual revenue >$180,000

Beware:

1. An invoice loan is for B2B startups and is ideal for the case that your customers will pay you on time. Otherwise, it can kill your profits quickly because of the weekly factor fee. 
2. You take an inventory loan only if you are confident that you can sell all your products. Otherwise, the loan will strain your cash flow.
3. Always try to use the business line of credit first because you can pay interest only and skip the loan application process. 

Best Loan Lenders

Unless you have a good relationship with a bank, it will be hard to get an invoice or inventory loan from banks. Recent data suggests banks only sign off on one out of four small business loans that come their way.

Thus alternative lenders are a better choice for you. The table below lists the top 2021 invoice loan, business short-term, and line of business leaders:

	Lender Type	Loan Option	Loan Requirments	Term
OnDeck	Online loan marketplace	Short-term loan	– 1+ years in business – founders credit score => 600 – annual revenue >$100,000	– Loan amounts from $50,000 to $250,000 – Repayment term lengths up to 2 years – Interest rates starting at 10%
Credibility Capital	Online loan marketplace	Short-term loan	– 2+ years in business – founders credit score => 650 – Strong revenue -business lien and may require a personal guarantee.	– Loan amounts from $50,000 to $500,000 –Repayment term lengths up to 5 years – Interest rates starting at 6.99%
Bluevine	Online loan marketplace	the business line of credit	– 6+ months in business – founders credit score => 600 – annual revenue >$100,000 .	– Loan amounts up to $250,000 –Repayment term lengths up to 18 months – Interest rates starting at 4.88%
Kabbage	Online loan marketplace	the business line of credit	– 1+ years in business – founders credit score => 640 – annual revenue >$50,000	– Loan amounts up to $150,000 –Repayment term lengths up to 18 months – Interest rates starting at 9%
BlueVine	Online loan marketplace	Invoice Loan	– 3+ months in business – founders credit score => 530 – annual revenue >$120,000	– Loan amounts Up to $5 million – Factor fee:0.25% to 1.7% per week
AltLINE	Bank	Invoice Loan	– founders credit score => 500 –  ability to factor $15,000 worth of invoices per month	– Loan Amounts Up to $4 million – Factor fee: 0.5% to 3% for the first 30 days; maximum of 5%

Loans for Software and Hardware Startups

Software and hardware startups are both capital and technology intensive. Since loans are killers to cash flow, startups should count on outside investors to finance their business. However, from time to time, startups need loans to fund one of the following emergency cases:

1. purchasing inventory to meet a spike in demand
2. temporary financing (invoice or payroll) to release strain on cash flow 
3. testing a new market

There are three types of loans that can meet the needs:

1. invoice loan
2. short-term loan for inventory or payroll financing
3. The business line of credit (payroll or invoice or inventory) 

Loan Options

The table below shows the available loan options your startups can use.

	INVOICE LOAN	SHORT-TERM BUSINESS LOAN FOR INVENTORY AND PAYROLL	BUSINESS LINE OF CREDIT FOR INVOICES, INVENTORY, AND PAYROLL
Terms	– Loan amounts up to $5 million – Repayment term lengths: until your customers pay the invoice – processing fee 3% – weekly factor fee until the invoice is paid: 0.23% to 3% – cash advance: up to 85% of the value of your invoices	– Loan amounts from $2,5000 to $250,000 – Repayment term lengths: 2 to 18 months – Interest rates starting at 10% –	– Credit limits of $10,000 to $1 million – Repayment term lengths: 6 months to 5 years – Interest rates starting at 7%
Idea Startup Profile	– 2+ years in business – founders credit score => 600 – annual revenue >$100,000	– 2+ years in business – founders credit score => 630 – annual revenue >$150,000	– 1+ years in business – founders credit score => 630 – annual revenue >$180,000

As you can see from the above table,

1. An invoice loan can quickly kill your profits and cash flow because of the weekly factor fee. You should avoid it if your customers chronically pay their bills over 30 days.
2. An inventory loan is expensive and can ruin your business if you can’t sell the inventory as planned.
3. The business line of credit should be your best choice because it is flexible and allows you to use it for any emergency cases. Plus, you can only pay the interest when you are pinched for cash.Best Loan Lenders

Best Loan Lenders

Since traditional banks have low loan approval rates for startups, private institutions and alternative lenders have stepped in to fill the gap. In the table below, we list the six best lenders for your reference.

	Lender Type	Loan Option	Loan Requirments	Term
OnDeck	Online loan marketplace	Short-term loan	– 1+ years in business – founders credit score => 600 – annual revenue >$100,000	– Loan amounts from $50,000 to $250,000 – Repayment term lengths up to 2 years – Interest rates starting at 10%
Credibility Capital	Online loan marketplace	Short-term loan	– 2+ years in business – founders credit score => 650 – Strong revenue -business lien and may require a personal guarantee.	– Loan amounts from $50,000 to $500,000 –Repayment term lengths up to 5 years – Interest rates starting at 6.99%
Bluevine	Online loan marketplace	the business line of credit	– 6+ months in business – founders credit score => 600 – annual revenue >$100,000 .	– Loan amounts up to $250,000 –Repayment term lengths up to 18 months – Interest rates starting at 4.88%
Kabbage	Online loan marketplace	the business line of credit	– 1+ years in business – founders credit score => 640 – annual revenue >$50,000	– Loan amounts up to $150,000 –Repayment term lengths up to 18 months – Interest rates starting at 9%
BlueVine	Online loan marketplace	Invoice Loan	– 3+ months in business – founders credit score => 530 – annual revenue >$120,000	– Loan amounts Up to $5 million – Factor fee:0.25% to 1.7% per week
AltLINE	Bank	Invoice Loan	– founders credit score => 500 –  ability to factor $15,000 worth of invoices per month	– Loan Amounts Up to $4 million – Factor fee: 0.5% to 3% for the first 30 days; maximum of 5%

Conclusion

We have shown you the follows:

1. Why your startup growth primary funding should be from outside investors or your revenue.
2. How startup founders should use business loans to smooth cash flow whenever needed.
3. Why the business line of credit is the best choice for financing inventory, payroll, and invoices.
4. How business loans are expensive and can make your startup run out of cash, killing your business.

We hope you can now decide if a business loan is right for your business and select the right lender and business option.

Our mission is to match more ambitious tech startup founders and women entrepreneurs to their ideal investors. If you have any questions, you could reach out to us via email: info@zettasher.com.