Pros and Cons of Startup Business Loans

Got a business idea you’re itching to launch? A startup loan can get your business off the ground by funding your payroll, retail space lease, business equipment, inventory and otherwise. Getting a startup loan can also help boost the impact of whatever personal funds, grants and investments you put into launching your business. 

Unfortunately, startup business loans can be difficult to qualify for, since lenders see newer businesses as risky borrowers – especially if you have low income and little to no repayment history. 

Should I get a startup business loan?

Taking on debt to launch your business idea is a decision only you can make. Taking on debt, of course, comes with risks, but you can make your loan work if you approach it the right way.

A startup business loan might be right for you if:

• You have a good credit score and history. Lenders will be more eager to approve you and offer you better interest rates.
• You have a good revenue stream/projection statement. If you’re upgrading a side hustle or know how much revenue you’ll bring in, a loan can be more manageable. 
• You have a solid idea of how to use the money. If you can demonstrate how the loan will be used to grow your business and revenue, lenders will be more likely to approve your application. 
• You need the money quickly. Crowdfunding and applying for grants can take time, so a loan can get you financing faster. 

A startup loan doesn’t have to be large to make an impact. Even taking on a smaller loan can help you get funding, build credit and establish a connection with your lender, which can lead to future lending opportunities. 

Compare pros and cons of startup business loans

Pros

• Fast access to capital
• Can retain ownership
• Can help build credit
• Tax advantages
• Protect personal finances

Cons

• Risk of default
• Strict eligibility requirements
• Can be costly
• May require a persona guarantee or loan

Pros of startup business loans

There are several main reasons you may want to look into startup business loans.

Fast access to capital

Startup business loans allow you to quickly get your business off the ground. Instead of having to save and invest your own money, or take the time to raise funds, a startup loan can get you financing almost immediately – especially if you have high upfront costs. 

For example, lump-sum options like business term loans or equipment financing are often used for high startup costs that your business needs to run, such as product development, office equipment, payroll or semi-truck financing. 

Retain business ownership

Startup business loans can save you the trouble of finding investors and selling equity, which means giving up partial control of your business. 

Depending on how much equity you sell, you may need to answer to the demands of investors and make decisions that may not align with your business idea, or have to answer for low revenue.

With a business loan, you keep full ownership and can run your business as you see fit.

Build business and personal credit

If you’re only beginning to build out your personal or business credit score, making on-time payments on a startup loan can set you in the right direction. 

Lenders will check both your personal and business credit scores when you apply for a loan. The better your scores, the better a deal you’ll get on your loan, with lower interest rates, higher limits and a better overall chance of approval. Getting your start with a startup loan can set you up for success when you want to borrow in the future. 

Certain types of startup loans are even designed to help new businesses build credit. Secured loans, for example, allow borrowers to take out a small loan in exchange for cash or collateral that the bank can seize if the loan defaults. So long as the borrower makes their payments on time, they can keep their collateral and build credit. 

Get tax advantages

The interest you pay on a business loan is tax deductible, allowing you to save more on business taxes when you file. This isn’t the case if you use personal funds, grants or crowdfunding platforms. 

Moreover, funds received from crowdfunding may be counted as business income depending on the nature of the campaign, which can push up how much taxes you pay. Funds received through loans, however, aren’t considered income. 

Protect your personal funds

If you take out a business loan as a limited liability company (LLC), you have a layer of protection between your funds and your business’s potential failure. If you default on your loan, or if your business goes bankrupt, only your business’s assets will be held liable for seizure and liquidation. Your debt may be discharged in bankruptcy, which means that taking on a loan can prevent you from putting your invested personal funds at risk if your business fails. 

Keep in mind that forming an LLC comes with certain pros and cons, and that it should be considered carefully as there are tax and legal ramifications to consider. In addition, lenders may require you to sign a personal guarantee or to put personal collateral on the line when you take out a business loan, putting your personal assets at risk and eliminating one of the key advantages of borrowing as an LLC. 

What is an LLC loan and how does it work?

LLC loans can allow you to borrow while managing the risk to your personal finances. Here’s what you should know.

Learn more

Cons of startup business loans

There are also several cons to consider before looking into business loans for startups.

Risk of default

If your business doesn’t produce the revenue you expect or turn a profit for a few years, you may not be able to make the business loan repayments. If you can’t make repayments, you run the risk of defaulting on the loan. The lender can then seize any assets you used to secure the loan to repay, and your credit will take a significant hit.

Strict eligibility requirements

Startups may have a difficult time securing small business loans. A typical business loan requirement is a credit score of 600 or higher. Many lenders also prefer to see an established business that’s been around for at least two years and has annual revenues ranging from $100,000 to $250,000 or more.

These requirements can be difficult for startups to attain. According to the Federal Reserve Banks’ 2025 Firms in Focus: Chartbook on Firms by Revenue Size, 52 percent of businesses under two years old have annual revenue of $100,000 or less, with 55 percent operating at a loss. 

It’s possible to find more lenient lenders. For example, some are willing to offer secured business loans to startups, while others may accept credit scores less than 600. But your options may be limited, and you may pay more in interest than an established business with higher credit and revenue.

Costs

Business loan fees and interest rates can also be an extra burden on startups. The best interest rates are reserved for established business owners with good-to-excellent personal or business credit. Riskier borrowers often get charged more interest, sometimes in the range of 30 to 60 percent.

You may also have to watch out for fees, which vary by lender and type of startup loan. For instance, origination fees can either be a flat fee or can be a percentage — typically anywhere from 0.5 percent to 8.00 percent. You may also have to deal with late payment fees, underwriting fees or even maintenance fees. These costs can add up, and you’ll need the capital and a plan to pay for these costs when getting a business loan.

Personal guarantee or lien requirements

To get a business loan, you typically have to sign a personal guarantee. This legal document states you are personally responsible for the company’s debt if you default on the loan. The lender may take you to court to recoup losses if you can’t repay the loan.

If you take out a secured business loan, you will have to provide some form of collateral, which is an asset that you put up to secure the loan and reduce the lender’s risk. The lender will place a lien on the asset, which is a legal claim giving the lender the right to seize the asset if you default on the loan. For instance, if you took out an equipment loan for a semi truck, used the truck as collateral, and defaulted on the loan, the lender could then take the truck.

Defaulting on a loan and losing your personal or business assets is a risk many business owners take. To be sure it’s right for you, you’ll have to make sure you can manage your small business loan well to avoid going into default.

Bottom line

Startup business loans are an option for getting upfront cash to get your business up and running. They may also help build credit, which can lead to more affordable loans down the road, and are tax-advantaged over other forms of funding. 

Make sure to consider all your options before applying, as there are risks to consider, including the risk of default if you can’t make the payments as well as high rates and fees. 

Frequently asked questions

• Is it a good idea to get a loan to start a business?

  While getting a business loan for a startup is risky, many startups need a loan to get off the ground. You may choose to take out a business loan if you have a solid business plan and a product or service that’s highly marketable to your target customers. But if you’re new to the market or don’t have data to back up whether your business will succeed, you may want to start the business first and get a business loan later to help you grow.

• Who offers loans to startup businesses?

  Small business startup loans are offered by banks, credit unions and online lenders. While online lenders tend to be more accessible to startups, it’s worth looking at traditional options like banks and credit unions to see if they’re willing to work with you, as they tend to offer more favorable rates and terms.

• Is it difficult to get a startup business loan?

  It can be difficult to secure a business startup loan if you are going through a traditional bank, which tends to work more with established businesses that have been around for two years or longer. Online lenders are often less stringent, and some specialize in working with startups but may charge high rates and fees.