Can Your Startup Get a Small Business Loan?
What is a startup business loan?
A startup business loan is a type of financing designed to assist a new business with its financial demands. The money from a startup business loan can be used for things like working capital, equipment, machinery, supplies, inventory, and furnishings, as well as construction equipment and real estate. Other possibilities for new business owners include business credit cards, certain SBA loans, and crowdfunding.
Obtaining the financing required to fund a new small business’s first growth is one of the most difficult tasks it must overcome.
Small businesses remain the an important source of job development in the United States, but they are far more likely than larger businesses to experience financial difficulties in obtaining financing. You may require money in the form of a small business startup loan in order to get your business up and running.
If you’ve already started looking for a loan, you’re already aware that there are an almost limitless number of small business loan alternatives available from banks and online lenders. Each will have its own set of advantages and disadvantages, and you may have realized that most of the low-cost choices are not available to new business owners without a couple of years of experience, good credit, and/or stable income.
While a bank loan may be your first choice, a typical loan will be out of reach for the majority of new ventures. Banks have strict funding requirements for small businesses, and what they have to give is sometimes unavailable to start-ups. If you have a good business plan in an industry that the bank serves, you may be able to work with your bank to acquire equipment financing or other types of business funding. There are additional financing partners to consider if you are unable to obtain a bank loan for startup costs:
How a Startup Business Loan Can Help You Grow Your Business
When it comes to finding funding for a startup, you may have to think flexibly. Although the Small Business Administration (SBA) does provide some funding for startups, you are more likely to find success through other sources. A typical illustration of this is equipment finance. Some things require cash, and financing (or leasing) the equipment you require helps you to free up cash for those items that cannot be financed.
And, because the equipment is frequently used as collateral for the loan, it’s easier to qualify for than a standard term loan provided you have a decent personal credit score.
With this in mind, consider the following examples of startup funding.
Where Can I Get a Startup Loan for a Small Business?
1. Equipment Financing
Equipment loans are similar to conventional loans in form, with monthly repayment terms over a predetermined length of time. They are specifically designed to pay for the acquisition of equipment and machinery. The proceeds, on the other hand, are utilized to buy equipment or machinery. Because your equipment will be used as collateral for the loan, lending criteria for equipment financing may be less strict other words, if you default, the bank has the power to confiscate your equipment to cover the cost of their lost money. (It’s worth noting that some SBA loans can be utilized to purchase equipment.) The SBA 504 loan, in particular, is beneficial for financing larger equipment and real estate purchases.)
Another option worth considering is equipment leasing. Keep in mind that many of the assets you utilize in your business, such as computers, a pizza oven, or even your restaurant’s furniture, may be leased.
2. Business Credit Cards
The majority of business credit cards come with excellent rewards programs and sign-up bonuses.
A smart advice is to look for a card that has a 0% introductory rate. While you get your business up and running, you can make purchases and carry a debt for 9, 12, or even 15 months without incurring interest. According to a recent Federal Reserve Small Business Credit survey, 53% of small businesses use credit cards to assist fund operations.
3. SBA 7(a) Loans
The Small Business Administration (SBA) mostly guarantees loans rather than making them. Individual lenders must be approved by the Small Business Administration (SBA) before they can make loans through SBA programs.
SBA loans come in a variety of forms, but the 7(a) program, which grants loans up to $5 million, is one of the most popular. If you’re wondering if you can acquire an SBA loan to establish a business, keep in mind that 17% of the money provided to small businesses through the 7(a) loan program went to new businesses in the 2020 fiscal year.
Obtaining an SBA loan isn’t a quick or simple procedure, however the SBA Express loan program (which typically offers loans of up to $350,000) seeks to help.
A number of prerequisites must be met, including appropriate credit. There is no minimum personal credit score, but the SBA needs a minimum FICO SBSS credit score of 155 for 7(a) loans of $350,000 or less to avoid a manual credit check. (This commercial credit score can factor in the personal credit of numerous owners as well as the company’s corporate credit.) The scale goes from 0 to 300.)
SBA 7(a) loans for startups are more likely to go to business owners with industry experience (a veterinarian starting her own clinic, for example) or those buying an existing business, such as a franchise.
It’s a financing option worth looking at because the terms are advantageous.
As previously stated, SBA 504 loans may be beneficial to businesses looking to purchase real estate or equipment, whilst SBA Export Loan programs may be available to businesses looking to engage in foreign trade. Find out more about SBA loans by clicking here.
4. Small Business Administration Microloans
Approved intermediaries, such as community development finance institutions (CDFIs) and other non-profit organizations, make SBA microloans. The highest loan amount is $50,000, while the typical loan amount is closer to $14,000. A term loan, an SBA microloan has a maximum length of 72 months and an average tenure of 40 months.
Working capital, inventory or supply purchases, machinery or equipment purchases, or fixtures and furniture purchases are all possible uses for funds.
5. Additional Microlenders
The SBA isn’t the only way to get a loan from a microlender. Microlenders are frequently non-profit organizations that provide tiny businesses with access to small-scale loans. When it comes to microlenders, have a look at these two possibilities:
- Accion: Accion’s CDFI partners offer loans ranging from $300 to $250,000. It has a reputation for being flexible with credit standards and assisting candidates.
- Kiva: Kiva is a community-based, trust-based lending platform. Small business owners can crowdfund up to $15,000 in business loans from generous individuals. These loans have a 0% APR and are available to struggling entrepreneurs who have demonstrated their character, invited their own network of lenders, were unable to access other financial resources, and have a business with a positive social impact.
- Invoice Financing
If your clients pay you via invoices, invoice financing (as opposed to invoice factoring) is a straightforward, albeit often expensive, approach to avoid cash flow problems caused by long invoice cycles. This is a quick alternative that requires little documentation. You can obtain your finance in as little as a day.
Crowdfunding sites such as KickStarter enable anyone with a vision, including entrepreneurs, to raise funds for their idea or endeavor.
There are three basic types of crowdfunding that businesses can take use of:
- Rewards (e.g. Kickstarter, Indiegogo)
- Debt (e.g. Kiva)
- Equity (e.g. Wefunder)
A business startup seeking cash through crowdfunding will need to discuss its goals and objectives with a broad group of individuals in the hopes of receiving investment from a large number of people (the crowd). These campaigns require a significant amount of marketing effort, but the end result, if you are successful in raising funds, is startup funding and validation of your business idea by a large number of possible future consumers. For businesses trying to raise up to $5 million, equity crowdfunding may be a more accessible funding source than angel funding or venture capital.
- Funding from friends and family
Personal funding is a realistic choice for many small business owners, and it is one of the ways they obtain funds. However, utilizing personal savings or personal loans is a risk, and you’ll need to carefully calculate all of your costs to ensure that you don’t run out of cash before the business can sustain itself. Even if you start with personal cash, we recommend that you begin establishing business credit as soon as possible. As a result, you’ll be able to start leveraging business credit and gain access to more financing in the future. The business should be able to function independently of personal assets and credit. When it comes to personal fundraising, you have a few options:
- Personal Credit Cards: If you can’t get a business credit card (which we prefer over a personal card), a personal credit card (or two) with a reasonable credit limit will help you get your business started. Keep a tight check on your credit utilization and make timely payments, as putting business costs on personal credit cards might harm your personal credit scores.
- Savings/Home Equity: Using your savings is even riskier, but if you have a substantial amount saved away, this may be the most cost-effective alternative for you. Borrowing against your home equity is a low-cost but high-risk choice.
- 401(k)/IRA Savings: You may be able to take money out of your retirement accounts, borrow against a 401(k), or use a ROBS plan to transfer money from your retirement accounts to your business. Keep in mind that risking your entire retirement assets on your brand new firm may not be prudent.
- Family and friends: Family members have aided in the funding of many businesses. In fact, it’s one of the most important sources of startup money for early-stage businesses. If they’re willing, family can be a terrific, supportive backer for your new enterprise if you tread gently and don’t put pressure on them. (An alternative is to invite them to be the first backers in your crowdfunding campaign.)
Small Business Loans: Pros and Cons
It’s possible that it’ll assist you expand your firm more quickly.
Acquires equipment, inventories, retail or warehouse premises, and so forth.
For capital-intensive businesses, it’s a must.
It may be costly.
The business could fail, and the owner could be personally liable for the debt.
How can I get a business loan to start my own business?
You know where you want to end up, but how do you get there? Start with your personal credit ratings and your business credit scores, which are indicators of your business’s creditworthiness. Nav allows you to check both your business and personal credit scores.
A strong credit score can put you in a much better position than a low credit score, so if you want to increase your business credit score, be willing to put in the effort.
It’s also crucial to consider your business from the lender’s perspective:
- Is the type of business you’re establishing risky?
- What is your background or area of expertise? What’s your credit history like?
- How quickly will the business turn a profit?
- Is there any equipment or assets that can be liquidated if the business fails?
Many of these questions can be answered by a well-designed business plan.
After that, you’ll need to decide the form of startup financing you want. Before you start gathering documentation for your business, figure out what the lender will be looking for; a microloan application will likely be significantly different from a business credit card application. Knowing how much you can afford in monthly installments will help you limit down the types of financing you’re interested in.
You can start filling out the application once you’ve decided on a loan type and lender. This won’t take long if you’ve done your homework ahead of time.
Choosing the Appropriate Amount of Funding
Begin by asking yourself, “What do I require the funds for?”
Let’s call your response your “loan purpose.” Calculate how much it will cost to achieve your financing goal, and that is the amount you should be looking for. You are more likely to acquire the money you need if you can properly define your loan objective to a lender, your crowd fundraising campaign, the SBA, or your uncle Fred, rather than simply searching for “as much as I can get.” Furthermore, you will escape the financial stress and consequences of borrowing more money than you require.
What are the requirements for obtaining a small business loan?
Although each lender’s requirements differ greatly, you should be aware of the following:
- Updated company plan that includes information on your expansion and marketing initiatives.
- All three major credit bureaus provide personal credit reports and ratings. (The lender will get their own copies, but it’s a good idea to double-check.)
- Details on future cash flow and costs are included in the business projection.
- Returns and accompanying IRS papers for both your business and personal tax accounts (if available) (including personal documents for all owners or registered agents of the business).
- Any licenses and registrations required to conduct business in your state.
- Any and any financial documents that might be considered relevant (including bank statements, credit card sales, unpaid invoices, and accounts receivable due to you, if available).
- Any legal agreements that might be important (franchise, incorporation, leasing).
You may not have business credit reports or even business tax records as a new business. Personal credit, tax returns, and/or a personal financial statement may be used by the lender in this situation. If you’re buying an existing business, however, the lender will almost certainly want information about it.
You may need to wait once you’ve submitted your application. Some financing alternatives can be granted in minutes, while others may take weeks or months to complete. Before you start the application process, be sure you understand how long you’ll have to wait. You don’t want to put your critical business needs on hold or miss an important deadline while you wait for a loan to be approved.
How Can I Get a Bad Credit Startup Business Loan?
Lenders will have to rely on your credit scores to help establish their degree of risk if you haven’t been in business for at least two years and have solid sales. A bad credit business owner will have a difficult time qualifying for practically any loan. Many microloan and crowdfunding possibilities, on the other hand, are worth investigating because they may be available to business owners with poor credit or no credit.
Final Thoughts on Business Loans for Startups
Running a small business can be challenging, and for many entrepreneurs, establishing a firm is the most difficult aspect. While finding a lender to borrow from can be difficult, don’t assume it’s impossible to get a beginning business loan.
Don’t be frightened to look into other types of financing. Nonprofit lenders with microloan programs can be a good fit for your business or using a business credit card might be worth it if the interest rate is low. Business credit cards can assist your business build good credit and, if necessary, bridge cash flow shortfalls.
Whatever path you take, be prepared and conduct thorough study and due diligence before applying for a loan. Even if you’ve been authorized for a high credit limit, be realistic about your business and your capacity to repay the loan.
Above all, remember why you started the business in the first place. Finding and getting authorized for a starting business loan might be difficult, but with the proper motivation and the appropriate business, you can get through it and finish the job.
G-Force Funding may be able to provide you with a start up loan if you have been in business for at least 3 months.
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