Cash is scarce, especially when you want to start a business. However, getting a startup loan makes it easy for you to kick off your desired venture. What do you need to know about startup business loans?
What is a startup business loan?
A startup business loan entails a financing arrangement that helps you to get upfront capital to start your new business. The loan goes towards meeting the initial business needs of your venture. You can either consider getting an SBA microloan, business credit cards, or asset-based financing, among other startup loans.
In the initial stages of a business, you can opt for financing. Even though you can start your business with savings, getting a startup loan enables you to cater to the business operations, develop new products, buy assets and raw materials, promote your business, or secure a business premise, among other business-oriented activities. Thus, you can shelve your savings for other uses.
Getting a loan stands as one of the most challenging issues for several startups. Even though new businesses are the largest employer in several countries, they find it hard to get loans compared to larger firms. Several lenders find the startups riskier than established ventures.
If you already have a business idea and a business plan, then know that there are several loan options available in the lending market to help you implement your plan or idea. However, you need to assess the pros and cons of each option.
You also need to understand that several low-cost options are not available for startups. However, you can access them after running your business for a few years, building a solid credit background, or achieving a reliable revenue generation capability.
Getting a loan from banks calls for you to meet their strict lending standards. Also, banks offer their loans to established businesses. However, you can get a loan from lending partners to start your business.
How does a startup business loan work?
A startup business loan is ideal for businesses that are less than 24 months old. You do not need to have a business history to get the loan. However, the loan does not have a standard definition because it depends on the business that you want to start.
Your business needs determine the type of startup loan that you need to get. Some startup loans will be more helpful in meeting certain business objectives than others. For example, equipment financing loans help you buy a business vehicle, copier, scanner, or a kitchen oven, among other equipment. It is difficult to meet such needs using an invoice factoring loan.
However, there is an array of startup loans in the market. So, you need to browse for one that suits you best. You should go for the lenders that understand the uniqueness of your business, support your efforts, deem you a strategic partner, and have an excellent reputation.
The amount of startup loan you get depends on your professional profile, project’s viability, financial strength, and your guarantee. You need to have carried out due diligence, have a realistic business plan, have a breakdown of financial projections, and sign a personal guarantee.
Does a startup loan make sense for me?
The answer is YES.
It is easy to cater to your business needs after getting the loan because you will have ready capital.
You will also retain the ownership of your business because you will not require investors that ask for a share of your venture.
Getting a loan to start your business also gives you a chance to improve your credit record. Ensure that you make timely repayment of the loan to get another loan whenever another business need arises.
Last, the loan will enable you to protect your wealth because you will not need savings to start up your business.
The different startup business loans
A small business administration (SBA) microloan seeks to empower women, veterans, low-income earners, and minority entrepreneurs to start a small business. You can get up to $50,000 to start your business from intermediary lenders that receive funding from the SBA program.
Also, the lenders provide technical help to enable you to understand the dynamics of the business world.
Asset-based financing provides you with cash to buy business assets, such as machinery, equipment, and vehicles. Also, the loan helps you to release value from your assets because you use them as collateral.
If you have already sold your products or services on credit, you can use the businesses outstanding invoices to get financing. The funding that you get is against the strength of your account receivables. Again, you can sell the invoices at a discount thus gaining from the sold invoices.
You can also get upfront capital from a business credit card. The issuer will only check your credit scores and your business and personal income. Did you know you can get a business credit card with a 0% introductory offer? Hence, you can enjoy a certain period of not paying interest while your business continues to run.
You can also get a startup loan against your income. All you need is a good personal credit score to get a personal loan for starting your business. However, you need to ensure that the loan that you qualify for will be adequate to cover your business costs.
What are the requirements?
- A for-profit business (except non-profit children-care centers).
- A credit score of above 575.
- Repayment ability.
- Excellent character.
- A personal guarantee as personal assets.
- Collateral: either account receivables, inventory, purchase orders, machinery, equipment, commercial real estate, marketable securities, or intellectual property.
- A credit score of over 600.
- $100k in business revenue.
- Over 11 months in business.
- A running business, especially a limited liability company.
- Commercial and government customers with good credit scores; 10%-15% profit margins.
- Invoices free from encumbrances.
- No open bankruptcies.
- A payment plan for any tax lien.
- Good personal character.
Business credit card
- Legal business name
- Business contact information
- Industry type
- Legal or business entity structure
- Business age
- Number of employees
- Federal tax ID
- Annual revenue and monthly expenditure breakdown
- Total annual income
- Personal information
- Personal credit history
- Personal guarantee
- Loan application
- Identity proof
- Income and employer verification
- Proof of address
How to apply for a business loan
To get a startup loan, you need to:
- Prepare your business plan and financial requirements.
- Prove that you have a repayment plan.
- Provide a security/collateral when the lender asks for it.
Common Asked Questions About Business Loans
Where can I source for a startup loan?
You can get the loan from banks, investors, and credit unions.
What are the requirements?
Each loan has its unique requirements that include collateral, excellent character, high credit scores, and the ability to repay the loan.
What if I do not have any collateral and my credit scores are low?
You can still get a startup loan. Some financial institutions offer the loan without asking for collateral or considering low credit scores.
Which is the most difficult loan to get?
SBA loans have a lengthy process, and they are the most difficult loans to get.
Should I get a line of credit for my business instead of a startup loan?
One advantage of a line of credit over a startup loan is flexibility. You can deal with cash flow problems easily. Also, a line of credit is cheaper than other alternatives.
What options do I have if I do not meet the requirements for a startup loan?
If you do not qualify for a business startup loan, then you can opt for other options, such as peer lending, use your savings, get a loan from friends and family, or apply for a grant.
Are startup loans with banks better than with financial institutions?
Even though your obligation ends after making a full payment of a bank loan, it is tough to qualify for the loan. Also, the interest rates of a bank loan are often high. Thus, try to explore other financial institutions.
You are spoiled for choices when getting a startup loan for a new business. Try SBA microloan, asset-based financing, invoice factoring, business credit card, or personal loan. So, do not sleep on the business idea that you have. Get a loan and implement it.