Securing a startup business loan can seem daunting at first, especially if you are new to entrepreneurship or have never secured a loan before. In this article you will find useful tips on exactly how to get a startup business loan, how to choose the best plan for you, and alternatives to traditional loan routes.
How to Get a Startup Business Loan:
Applying for a loan can seem daunting at first, especially if you haven’t yet amassed major profits to impress lenders. When it comes to getting approved, however, there are numerous ways to obtain the funds you need in order to get your business off the ground. First, consider going to the Small Business Administration for your first loan—they offer many different programs, and it’s been reported that the SBA released $50 million daily last year to help small businesses get started. Although they typically lend up to $50,000, the average loan is closer to $13,000. If you have a few startup costs, one such microloan from the SBA might be the best route.
The 7(a) Loan:
If you’re looking for a larger loan, however, you may want to consider the 7(a) loan, in which a local 7(a) lender loans you up to $750,000, and the SBA supports you with a partial guarantee. Having a good credit score (720 or higher) will be an important part of getting approved for this kind of loan, and business owners must guarantee the loan as well, but if you have both the 7(a) loan can be an ideal way to get your business started.
If you already have good experience with SBA loans, however, you might get a faster loan through the SBA Express program, where you can qualify for up to $250,000 quickly from lenders. To qualify, your business will need to be worth less than $7 million in tangible net worth, and you should be able to provide at least 2-3 years of financial statements. Other programs include the 504 loan program and the 7(m) microloan program, the former of which can loan up to $1 million to those who qualify, and the latter up to $35,000. Read more about SBA loans here.
Although SBA loans can be a great means to getting your business started, there are a few drawbacks. Typically, lenders prefer types of businesses with collateral that can be collected in the instance of loan default. Additionally, it may take at least six months before you are able to obtain the loan. Finally, you will need to go through another lender in order to get the loan from the SBA—either through your bank, a nonprofit, or a credit union.
One alternative to an SBA loan is a personal loan. Personal business loans allow you to borrow money from a single lender, but often come with the downsides of having high annual interest rates, especially for credit scores lower than excellent or good. If you might be able to repay your loan quickly and already have good credit, however, a personal loan might be exactly what your business needs.
With the accessibility that the Internet has provided both lenders and entrepreneurs, many alternatives have evolved allowing individuals to raise money quickly and easily. One such way is through grants; although not the easiest path to financing your small business, some are easier to obtain if you and your business qualifies.
Also known as crowdfunding, sites such as Kickstarter and Indiegogo now allow you to easily raise your startup funds. However, while donors may not expect a refund, a gift or reward is often expected. Investors may request partial ownership of the company. If you have multiple people investing in your business, however, it can be a good way to accumulate the money you need without having to rely on a single lender or accrue enormous interest amounts.
Finally, if traditional and alternative routes still leave you in need, it may be worthwhile to borrow money from friends or family, especially if your loved ones are equally invested in the business venture. If unable to pay back your loved ones, however, it can cause more trouble than high interest payments, so be sure to weigh the risks before making requests.
Whether your first venture or your tenth, getting a good loan can make a huge difference in the ease and growth of your startup business. With a little planning, obtaining a startup loan can be one of the first steps towards success.