Where to Look for Start-Up Business Loans

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Updated on Wednesday, March 14, 2018

There are many ways to obtain funding for your small business, and they come in many forms — from business loans, personal loans and credit cards, to grants and crowdfunding. The key is to find what’s right for you and your business.

According to the Small Business Association (SBA), 73% of small firms used financing in some form in the past year. These funds could come from loans, other sources or even personal savings.

In reality, most small business owners are going to one primary source to get their business off the ground: their personal wealth.

In the same survey of business owners, the SBA found that more than half (57%) of small business owners used their personal savings as a source of capital.

“There are numerous sources of capital available yet too often we see start-ups, especially those run by women, tapping into their person credit for funding and financing,” said Kathy Warnick, National Association of Women Business Owners National board chair. “Not only is this potentially personally detrimental, but it can also make it difficult to receive funding from an outside source as your business grows.”

In this guide, we’ll explain all the different ways you can fund your start-up — and help you determine which strategy is best for you.

Choosing the best funding source for your business

One of the first steps in looking for funding is asking yourself some questions. Here are a few to figure out what you need and what the best options are for you.

  • What do I need this money for?
  • How much money do I need?
  • What’s my credit score like?
  • Does my product have enough social drive to power a crowdsourcing effort?
  • If I get a loan, how long do I think it will take me to pay it back?
  • How quickly do I need these funds?

Everyone has different needs and their own unique situations, which is why it’s important to take some time to think about them. If you need a smaller amount of money and your personal credit score is in good shape, a credit card for your business might seem like the right choice.

In fact, according to the SBA, more than one-third (39.5%) of non-employer firms needed $5,000 or less in capital. Even among firms with employees, one in five said they needed $5,000 or less.

Finding the right start-up business loan

After answering the questions above, perhaps you think a business loan is the right way to obtain the funds you need. The next step is to figure out which type of start-up business loan is best for you and fits your needs.

Here, we’ll take you through the advantages and disadvantages of certain types of start-up business loans.

SBA Loans

Best for: If you need more money for larger purchases and investments, an SBA loan might be a better option for you, but you’ll have to contend with strict eligibility requirements and more paperwork.

An SBA loan is a loan lended by the Small Business Administration, a government organization that was founded as part of the Small Business Act of 1953. The Small Business Act created the SBA with the purpose of aiding, counseling and protecting the interests of small business concerns. The SBA helps all sorts of businesses and now specializes women, minorities and armed forces veterans.

How SBA loans work: Although it might sound like an SBA loan is receiving money from the SBA, that is not actually the case. The SBA doesn’t lend money. The money is loaned from a bank and that loan is backed by the SBA.

The process for acquiring an SBA loan varies from person to person and business to business. This timeline can be longer or shorter depending on how prepared you are. The SBA offers a guide to help you through this process called the Build Your Business Plan tool. If you already have a business plan, this puts you a step ahead and can accelerate the process for you. According to the SBA’s application timeline, the loan amount you are requesting can also affect the time period. They suggest expecting to wait at least two to five months from start to finish.

The repayment period also varies and depends on several factors, which include the type of loan, the amount of down payment and the amount requested. For example, according to the SBA, an SBA microloan would have a maximum loan term of six years. An SBA microloan of more than $10,000 could not be charged more than 7.75% interest, while a microloan of $10,000 or less could not be charged more than 8.50%.

Pros:

SBA loans have several advantages:

  • They typically have competitive terms with rates and fees similar to non-guaranteed loans.
  • SBA loans also offer counseling and educational opportunities to help you as you take the first steps (or the next steps) in starting your own business.
  • SBA loans generally require lower down payments, which is a huge bonus if you don’t already have a lot of cash at hand.
  • Requirements for overhead (expenses such as run, repairs, utilities) are flexible, and, in some cases, no collateral is required.
  • Depending on several factors, including your needs, you could receive anywhere from $500 to $5.5 million in funding for your business.

Cons:

  • Strict eligibility requirements (see below)
  • They can require a lot of paperwork. See the SBA Loan Submission checklist.
  • You won’t be allowed to receive funds from another lender.

Let’s expand on some of the “catches” that come with SBA loans that could be a disadvantage for you, starting with those eligibility requirements.

According to SBA.gov, “eligibility is based on what a business does to receive its income, the character of its ownership, and where the business operates.”

Here are some of the requirements for an SBA loan:

  • Your business must be for-profit and operate legally in the U.S.
  • You (as the business owner or loan applicant) must have invested equity which can come in the form of time or money.
  • They can require a lot of paperwork. See the SBA Loan Submission checklist.
  • But perhaps the biggest disadvantage is that you will not be allowed to receive funds from another financial lender. Meaning, if you were hoping to get an SBA loan for $50,000, you can’t go get another loan for the bank for $20,000.

Another disadvantage is having to wait. Depending on your business needs, you might not be able to wait 60 to 90 days. “Be aware and prepared,” Warnick told LendingTree. “Waiting for funding to kick in can be a challenge and requires patience.”

If you are eligible, then an SBA loan is certainly something to consider. Although they might be hard to qualify for, if you do qualify, the advantages are aplenty.

Microloans

Best for: If you’re not seeking a whole lot of funds for your business, just enough to get your started — or keep you going — a microloan could be the best option for you. But it is important to consider factors, such as your credit score, your needs and of course, other options before making a final decision.

If the amount of capital you’re seeking is, well, micro in nature, a microloan might be your best option. Microloans are loans for small amounts and are given to small businesses with either one or few employees.

Microloans can come from several sources, including but not limited to the SBA lenders; Accion, a global nonprofit organization; Kiva, a nonprofit lender; and others.

These are some pros and cons of microloans:

Pros:

  • Good for people who don’t have a good business credit score.
  • Microloans may help your business establish credit.
  • Microlenders can assist you through the process.
  • Because the amounts are smaller, you have less to lose in the event that things don’t pan out the way you expected.
  • The interest rates can be low or even nothing. For example, Kiva offers some microloans with zero percent interest.

Cons:

  • The amount of funds received might not be as much as you would have hoped for. According to the SBA, “Intermediary lenders must use the funds loaned to them by SBA to capitalize a revolving loan fund from which they must make loans to small businesses in need of $50,000 or less.”
  • Depending from which microlender you are borrowing, you might not get the funding at all. On Kiva, for example, your loan might not be crowdfunded by enough lenders.

Start-up equipment financing

Best for: If you have good credit, and are in need of equipment for your business this might be the best option for you. But it’s always best to consider all of your choices before making your final decision.

One reason it’s important to ask yourself what exactly you need your funds for is because it can help you decide what kind of loan to get. For example, if you plan to open your own restaurant, and you need funds to secure equipment for your kitchen, then start-up equipment financing might be the best option for you. Start-up equipment financing is a loan which uses the equipment you buy as collateral, and it can be obtained through various lenders.

Here are some pros and and cons of start-up equipment financing.

Pros:

  • You can pay off the equipment while making revenue at the same time. Ernie Quilantan, president of the Greater Dallas Restaurant Association, says this is a huge benefit because you’re not stuck waiting. “If you’re a restaurant owner, you can’t do much if you’re saving to buy a fryer and other kitchen equipment,” Quilantan said. “But when you finance your equipment, you can get started and pay it off as you go.”
  • The depreciation of the equipment could be used as a tax benefit in the future.

Cons:

  • You’ll need a solid credit score. (This is only a con if you have a low credit score.) If your credit score is low, Warnick advises you not to get discouraged. “Don’t take ‘no’ personally or let that stop you from pursuing another financing option,” she said. “We believe that by increasing awareness of the financing resources available and being better prepared to demonstrate a pattern of responsible borrowing, start-ups can be better positioned to grow and scale their businesses.”
  • By the time you have paid off your equipment, it might be outdated. “This is a problem because it creates a cycle,” Quilantan said. “On the upside, you’ve improved your credit. On the downside, you’re stuck with old equipment. Then it becomes tempting to your improved credit to finance newer equipment. It can be hard to get out of this cycle, especially if you’re not bringing in enough profit.”

Personal loans for business

A personal loan is simply an agreement to receive a certain amount of funds to be paid off in a certain about of time with a fixed interest rate. These funds come directly to you, deposited straight into your bank account. Unlike start-up equipment financing where the funds must be used for equipment, these funds can typically be used for anything. So you can use this money for equipment, marketing, consulting or whatever else you might need.

These are some of benefits and disadvantages of personal loans.

Pros:

  • There has been a rise in online lenders over the past few years, which has made the application process much easier.
  • Depending on the lender, the terms of personal loans can range from 24 to 84 months, like financing a car, which means you would pay it off faster.
  • So long as you make on-time payments, you can improve your credit score.

Cons:

  • Most fees are non-refundable.
  • If you have poor credit, your interest rates could be pretty high.
  • You will be required to provide verification of your income. If you are in the beginning stages of building your business, this could be a challenge.
Best for: If your credit score is in good shape, this could be a good option for you. What is probably most appealing about personal loans is the benefit of being able to do what you want with the funds. But make sure you weigh the pros and cons of this and other options first.

Pro tip: Develop a relationship with a lender early.

“Perhaps the most important tip for start-up businesses is to develop a relationship with a lender early,” Warnick said. “It is important if at all possible to develop a relationship with your lender early so they can grow into the business with you and the funding you need can more easily increase as you scale.”

Other sources of funding

Sometimes loans aren’t the best moves for your business. If that’s the case, consider three other options to obtain the funds you need for your business. While this guide focuses on start-up business loans, here are a few quick tips about three options that might be more suitable for you.

Credit cards: The pro and cons depend on your credit score (read: interest rates). If this is the option you choose, an advantage is that you can use the money for any business needs once you have it. When it comes to credit cards, Warnick says it’s important to get one early, regardless of whether you need it. “Once you need it you won’t be able to get one — even a small one,” she said. “Use it and pay it down to zero at least once a year. Show a pattern of responsible borrowing. It will go a long way as you grow and will make it easier for the bank to increase the borrowing limit.”

Check out our list of best small business credit cards here.

Grants: Grants can come from many shapes and sizes such as Grants.gov, the SBA Women’s Business Center, the Economic Development Administration, the National Association for the Self-Employed and many more. The hard part is determining your eligibility, but if you qualify, grants are great because usually you don’t have to pay them back.

Crowdfunding: As mentioned at the beginning of this guide, crowdfunding is a great option because it combines marketing and funding. This usually works best for a new product, so it might not be your best option if you’re a restaurant owner. But you never know. Places like Kickstarter are great places to begin if it’s something you want to consider.

Next steps: How to use start-up business loans

So you made your decision on which start-up loan to get or where to get your funds from. Now what? Take some time to re-evaluate what your needs are and be sure to prioritize them. Your priorities will differ. You might prioritize in order of more expensive needs to least, or in terms of what you need first.

Here are some things to consider:

How much do I need to borrow?

It might be less than you think. The amount of capital differs for everyone based on your needs, which can be difficult to estimate when you’re just starting out.

According to the SBA, 39.5% of non-employer firms needed less than $5,000 in capital. For firms with employees, 22.5% of those firms also needed less than $5,000, while 7.3% of firms with employees needed anywhere from $250,000 to $999,999.

Where will I work?
Do you plan to work from home or rent an office? Think about whether a co-working office space would make sense for your business. If you plan to open up a brick-and-mortar shop, will you be building a new location entirely or renting a space? How much will that cost?

What do I need?
Then think about all of the equipment you will need for this location, from computers to furniture and everything else. Will you need a warehouse to store merchandise?

How will this grow?
What steps do you plan to take to ensure the growth and success of your business? Will you advertise? And what kind of marketing efforts should you make?

While these questions may seem overwhelming, it’s important to remember that you’re not racing anyone. Take your time to make the best decision for your business. You can’t sprint a marathon!

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