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So you’ve got a great product or service to offer and a well-researched business plan. The next step is to think about small business startup loans. Deciding how to get startup capital is one of the most important decisions you can make for your business. The route you take can even dictate how much equity you have in the business.
Banks can prefer to lend money to more established businesses, but there are still many options for small business startup loans today, and some of them aren’t what you’d think of as traditional loans.
The market rewards businesses that provide value. You might not have the best personal credit, but if you can show a lender that your business is on the right track for growth, you can find small business startup loans. In this article, we’ll look at 10 concrete ways you can find small business startup loans for a variety of situations.
1. Small business loans
Taking out a small business loan through a bank may be an option for your business. This well-known route for small business startup loans can offer good repayment terms if you qualify.
Since these small business startup loans are obtained through a bank, you’ll want to have all of your information ready for the application process.
This includes an expense sheet, business plan, and financial projections for the next five years. These materials help the lender decide if it’s a good idea to fund your business, so make sure your documents are thorough. You should know that they may require you to secure small business startup loans like this with a personal guarantee. This makes you personally responsible for repaying the loan even if your company is an LLC or corporation.
2. SBA micro-loans
An SBA micro-loan is a more traditional way of getting small business startup loans. SBA micro-loans are given in amounts from $500 to $50,000, so it may not be ideal if you need more than that amount (though you can always use multiple funding sources).
The Small Business Association connects businesses with intermediary micro-lenders across the country. The SBA doesn’t administer small business startup loans itself but provides funds to a local management company that you then work with.
Each intermediary can have slightly different requirements for giving small business startup loans. Five intermediaries serve different parts of Texas. To apply for an SBA micro-loan, you can either contact an SBA district office or get in touch with the intermediary for your area directly. SBA’s website also states that they may require business owners to meet certain planning requirements or take business training.
They can use these small business startup loans for working capital, furniture or fixtures, inventory, and equipment. However, the SBA micro-loan program doesn’t let you use the funds to pay existing debts or buy real estate.
3. Small business startup grants
Grants are a little different from small business startup loans. You don’t have to pay them back. To a new business owner, free money is scarce. However, grants are also harder to get than small business startup loans, and they come with restrictions on how you can use the money.
Startup grants are almost run like charities: they each have a specific cause on their agenda. A grant can promote local tourism, green technologies, historic preservation, working mothers, job creation, and more.
It’s rare to find a grant open to any business. Usually, meet certain requirements, more than you would have with small business startup loans. You must create a proposal that shows how the grant is a good fit for your business and its goals. If you’re awarded a grant, there will be stipulations on how you can use the money.
For example, if you get a grant for creating green technologies, you can’t just use the money to pay a lease on a building. You’d have to use it for the research and development of the technology. If you’re looking for small business startup loans, take some time and see if any grants apply to you. The federal government, state governments, local communities or even other corporations like FedEx can give grants.
4. Small business startup loans: Equipment financing
If you’re starting a business that needs to invest in equipment, an equipment loan can come in handy. These are small business startup loans banks gives that for the specific goal of financing equipment.
As we mentioned earlier, large banks can shy away from giving small business startup loans that finance a business in full.
However, they can be more likely to finance part of your startup. To them, it’s less risky to finance your equipment and machinery alone. This is because they use your equipment as collateral for the loan. If your business went under and you couldn’t make payments, the bank would then may seize your equipment.
Equipment financing still works like traditional small business startup loans with monthly payments and interest. They also report the payments to your business credit report and help to build good business credit.
5. Business credit cards
Another option for small business startup loans is to open up a business credit card—or even more than one. If you don’t have any business credit yet, the lender will look at your own credit history to determine approval. Applying for a business credit card is simple and can be done online.
You don’t have to have an LLC or corporation to get a business credit card. These types of small business startup loans are available to freelancers, people who sell on places like Etsy and eBay, Uber drivers, music tutors, people who sell at farmer’s markets, and more.
Your business need not have a revenue stream yet, either. You just need the intent to make a profit.
You’ll need the following items when applying for a business credit card:
- Age of the business
- Your role in the business
- How many employees are in the business (can be 1)
- What industry your business is in
- Business structure
- Tax ID
- The legal name of the business
- Business contact info
- Estimated revenue
- Estimated monthly spend
If you don’t have any business credit built up, you may need to provide a personal guarantee for this small business startup loan option. If your business closes and can’t make payments, the bank can come after you to resolve the debt.
A business credit card might be one of the simplest and quickest options for small business startup loans. It’s also very flexible. As long as you keep your personal and business expenses separate, there aren’t any requirements for what you can and can’t use your business credit card for.
Once you open up one business credit card, other lenders may look more favorably on your applications for more small business startup loans. It’s common to open two to three lines of credit around the same time and double or triple your starting capital.
6. Personal loans
Personal loans can be another effective type of small business startup loans, especially if your business is brand new. They give personal loans like standard loans with interest and monthly payments. In the grand scheme of things, it means personal loans to finance personal expenses, which can include business expenses.
Unlike typical small business startup loans, personal loans aren’t geared towards businesses specifically. When you apply for a personal loan, your credit score is crucial. It’s hard to get approved if you don’t have a decent score. A business loan takes into account things like your revenue, business plan, expected sales, and more. That information doesn’t matter when you apply for a personal loan.
Also, if you have a business loan, you can offer business assets to cover the cost of the loan should you default. But a personal loan allows lenders to sue you for your own assets if you do not pay.
The upside of using personal loans as small business startup loans is that there are fewer restrictions on how you can use the money. If you are a sole proprietor working from home, you could use the money to pay your rent or mortgage, which a business loan may not allow.
7. Small business startup loans: Invoice financing
Invoice financing (also known as receivables financing) lets businesses borrow against their outstanding invoices or the money that their customers owe them. It’s another versatile style of small business startup loans.
For example, let’s say Rob started a new coffee roasting business. Things are flourishing until a big grocery chain wants to put Rob’s coffee beans in their stores. That’s great, but Rob can’t pay to manufacture all of those beans right away. He must expand the business to do so and wonders what options he has for small business startup loans.
What Rob can do is sign the deal with the grocery store chain and then borrow money against that unpaid invoice (typically, larger businesses pay on credit, 30 to 90 days later). A lender will provide invoice financing that lets Rob pay his suppliers and create the product. The lender will collect the money they gave plus a fee when Rob is paid by the grocery store.
Small business startup loans like this don’t work in every situation, but they come in handy if you’re starting a B2B (business to business) or supplier type company.
8. Small business startup loans: Venture capital
If you’re starting a business in a high-growth field that capitalizes on new trends and technology, venture capital might be worth looking into. Unlike traditional small business startup loans, investors give capital for equity in your company. You don’t have to pay the money back, but investors are expecting to make money on the deal. That comes when your business grows and they can sell their equity for more than they originally invested.
Venture capital comes in many forms and can be given by singular investors or small to large firms. One advantage of venture capital is that it’s available to higher risk businesses than small business startup loans usually are. With venture capital, your business plan and supporting documents are the focus. Personal credit scores don’t come into play like in other types of small business startup loans.
9. Crowdfunding and P2P lending
Getting small business startup loans through a normal bank takes time and often isn’t available to everyone. The downsides to traditional bank loans have led businesses to create other solutions like crowdfunding and peer-to-peer (P2P) lending.
Platforms that allow these services (such as Kickstarter and Upstart) don’t give money themselves. Instead, they connect small businesses with a network of supporters or lenders.
Crowdfunding is a small business startup loan useful for companies bringing a new product to the market or doing something creative (like making a movie). Crowd-funders are regular people who contribute a small amount towards the goal. They don’t own any equity but expect a gift or perk for helping you out. A documentary could mention the names of supporters in the credits, while a new product could be sold at a great discount to the first supporters.
P2P lending is closer to traditional small business startup loans, but instead of borrowing money from a bank, you’re borrowing it from other people. People invest in P2P lending sites and hope to get their money back with interest, though there is always the possibility of default.
10. Small business startup loans: startup consultants
If you aren’t sure where to start, startup consultants are there to help. You can work with a startup consultant to secure small business startup loans. They typically require a fee and work on moving an aspect of your business forward.
Business owners can be experts in many areas, but it’s hard to be an expert in everything. Getting the right small business startup loan takes skill, and a startup consultant has that skill under their belt. They also have knowledge and connections in areas that you might not consider. Choosing between small business startup loans can be a hard choice which will permanently affect your business. Working with a startup consultant can help ease the process.
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