When you’re starting a small business, there will probably come a time when you need to secure outside funding, whether it’s for inventory, more staff, or leasing an office space. As a startup seeking money, you’ll realize quickly that it’s not so easy to come by. Traditional banks generally don’t want to assume the risk of lending money to an unproven business, and the smaller lenders who are eager to take you on as a borrower may not be reputable, or may have prohibitive terms and interest rates.
You need money to get your business off the ground, but you need an established, profitable business in order to borrow money—so what’s a startup to do? Here are a few ideas for securing a loan to help get your small business running.
Home Equity Loans
If you have a significant amount of equity in the home you own—often at least 80%—you may qualify for a line of credit that you can use for your business.
It’s a risky move for a couple of reasons: 1) you’re putting your house on the line and 2) interest rates on home equity loans are typically higher than those on mortgages. Make sure you have the ability to meet your monthly payments before choosing this option.
Many startup business that can’t get funding from traditional banks turn to nonprofit microlenders, like Accion. Microlenders typically have more flexible criteria for eligibility than commercial banks, which don’t typically lend to business without a proven track record of at least 2-3 years.
Microloans are typically for smaller amounts of money than traditional bank loans—for example, though Accion’s microloans range from $300 to $1 million, the average loan amount is $10,000. Learn more about Accion’s startup business loans.
Small Business Administration (SBA) Loans
The SBA doesn’t lend money directly—they work with banks and other lenders to give startup business loans to companies that might not be able to secure funding on their own. The downside to SBA loans is that the process to secure one can require more documentation than less reputable lenders. Full disclosure: Accion is an SBA Preferred Lender. From the SBA web site:
“SBA's Preferred Lender Program (PLP) includes many of the nation’s largest lenders who do high volumes of SBA lending. These lenders have a proven track record in processing and servicing SBA loans. They use a streamlined paperwork process with delegated authority to approve loans, which expedites the loan approval process for small business owners and delegates the final credit decisions to these lenders.”
Peer-to-Peer (P2P) Loans
Services that allow individuals to loan money to entrepreneurs—generally $25,000 or less—are growing in popularity, due to the speed at which investments can be accessed, low interest rates and flexible requirements.
There are some downsides to P2P lending, however. They are largely unregulated, which can hurt a borrower who may be eager to get money—but not so eager to read the fine print. Also, P2P networks are set up for individuals, not businesses. A business owner who wants to secure a P2P loan must do so as an individual, not a company, which can hurt his or her credit score.
Family and Friends Loans
Getting financial help from the people who care about you can be both a blessing and a curse. Though you aren’t likely to be subjected to the rigorous screening of a traditional bank, you will be expected to pay back the money in a timely fashion—and even if you aren’t, it’s a good business practice to do so. If you borrow from friends and family, make sure all terms and conditions are explicitly laid out in writing, and signed by everyone involved.
With all of the options available for small business startup loans, it can be hard to know where to start. Once you figure out how much money you really need to get your business off the ground, you can research your financing choices thoroughly. Make sure you compare rate and terms, and fully understand the ins and outs of your loan before signing on the dotted line.
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