Starting a new business is an enormous undertaking on its own—tack on the added stress of finding and securing financing and it’s enough to make anyone commit to a life of cubical work.
While not every startup needs a loan right out of the gate, obtaining financing isn’t a sign of early weakness in your business model or other trouble in paradise. Sometimes you need additional funding to capitalize on a good inventory or marketing opportunity, or to cover payroll after a surprisingly expensive month.
Loans aren’t shortcuts to success, but they can open doors to opportunities.
Debt isn’t always a bad thing. It can be used for good and is sometimes the best option to grow your business.
If you’re considering business financing for your startup, here are some of the most popular options.
Why take out a loan as a small business owner?
A loan or other debt financing isn’t always the answer for a small business looking to grow. Never take on debt unless it will provide value to your business in the long run.
When used responsibly, however, a small business loan can be an excellent way to jump-start growth by giving you access to capital that you can then use to get a deal on inventory, fund a renovation, bankroll a marketing campaign or cover any number of useful working capital needs.
Never take on debt unless it will provide value to your business in the long run.
Loans aren’t shortcuts to success, but they can open doors to opportunities. For any loan, you’ll need to do your part to demonstrate to lenders why your business is a good investment. Since your business is just getting off the ground, good personal credit and a business plan that illustrates your vision for the future will be your biggest assets.
What business loans are best for me?
There are different funding options for all kinds of business, including new businesses and startups. As a new small business owner, you may not qualify for every loan option, but that doesn’t mean you can’t find capital.
Of the funding you do qualify for, the best options depend upon your personal and business credit histories, your business’s profitability and what you’re comfortable with.
For any loan, you’ll need to do your part to demonstrate to lenders why your business is a good investment.
Here are seven common funding choices out there, with an eye towards options that will work better for a startup:
A term loan is a traditional loan — you receive a lump sum from a lender and pay them back over a fixed time period with a fixed interest rate. It’s also a loan that typically is more difficult — though not impossible — for startups to obtain.
There are many options for term loans. Banks are the traditional lenders in this space, but a class of alternative lenders that operate online has emerged to offer loans with faster turnaround times and less strict barriers to approval (though their rates are often higher than bank rates).
A term loan is a traditional loan — you receive a lump sum from a lender and pay them back over a fixed time period with a fixed interest rate.
A term loan can either be short-term or long-term and secured (by collateral) or unsecured, and typically require good credit and an established business history that lenders can review to determine if the borrower is a good bet to repay the debt. This is the sticking point for most new business term loan applications.
These loans are less likely to be available — at a good rate anyway — for a startup. Carefully review the loan’s APR and other repayment terms before going this route.
SBA loans are considered the gold standard of small business loans. Though the Small Business Administration itself does not disburse funds to business owners, it does guarantee up to 85 percent of the loans it approves, encouraging lenders to extend more generous repayment terms to lenders.
The thing about SBA loans is that the process of applying is time-consuming and intensive. You’ll need to supply a wealth of documents and forms, from personal tax returns to a business plan and bank statements. Funding can take weeks or months, so you should be prepared to wait.
There are several different SBA loan products that businesses with different needs can apply for, but startups are only likely to qualify for the SBA microloan program. This program provides loans between $500 and $50,000 to new and small businesses through nonprofit intermediaries. While you’ll still need good personal credit, you can offer a business plan, collateral and “good character” in lieu of established business history.
Though the Small Business Administration itself does not disburse funds to business owners, it does guarantee up to 85 percent of the loans it approves.
Keep in mind that some SBA applicants can also apply to work with the SBA’s 8(a) Business Development program, which is geared toward businesses run by socially or economically disadvantaged citizens. That includes women, minorities, veterans, and other groups who have a net worth of under $250,000.
The SBA isn’t the only entity that awards microloans to business owners. Some high-profile nonprofit microlenders can extend tens of thousands of dollars in financing, and some specifically look to lend to women. These lenders include:
- Accion: A nonprofit lender that has loan programs specific to both women-owned businesses and startups around the world.
- Opportunity Fund: Depending on what kind of business you want to start, Opportunity Fund provides microloans—sometimes as much as $100,000—to entrepreneurs who would otherwise be overlooked by banks.
- Grameen America: This microfinancer specifically supports women by offering not only financing, but training, support and help to build credit and savings, as well.
- Tory Burch Foundation’s Capital Program: Via Bank of America, this program connects women in business with “community lenders.”
Landing a client is great, but getting paid for that invoice is even better. You can use your outstanding invoices to acquire financing by borrowing money against them. An invoice financing lender will give you a large chunk of what you’re owed (typically a minimum of 85 percent) up front, and you pay them back (plus additional fees) once you get paid by your client or customer.
You can use your outstanding invoices to acquire financing by borrowing money against them.
If you’re constantly waiting for clients and customers to pay you — and find that doing so is upsetting your cash flow — invoice financing can help you steady your finances and keep things moving.
Business credit cards
You may not think of a credit card as a loan, but it functions much the same way as other revolving forms of financing. You use your credit card to buy something, then pay it back (either all at once or in installments), racking up rewards points and perks you can then pour back into your business.
It’s an excellent way to track your business expenses while building credit at no additional cost.
If you have good credit, you may be eligible for certain business credit cards that offer a 0 percent APR for a limited introductory period. Assuming you make your minimum payments, this functions as an interest-free loan for the life of the offer. It’s an excellent way to track your business expenses while building credit at no additional cost.
The benefits of crowdfunding are two-fold: One, you can use your network — friends, family, old co-workers, parents, even strangers — to raise funds without going through a traditional lender. And two, you can use this as an opportunity to prove your concept. If you get overwhelming support for your idea via your crowdfunding platform, you know you’ve likely got a good idea.
Kiva is a microfinance peer-to-peer crowdfunding platform where you can obtain loans for up to $10,000 via lenders all over the world for 0 percent interest. Another option is any one of the popular crowdfunding sites — such as Indiegogo or GoFundMe — where you receive seed funding in the form of grants rather than a loan.
Finally, keep in mind that you can use personal loans to fund your business as well. Your business is very much a personal project, after all.
...if you only need a small boost to get your business off the ground and you’re confident it will pay off, this is a viable option.
There are some major benefits to using a personal loan here, especially if you’re opening a brand new business, or trying to turn a side hustle/hobby into a venture. Personal loans don’t require you to have an extensive business history, often boast lower APRs than business loans from alternative lenders, and typically don’t require additional collateral to secure them.
But that doesn’t mean you should jump at taking out a personal loan. You typically want to separate your business and personal finances, and you may be personally liable for the loan if you default on your payments. But if you only need a small boost to get your business off the ground and you’re confident it will pay off, this is a viable option.
A business loan is not an option you turn to on a whim. You need to be diligent with your planning, prepared to make payments,and smart about how you spend your funds.
Don’t let the additional responsibility of taking out a loan scare you away from the process, however. Capital is an enormous asset to have and a lack of it is often cited as the number one reason why small businesses fail. If you can obtain funds that make sense for your business, it’s an option worth exploring.