You’re not going to get free money, no matter how they make it sound. Let’s just put that out there right now. But if you’re like most entrepreneurs, you’ll need a cash boost to cover some of the overhead costs and get you going. So how can you do that safely? Most small business startups require the help of a small business loan.
Helping New Businesses Get Going
Many entrepreneurs have the million-dollar idea, the plan, and the drive to start their own business. But most don’t have the capital on hand. So your choices are to try and convince a wealthy backer that your idea is something worth investing in (which truth be told, is unlikely when you’re just one of 543,000 small business startups that are created every month in the U.S.) or you can go for a small business loan from a source that you trust.
Now here comes a snag: some new entrepreneurs don’t qualify for a business loan. The Small Business Administration, typically a great resource for starting up your startup, recently maxed out their funds and had to put loans on hold until Congress raised their lending limit this summer. As a result, they’re currently a bit backed up, and some entrepreneurial hopefuls might not make the cut.
Alternative Funding for Startups Outside of Business Loans
Your alternatives would be online lending resources, invoice advances or pre-sales, personal loans from friends or family, equity loans, selling off your own assets, venture capitalists, crowdfunding, or some other inventive way of bringing in some extra money to help get your startup running. But none of those are going to be as safe or effective as a standard business loan.
Use The Small Business Association For What It’s Meant to Do: Starting Startups
There are three types of small business startup loans from the Small Business Association. The first one, the SBA 7(A), can be used for real estate, working capital, or equipment. Fortunately, those are three of the biggest financial hurdles for a new startup, so if you can get funding for at least one of those things, you’ll be much closer to your goal of opening up for business.
1. The SBA 7(A) Loan
Here’s what you need to know about the SBA 7(A) business loans that you may qualify for:
- You’ll need to put down a 10% down payment. You might want to use one of those alternative resources for small-scale funding that we mentioned above.
- If you own more than 20% of your new business, you’ll be required to provide a personal guarantee.
- The business loan will have to be secured via personal collateral (usually your home).
- A “blanket lien” will be put on all assets of owners, both business and personal assets.
- Loan terms: up to 10 years for equipment loans, 25 for real estate, and 7 for working capital.
- The average loan amount for small business owners is $337,730, but can amount to as much as $5 million.
The reason why SBA 7(A) business loans are such a great option? They’re one of your cheapest financing options as a prospective small business owner, and also one of the most effective business loans.
The main benefit of these types of business loans:
The interest rates are extremely low, unlike most alternative loan sources.
The main drawback of these types of business loans:
It’s extremely hard for startup owners to qualify for SBA 7(A) loans. Approximately 85% of the requests for these loans are denied.
2. The SBA 504 Loan
The second type of SBA loan is called a 504 business loan, and it can be a bit more accessible to startups. These funds can only be used for land, buildings, improvements to buildings, equipment, or modernization and/or construction of a building to house your new business, so it’s uses are slightly more limited.
In addition, the SBA 504 business loan can only be used to purchase an already existing business, which is good for entrepreneurs looking to revamp an old business model and turn it into a more viable startup.
The facts about a SBA 504 business loan:
- You’ll be required to put down a 10% down payment.
- You’ll have to provide proof that you couldn’t get funds anywhere else.
- Loan amounts are up to $5 million.
- Loan terms are of 10 or 20 years.
- Your startup must be creating 1 job for every $65,000 in funding ($100,000 if you’re a manufacturer.)
- The assets being acquired can serve as collateral, but you will need to personally guarantee the loan.
The main benefit:
Again, the interest rates are very low, so it’s an extremely affordable loan for new startups that likely won’t see much revenue in the first few months.
The main drawback:
Only very new startups will qualify for these business loans, so if you’ve been working up to this for a while you may not qualify for a SBA 504 business loan. The process is also considerably slow, so you may be waiting several months for the funds to come in.
3. The SBA Microloan
The third type of loan that the Small Business Association has to offer for startups is the Microloan Program. It provides loans through a network of intermediaries across the country. You can use a SBA Microloan for things like furniture, equipment, inventory, or working capital.
Once again, here are the basic facts about the SBA Microloan for startups:
- You’ll need both collateral and personal guarantees, but the specific requirements can vary depending on the providing intermediary.
- Rates can also vary (again- depends on the intermediary) but tend to be between 8-13%.
- The maximum loan term is six years, but final repayment depends on their analysis of your startup business (they try to be generous.)
- Microloans can amount up to $50,000.
- The average microloan is about $13,000.
The main benefit to SBA microloans:
There’s no down payment, and rates are still relatively low compared to bank business loans, so it’s still more affordable for new startups. Microloan recipients often see funds faster than with the other SBA business loan options, because the loan amount is smaller.
The main drawback:
You’re required to take business training and classes, as well as submit a business plan for review in order to be considered for this loan, so the process can take a few months if you’re not sufficiently prepared. Because it relies on SBA-approved intermediaries, the need to prove that you’re ready to run a successful startup business is greater.
Other Small Business Loans Outside of The Small Business Association
More similar to a personal loan than a business loan, you could apply for a new business working capital program if the Small Business Association proves too difficult for your startup to qualify for. Smarter Finance USA will work with a partner to get you up to $150,000 to finance your new business startup, or up to $250,000 for medical startups.
The loan terms for new business working capital loans can either be a 5-year term, or an open line of credit if you’re willing to opt for that. Rates range from 7-10% which is still a bit better than many bank’s business loan or personal loan rates. Affordability is always key for new businesses trying to get a foothold.
Here’s what you’ll need to qualify for this type of business loan:
- A good personal credit score of at least 700.
- A clean financial history, free from bankruptcies, repossessions, or foreclosures in the past 7 years.
- No history of late payments in the past two years.
The requirements are similar to personal loans, but offer the safety of a business loan. This is another good option for entrepreneurs in need of help in the form of affordable loans that won’t eat at their revenue in those first few years.
While the Small Business Association is always going to be the best option for new startups in need of funding, there are a wealth of options that you can explore. The SBA loans just happen to design their loans with your unique set of financial needs in mind, whereas many standard business loans from the bank are designed for more established businesses that need a different kind of financial assistance to help with their cashflow and working capital.
Find the Small Business Loan That’s Right for Your Startup
Do a bit of research if you haven’t already, see what small business loans you might qualify for, and then work from there. See what might be the best fit for your new startup. A word of caution: don’t apply for a multitude of loans that you know for sure that you won’t get approved for. It could potentially hurt your credit score as well as your chances of getting approved for a loan in the future, not to mention waste time you could be spending starting your shiny new business. Only officially apply for business loans that you could potentially qualify for.
If you like your personal bank, you can check to see their small business loan rates and find out if it’s affordable enough that it won’t hurt your fledgling startup more than it helps. Be thorough in researching their terms, qualifying conditions, and if you receive any additional benefits by also banking with them personally. The major upside to using your bank to fund a business loan is that it’s likely to be a much quicker and smoother process, since they have your financial history on hand.
Paperwork and ensuring that you check out as a good potential business owner sucks up the majority of the waiting time for most small business loans, and delays you from actually getting started at what you’re getting the loan for: to start your startup for real. You can help streamline that lengthy application process by (again) checking that you’re a good candidate for getting approved for the loan, and that your business meets their qualifications. You can also get started on any set of requirements the business loan provider may have for you, and have proof that you meet those requirements ready for their inspection.
The more prepared you seem, the greater the likelihood of you getting approved for the business loan. Don’t be discouraged if you get declined for your first several loan applications, however. The statistics of a small startup getting funding on their first try is slim to none, simply due to the overwhelming number of startups all trying to do the same thing: secure a loan to help get them going. Even if your business idea is solid gold, the loan providers funds might just be depleted. Don’t let it keep you from accomplishing your goal.
If you truly don’t think you qualify for a small business loan, you can look into federal, state, or local grant programs. Depending on your startup idea, you could qualify for funding from potentially more than one program. Ask your local and state small business programs to see if there are any funds available, or if they can point you in the right direction of the appropriate providers. There might be more money out there for you than you’d expect.
On a federal level, there’s almost always a program or type of small business loan that you’ll qualify for, even if it’s only enough to cover a few of your startup costs. When you’re just starting out, every little bit counts, right? For most aspiring small business owners, paying out of pocket leads to a short road to bankruptcy and a shut-down business.
Finally, get that business dream of yours going with a business loan if at all possible. It’s the most straightforward and affordable way for entrepreneurs to get the funds they need to get their start-up started up and running. Check sba.gov and your local small business organizations to see what loans you might qualify for, and get the money ball rolling.