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Getting a small business loan can be tough. As a business owner, you have to prove to a lender that you’re worth taking an investment risk. You have to demonstrate that both you and your business are creditworthy and provide evidence that your business is bringing in enough revenue to cover the cost of the loan. For an established business, the process is time-consuming but not too difficult. For startups, however, this can be more than a little tricky.
Unless you’re independently wealthy, you need capital to get your startup business off the ground. Chances are, though, you keep hitting brick wall after brick wall when it comes to financing. You don’t have the required time in business to work with this lender, and you don’t have the documentation required by that one. You need money for your startup, but you can’t seem to find it.
Don’t worry – there are loan options for startup businesses. In this post, we’ll review eight of the best options, including the benefits, drawbacks, and what to know before you apply.
1) Microloans
Microloans are smaller loans that provide up to $50,000 for small businesses and startups. This type of financing is best for companies with smaller capital needs.
Microloans can generally be used for any business purpose, although specific lenders may have their own restrictions in place. Generally, microloans can be used to purchase supplies or inventory, equipment, or can be used as working capital.
The Small Business Administration’s Microloans program is a very popular choice for small business owners. This program is open to any startup or business that fits the definition of a small business set by the SBA, which limits the number of employees, annual revenues, and net worth of a business. For-profit businesses and non-profit childcare centers located in the U.S. are eligible to apply. Loans of up to $50,000 with repayment terms of up to 6 years are available through non-profit intermediary lenders. The average microloan given by SBA intermediaries is $13,000.
One of the biggest benefits of microloans is that they typically come with very low interest rates and are more affordable than other startup loans. Non-profit organizations and SBA intermediary lenders that offer microloans may also provide additional resources for small businesses owners, including training, workshops, and mentorships.
The biggest drawback of microloans is the low maximum borrowing amount, which could be limiting for businesses that have larger expenses, like the need to purchase commercial real estate. Another drawback is the length of time it takes to receive a loan. From application to funding, getting a microloan can take several weeks or longer.
The availability of microloans may also be limited. Many non-profit organizations get their money through government grant programs, limiting the number of new borrowers that are accepted.
2) Personal Loans
When applying for a business loan through a bank or other conventional lender, both personal and business information will be considered, including personal credit score, business credit score, and annual business revenues. For new businesses that don’t meet these qualifications, getting a bank loan is out of the question, right?
Not necessarily. Business owners with high personal credit scores can apply for a personal loan from a bank or credit union. The credit history and income of the applicant – not the business – will be considered when applying for a personal loan.
Even businesses that don’t meet the credit and income qualifications of banks and credit unions can get a personal loan to use for business expenses. This can be accomplished through alternative lenders that have fewer requirements for qualifying for a loan.
A personal loan is a good choice for a startup business because the history of the business is not a consideration for approval. For personal loans, the borrower will just need to prove their personal creditworthiness and https://worldpaydayloans.com/payday-loans-fl/titusville/ show that they are financially able to pay back the loan.
Many personal loans can be used for most business purposes, but some may have restrictions on how the proceeds are used based on the lender’s specific policies.
Banks and credit unions offer low interest rates and long repayment terms, resulting in a more affordable loan. Of course, these low-cost loans are reserved for the most qualified borrowers with credit scores at least in the low 700s. Applicants with a low personal credit score will face higher interest rates and a higher overall cost of borrowing. In some instances, applicants with credit or income challenges will need to seek out alternative lenders for a personal loan.
Maximum loan amounts may be lower for personal loans than business loans. Depending on the amount needed, a business loan with higher limits may be a better choice for business owners with higher capital needs.
Be aware that, at tax time, business owners with a business loan can write off interest payments. With personal loans, business owners are unable to write off these payments, therefore missing out on these tax benefits.