If you’re planning to launch a business, you need some form of capital, and starter loans are a great place to start. Getting starter loans to finance a new business is one tough task a business owner can face.
Although you may already have a unique idea for the business, including a well-drafted business plan, it’s very easy to get disqualified for a traditional loan. Most financial institutions will not lend money to companies that don’t have a great credit history, an owner’s equity stake or a proven track record.
But why is it so difficult to come by startup loans? Well, lending money to a new business is considered very risky compared to an established business. This is because a starter can’t offer evidence of their ability to succeed, and there is little chance the company will manage to repay the loan.
Most new businesses fail because they undercapitalize themselves. Therefore, before you can start searching for a loan, ensure that you know the exact amount your business needs to start and run until you can attain the break-even point (the sales revenues match your total expenses).
Here are questions you must ask yourself:
- How much funding is needed to start a business?
- How much have you put aside for the business?
- Do you have some assets required to start the new venture?
- Is your credit rating strong or are credit lines available?
- Do you have family, colleagues, and friends who would like to invest in the new venture?
Finding answers to these issues will guide you in the direction you need to take to get start-up loans for your company. Let’s explore some places you can get starter loans to fund the business.
Loans From Family And Friends
In case you have bad credit, one of the ways to get a loan to fund your business is borrowing money from family or friends. If your friends and family already know your predicament, you can persuade them and guarantee that you will pay the money back. In such a situation, the probable cost of failure is not only financial but also personal.
Be sure to trim the list of friends and family to people who understand and share a vision in your plans. Do your best to make sure that they are comfortable with the risks associated with new ventures.
Microloans And SBA Loans From Nonprofit Organizations
The SBA (small business administration) was created in 1953 by Congress. It does not lend directly to the small businesses, but it instead provides various guaranty programs for loans by credit unions, banks and nonprofit lenders that qualify.
The SBA microloan program provides loans of up to $50,000 for non-profit child care centers and small businesses. The average microloan SBA offers is approximately $13,000. Despite the prolonged recession and economic crisis effects, the SBA loan programs have still been experiencing unprecedented growth.
7(a) Loan Program is one way the SBA funds small businesses. The funds can be used by the business owner to launch a new company or even expand an existing one. There isn’t a minimum amount set for the 7(a) loan although the SBA says that the program can’t back a loan that exceeds $5 million.
Although you can get a loan via the 7(a) Loan program to start a business, this loan is tough to get. In most cases, the loans go typically to established companies that offer collateral – a physical asset like equipment or real estate that the lender can trade if a borrower defaults. The requirements for qualifications are strict, and even when you qualify, the process can even take some months.
Nonprofit lenders and micro lenders are another options you have when you need a starter loan for your business mainly when you have shaky funds. Most focus on unfortunate or minority small-business owners, including small companies in communities that struggle economically.
Frequently, you will access solid loan terms from the lenders, and you will be able to grow your firm while establishing better credit. This will help you qualify for other kinds of financing as your business grows.
Personal Business Loans
Most new small-company owners can also access financing via personal loans. Often, these personal loans are provided by online lenders, who have been growing in number by the day. However, these loans attract high rates, especially for the bad credit borrowers.
Personal business loans are suitable for any borrower who has a strong income and excellent personal credit. Its recommended that you consider this type of loan as a last resort option.
Thanks to sites such as Indiegogo and Kickstarter, crowdfunding is one of the popular ways for the new and small business to raise money. Although this isn’t a real loan, a similar procedure is applied: you solicit funds via online programs and rather than paying the money back to the lenders, you are required to give them gifts. This is how the system got its other name-rewards crowdfunding.
Other avenues have also been cropping up for equity crowdfunding. In this case, you are required to tap a pool of investors who can finance your business and get equity ownership in exchange.
Grants from government agencies and private foundations can be sources of capital startups can rely on to fund their businesses. While these loans may not be easy to get, the free capital is worth the hard work for new companies that manage to get them. For instance, people who served in the military can get business grants designed for veterans. There’re also some business grants for women.
Unless one is a millionaire, getting adequate funding to launch a startup requires serious effort and planning. A diligent entrepreneur will weigh the downsides and benefits of the available starter loans and then determine the sources that will offer great flexibility at a minimum cost.
However, there is no need to limit the options. Most small businesses are launched using funds obtained from different sources. You may land a significant SBA or bank loan, but you’ll still need more money from family and friends, including yourself to make the startup dream a reality. What’s more, you are bound to face unanticipated expenses and events, so any additional source of funds is always welcome.