Guide to Startup Business Loans
As a new business owner, you have to face the tough task of finding the money to finance a startup. Although you may have an extraordinary idea and a solid business plan, you may still struggle to get approved for a traditional business loan.
Small-business startup loans are can help these new ventures meet their financial needs. You can use this new cash as working capital, to purchase of inventory and supplies or to build a new office. But lenders are often hesitant to offer loans to businesses without a good credit history, two or three years of stable business and revenue, and an owner with a stake in the business.
Lending money to startup businesses is often considered riskier than established businesses. Since there is no evidence the business can succeed, there is a higher default risk.
Types of Startup Business Loans
Established businesses have the revenue to pay for things like inventory, equipment, furniture and marketing expenses. A brand-new business, however, may not have that ability and may need a loan to get it off the ground. So what are the options?
- Equity financing: This is a way to fund your business by seeking funding from investors who agree to become partial owners in your business. The level of ownership would be proportionate to the size of their investment.
- Microloans: One of the major problems facing business owners is that they only need small business startup loans while most lenders only offer large loans. To fill this gap, some lenders and organizations now offer smaller microloans to startup businesses.
- Equipment financing: Lenders would often expect collateral before funding a startup loan. This type of loan is specifically designed to pay for the equipment a startup needs. Lenders include equipment dealers, banks and online providers.
- Peer-to-peer lending: This process involves borrowing money from an online site that matches you with individual or institutional lenders. This allows you to reach a lot of investors who are willing to offer you a small-business startup loan.
- Angel investors: You borrow money from wealthy individuals who lend debt-free money in exchange for an ownership stake in the company. They like to invest in early-age startups, but they rarely take an active role in your business.
The Application Process for Startup Loans
Since this is a new business, lenders will focus on your personal credit score and previous experience in the industry.
Lenders will also want to see a detailed business plan before offering a startup-business loan to help determine if the startup loan would help you grow your business.
Various lenders have differing terms, so it is always good to compare your loan options. Our comparison tool will help you choose a startup lender that suits your needs.