Are you thinking of setting your small business idea into motion? Do you own a business that needs to be further expanded and supported? To be honest, financial experts regularly hear the question of “Should one start a business with a loan?” The answer is everything but not straightforward and depends on many factors.
In this article, the financial experts of ProMoneySavings have laid everything you need to know about starting a business with a loan. Scroll down and learn all the advantages and drawbacks of the concepts. Ultimately, our guide will help you decide if this step is the right for you or not.
Table of Contents
- 1 Is Starting A Business With A Loan A Good Idea?
- 2 Pros and Cons of Outside Financing
- 3 What Is A Startup Business Loan?
- 4 Get A Personal Loan To Start A Business
- 5 Where Do I Get a Small Business Startup Loan?
- 6 How to Self-Finance Your Business?
- 7 How Do You Apply for Startup Business Loan?
- 8 Standard Documents Needed For Startup Business Loans
- 9 Who Qualifies For A Startup Business Loan?
- 10 Final Word
- 11 FAQs
Is Starting A Business With A Loan A Good Idea?
A vast number of small businesses fail within the first five years because they lack a thorough business strategy. No clear vision of where you see your business in the future can cost you an arm and a leg. The second most common reason for failure is insufficient funding or a wrong source of financial support.
Whether you’ll opt for a personal or business loan, the path is not an easy one to take. Both require financial creativity and diligent hands. That’s why we are here to guide you in the process and let you choose the most feasible path for you.
Pros and Cons of Outside Financing
Any sources you might obtain beyond the company’s gates are referred to as outside financing. Before you set out to provide external funding, you must consider both the advantages and the disadvantages attached to it.
One of the significant upsides is the possibility of fast and unlimited growth of the company. Second, you might get some valuable advice and expert support by financing institutions willing to see your potential rise. Third, you can keep your resources and dedicate them to cash payments to vendors, thus improving your credit rating.
When it comes to the downsides, you should be aware that many external funding schemes require founders to renounce a part of the company’s ownership. It means you won’t be making unilateral decisions, and the vision for the startup might get compromised. Outside funding from banks accrues interest on the loan and can be a tough financial burden. Lastly, securing the loan and presenting collateral can be a daunting job since it requires a lot of time and resources.
What Is A Startup Business Loan?
Startup loans can come in many shapes and from many sources. The money is approved by a financial entity and aimed specifically to support your business venture. Borrowed money can be used to procure equipment, machinery, inventory, and furniture. Also, it can go towards buying or constructing real estate or working capital.
Promising ideas require stable funding, but obtaining it can prove challenging. Supporting the initial growth of small businesses is also essential as it is the primary strategy of creating new jobs and driving the economy forward. Yet, to display an “open for business” sign, most startup owners will need at least a small business loan.
The truth is there are many financing options, but they all have their upsides and downsides. If you lack several years of substantial business experience, you might find that low-cost funding is hard to reach. Among other things, this article is custom-made to advise you on several viable alternatives to gain the proceeds of small startup business loans quickly.
Get A Personal Loan To Start A Business
Finding the most suitable personal loan in the ocean of offers can help your business survive. Your first thought would be to go from branch to branch and gather offers. Luckily, there’s no need to go the old-fashioned way. We’ll save you from much trouble and make the entire lending procedure less time-consuming. Here are our suggestions on some of the best online offers.
- PersonalLoanOnline.net – Get a personalized and straightforward application service for any loan up to $35,000. Depending on your application, the site may offer you various deals that you’re eligible to apply for. A perfect loan if you wish to start or grow your business.
- DirectLoanTransfer.com – This is the best place to obtain a personal loan if your credit score is poor and banks won’t consider you. It is particularly suitable for loans of up to $2,000 in value. Expect to pay higher interest if your credit score is under 600.
- StartFreshFunding.com – With a modest credit score, finding external funding can be quite challenging. With StartFreshFunding, you may be approved up to $5,000 within 48 hours. The entire application process is simple and requires less paperwork.
- QuickCashOnline.me –This Company polls various lenders and then matches them with applicants depending on their needs. If you accept the proposed conditions of the lender, the money will be transferred to your account within a couple of days. The amounts vary from $100 to $5,000, and the service is free of charge.
- LoansLab.us – Specializing in rapid approving of personal loans, Loans Lab can lend you up to $5,000. Keep in mind that you should be in regular employment and present identification documents to be considered for a quick loan.
Where Do I Get a Small Business Startup Loan?
Is starting a business with a loan a good idea has come to mind to millions of entrepreneurs. It is financial assistance with strict payback terms granted to new companies. You can choose what to spend the approved funds on, and this can range from working capital to purchase of supplies and other business needs. Bear in mind that small business startup loans are collateral-bound and involve a lengthy and document-supported procedure.
1. Startup Consultants
Starting and building your business on solid foundations guarantees future survival. You don’t want to sink in the early years, so choose your initial business paths wisely. Hence, finding a startup consultant for a small business loan is a sound idea.
Such consultants do charge a premium to get you financing, but it’s worthwhile. The good thing is that consultants check your grounds for funding and whether you have the essential means that startup businesses need. It includes budgeting, a business plan, business insurance, etc.
Further on, consultants give many cost reduction tips. They make sure you have the appropriate funds not just to launch the business but to keep it going in the long run. Plus, they help you get prepared with many aspects of running a company that you haven’t even thought of. Organizing a proper launch and maintaining your operations along the way is crucial for your business to sustain in the future.
2. Business Credit Cards
In reality, many startups are financed with the assistance of business credit cards. If you decide to use this way of small loan financing, you’ll get access to a revolving line of credit. The upside is that you always have the capital available and can use it for different purchases or cash withdrawals without delay or complicated procedures.
Moreover, business credit cards are way easier to acquire and can be exploited for various expenses. No collateral is requested of applicants, and sometimes there is no initial payment of the interest. So, it’s best to seek business credit cards with a 0% introductory APR.
You might also stumble across some credit line builders. It includes an application for multiple business credit cards that form the entire credit amount you’re approved. This amount is then split to your set of credit cards that you can use them to make purchases.
We advise you to be careful with spending too much with any of the credit cards available. If you fall behind with your payments and heavily utilize several business credit cards, this can reflect poorly on your credit score.
3. Banks and Equipment Financing
With startup businesses, it may be less complex to receive equipment financing rather than standard loans. Banks have strict lending rules and mostly trust and lend money to well-established and developed companies. Your best shot is to put your business plan in action by equipment financing.
In short, these loans are specifically tailored for purchasing equipment and machinery for your business. So, you can only make use of the available funds if you buy material assets. This kind of financing is easier to obtain because banks have solid proof that their money is secured.
The above loans undergo more lenient requirements since your equipment and machinery will be used as collateral. So, if you cannot repay your debt, the bank will seize your equipment in return. The payment term of equipment financing is done monthly as with conventional loans and over a long period of repayment.
An innovative idea that’ll spur a great business needs a cash injection to set in in motion. Luckily, the concept of crowdfunding is simple. What you need to do is find someone that will love and support your idea financially. By all means, this is not easy money, and it’ll take many sleepless nights to get the business up and running.
Startup circles particularly favor this method of financial assistance, and the pool of donors is continuously increasing. Plus, their networking will spread the word on your products or services. Have several things in mind before you pursue the crowdfunding strategy to back up your business.
One thing that guarantees you lead a successful crowdfunding campaign is that you offer a unique product that fills a market void. Conversely, a strong and moving life story can compel investors and customers to believe in your intentions. Having a vast network of supporters that’ll promote your cause is another milestone in this kind of investment.
Also, bear in mind that there are two major kinds of crowdfunding and decide which one suits your needs best. Most entrepreneurs opt for the reward-based type and provide donors with products or services depending on the invested amount. Equity-based crowdfunding offers investors shares in your company.
5. SBA And Other Microlenders
SBA loans are more desirable than conventional loans because they’re low-cost, flexible, and with decent repayment terms. The fact that they’re backed by the US government guarantees that 85% of the loan will be paid off. As a result, lenders are encouraged to issue SBA loans even to applicants who don’t fully comply with the bank’s strict standards. Though you might have the right background to be approved, you still have to undergo a lengthy application process.
Accion is another popular non-profit organization that gives small businesses the chance to secure financing. With up to $10,000 at disposal, this startup loan is ideal if you’ve been working less than half a year in a home or incubator-based business. With a credit score requirement of 575, even those with bad credit scores can be eligible.
KivaZip operates on a community-based, trust-stimulated platform. Like-minded philanthropists are ready to crowdfund up to $5,000 as a business loan. The benefit of such loans is that they entail a 0% APR and are aimed at struggling entrepreneurs. Businesses with a positive social impact, an extensive network of clients, but lacking financial resources are more likely to receive KivaZip loans.
How to Self-Finance Your Business?
The opinions on whether you should invest your equity first or not are largely divided. Many experts consider that taking loans or seeking investments should be used as a last resort solution. In contrast, other financial pros believe that losing your hard-earned money isn’t a smart idea. They suggest leveraging any funding options to grow your startup.
Yet, if you’re considering going with the personal funding, we have selected the most viable options. What you need to focus on is doing the right calculations to support your business operations. Read our suggestions to get a clear picture of your business development possibilities.
Many entrepreneurs decide to bootstrap their startup with only personal savings and some luck along the way. Only when the first sales start to come in, you can expect to see a return on investment. Though self-funded businesses will entirely belong to you, you might find it challenging to cope with constant revenue inflow.
- Personal Credit Cards – Many entrepreneurs who didn’t get to save much bootstrap by exploiting personal credit cards for business expenses. This funding method is recommended if you wish to spur the initial phase of the business and get it going. Good news is that there are even credit cards for Americans with bad credit you can get.
- Savings/Home Equity – Financial consultants support the idea that savings should be considered first, since no repayment is needed and, therefore, no interest to pay back. Plus, you won’t have to share your profits once they start flowing in. Home equity can also be a reliable source of cheap capital but should be established first. Be aware of how you’ll repay the loan if you need more time to get on the positive side of the balance.
- 401K/IRA Savings – Sometimes, it can be a wise idea to use any retirement plan you might have established to fund your new business. This is your money, and you can use if to build a life without incurring debt or paying excessive fees and interest rates. Anyway, refrain from spending the entire amount of savings as it can have negative consequences in the future.
2. Friends or Family Funding
Going weak in the knees is not a feasible funding method for everyone but frequently can work wonders. Having close friends or family members willing to support your business intentions financially can be quite beneficial. They certainly have your best interest in mind, so don’t hesitate to use this opportunity. The thing that they are ready to assist you means they believe in your ideas and have extra money to invest.
Our extra hint is to never put pressure on them. Thread your ideas and plans carefully and explain what you expect to gain from the invested resources. If you have your figures ready and you sound confident, they will seek to support you even without pressing them to provide funding.
Don’t forget to pay the money back when profits start to increase. Even better, set the payback dates, if possible. Alternatively, you can skip this step altogether by utilizing our proven money-saving tips and getting your own cash.
Let’s imagine your business is not in the best condition to negotiate any borrows. In that case, your best shot can be business grants. Such free money granted by various organizations, the government, or individuals usually serves to promote a clearly-defined cause. If your business is within an underdeveloped or poorly-served area, a grant may be a step closer to you. This can also apply if you operate in a niche industry.
More precisely, if you’re an innovator, green or rural business, woman entrepreneur or non-profit organization, the likelihood to be approved increases. Conversely, if you plan to start a business, pay off a debt or settle operational expenses, consider yourself rejected for any grant available.
We suggest you do your job and seek an updated list of grants specifically tailored for your needs. Then, gather any document you might need and increase your chances to obtain the target grant. Take into account federal, state, regional, and corporate small-business grants when applying.
Unlike loans, granted money is not to be paid back. Anyway, you’ll have to abide by specific rules to keep the funds invested. Grants are usually given to be used on a particular aspect of your business, such as buying new equipment or devices. If you, for instance, use the money to pay your employees, you may be charged with fraud and obliged to pay the money back.
How Do You Apply for Startup Business Loan?
Your plans may be far-fetched, but you must start from the beginning. The beginning is tightly connected to finding reliable and substantial financing. To do so, you must improve your business credit score and prove that your business is credit-worthy. Higher credit scores result in a better position to obtain smooth and fast funding.
Assign a holistic outlook to your startup. Define the most important aspects of your business intentions before approaching any lender. These might include your capacity to budget monthly payments after you’re approved the loan. Then, consider your business background, the cash flow, and any collateral you can offer to back up the guarantee.
After considering the available options on the market, opt for the most suitable financing source. Of course, you need to know what you’re applying for to collect the underlying documents. Defining a budget for monthly installments will help you narrow down the funding products you’ll apply for.
Finally, set your aim on the lender you’ll put your trust in. Having read our advice, you know that the financing world extends far beyond local banks and financial institutions. Not that they can’t saturate your needs, but make sure you meticulously investigate and exhaust all options at disposal.
Standard Documents Needed For Startup Business Loans
Knowing the right documents can spare you a lot of energy throughout the application process. Moreover, if you procure the relevant endorsements from individual bodies and authorities on time, the application procedure can go like a clockwork. The following items are more or less the bunch of documents that almost any lender would ask for. Make sure you have them prepared:
- A detailed report of your personal and business credit score.
- Future business projections on cash flow and expenditure.
- A recent short and long-term business plan outlining your growth, market strategies, etc.
- Valid certificates, licenses, and registrations for the business activity required in the state of the headquarters.
- Tax returns and underlying IRS documentation for personal and business tax accounts (documents of any owners or registered agents of the company).
- Legal agreements or contracts that can be relevant (leasing, franchise).
- Financial pertinent documents for the business (updated bank statements, invoices, accounts receivable, claims, credit card sales, etc.).
- Evidence of underserved representation (for specific loan applications only).
Confirm whether it’s better to apply online or go straight to the lender and submit the documents in person. Some online supplication systems approve your application within hours.
Who Qualifies For A Startup Business Loan?
As you have seen, your financing variants are practically endless, but this doesn’t have to mean that you’ll be automatically approved for any of them. There are always young and well-established businesses that struggle to obtain the loans or grants available. So, yes, with loans, you’re swimming out in the open with sharks around.
If you’ve been longer in the business circles, you’re more likely to be approved than if you are at the very beginning. A favorable business credit history increases your borrowing chances, too. Anyway, the paramount factor is always the cash flow. Meaning, any financial entity will be more than ready to overlook your brief time in business if you prove that cash flow is steady and constant.
The industry you’re serving can tell tales about whether you stand a chance of receiving some funds or not. Innovative and promising businesses are definitely on the top of widely approved loan applicants. Conversely, if you operate in the real estate market, this entails higher risks, and lenders might turn down your calls for help.
Lending factors might also include profitability and annual revenue. Collateral isn’t excluded, and lenders always find ways to mitigate their risk of losing their money in case of default. If you’re new in business, all these requirements can give you a hard time.
Simply put, if you aim to start a business with a loan, make sure to meet the criteria upfront. Be realistic about your goals. Once you review the financial situation your business is currently in, you’ll know what type of financing options to look for right away.
When in doubt what kind of loan to pursue, always evaluate your personal and business finances. Consider the intended use of the loan and consult a financial consultant to make sure you go after the right loan. Sometimes, personal loans make more sense if you’re a starter. This way, you don’t have to provide any credentials, and interest rates tend to be lower.
A scrappy entrepreneur will never consider funding a significant constraint for expanding and keep the business in working order. There are plenty of ways to financially back your plans, even without the need to borrow. Keep our advice in mind, and never give up your dreams. As long as you’re committed to what you’re doing and have willpower, success is guaranteed.
Can you use a personal loan to start a business?
The answer is always positive. Lenders only care about your credentials, so you don’t even need to provide collateral. Plus, interest rates are less significant with personal loans. You always have the choice of swinging it using a business loan later. Remember always to separate your personal and business finances to avoid tax difficulties.
Should you use your own money to start a business?
Many experts suggest you invest your own money first before considering any loans. This way, you won’t have to share monthly profits with financial institutions. The money stays with you, and you don’t have to pay any interest on top of the money you’re paying back. You’ll avoid the lengthy and complicated application process, and no collateral will be needed.
How much money should you have saved to start a business?
It’s best to do your calculations on your own. This way, you can rely on figures related to your kind of business only. If not viable, bear in mind the estimates of the US Small Business Administration. According to them, most small companies need about $3,000, whereas home-based franchises can be started with $2,000 to $5,000. Consulting someone involved in the financial field or your kind of business can be useful when doing the numbers, too.
What is it called when you put money into your own business?
The general term for putting your saved money into a business is called an investment. Multiplying your money by investing has probably come to everyone’s mind at a particular stage of their life. While establishing the company, the owner needs to transfer the funds to a business account. This is referred to as a capital investment. Make sure you have separate bank accounts for personal and business needs.
Are angel investors a good idea for my business?
Angel investors are highly experienced in the business field and can ‘smell’ a promising business right away. An angel capitalist will financially back you in return for some future net earnings. The upside is that such money isn’t a loan, but angel investors usually take an active part in the business they support. Also, such investors can assist you with precious knowledge and expertise that’ll help you stay in business longer.