Are you planning to start a business? If you think you have what it takes to make it as an entrepreneur, you’re not alone. There are now over 28 million small businesses in the U.S., which account for over half of all of our country’s jobs and sales. But you’ll need money to get your startup off the ground.
The biggest challenge in launching a new business is access to capital. But if you have a great idea that you can’t wait to put into action, the good news is there are many sources of funding available, if you know where to look.
Before you get your hopes up about securing funding for your startup, a reality check might be in order. Business startup loans are much harder to qualify for than loans for businesses with proven financial results.
Traditional business loans
Most startups will not qualify for a traditional business loan from a bank. The requirements are very strict for these loans. Here’s what you need when applying for a traditional business loan:
- Good credit
- Detailed business plan (with financial projections)
- Bank statements
- Tax returns
- Corporate documents
- Your Resume
SBA loans for startups
The Small Business Administration (SBA) has two programs with loans suitable for startups:
Your company can borrow up to $250,000 with the Community Advantage Program and as much as $50,000 with the Microloan program, both of which feature low interest rates and other favorable terms.
The limitation of these startup loans is twofold. The SBA wants to see that you are partially self-financed, so you need to have up to 30% of your own money to invest. You also need to have a strong credit score (typically at least 680), to qualify.
Grants are also worth pursuing, with one useful source of federally sponsored grants found at grants.gov. Other places to look include state and local economic development agencies, which focus on building local economies. Many nonprofits and international corporations also sponsor small business grants.
Although most small businesses do not qualify for grants, it is still worth checking out. If you find a grant program that you want to consider, be sure to read the criteria carefully. If your business does not meet the listed criteria, your business will not be approved for a grant. The steps are as follows:
1) Request an application package
2) Fully complete the application as well as provide any supporting documentation requested
3) Write your grant proposal
4) Review your grant proposal
5) Submit application and all documentation (be sure to keep copies)
6) Wait for a response
Friends and family
It may seem uncomfortable or awkward, but getting a loan from family or close friends is common. If you decide to go this route, communicate your intentions as well as your business progress so that your lenders remain comfortable with their decision. The downside to this option is that failing to repay the money could seriously damage close relationships.
Your home, 401(k), or life insurance policy
You may also want to consider:
– Tapping into the equity in your home and taking out a home equity line of credit (HELOC). The downside of this is that the loan payment will be in addition to your regular mortgage payment. Using your house as collateral can be risky.
– Borrowing against your retirement, or 401(k) account can have some negative consequences. For instance, you will make loan repayments with money that has already been taxed. You will also pay taxes on your retirement withdrawals, so you will pay taxes twice on the money you borrow.
– If you have a life insurance policy with cash value, you may be able to take out a loan against it as well. But if your life comes to an end before the loan is repaid, the loan amount owed plus interest will be deducted from the death benefit.
Angel investors and venture capitalists
Angel investors and venture capitalists are private investors who fund your business in exchange for a generous rate of return on their investment. They may want a rate of return of up to 10 times the amount of their investment within the first 5 – 7 years.
Another downside to these arrangements is that the investors get a stake in your company, and typically have a certain amount of control over your business decisions.
Personal credit cards
Funding a small business startup with credit cards is more common than you might think. Since a traditional business loan will likely be elusive, you may need to rely on your personal credit.
If you have credit available and can qualify for personal credit cards at a reasonable APR, this might be a good short-term solution. As long as you can pay your bills on time, you’ll be funding your business as well as building up your credit, which can help you get access to more capital in the future.
If you have a novel idea, you can also try crowdfunding. The most popular platforms are Kickstarter and Indiegogo, where you create an online campaign that allows individuals to invest in your business in exchange for future rewards or services.
Another option is to pursue a microloan from a nonprofit lender. These are smaller loans, usually no more than $10,000. Accion is a nationwide nonprofit lender of microloans, one that is open to working with disadvantaged business owners as well as struggling communities. Of course, they will want to see that you have the ability to repay the loan or may ask for a cosigner. A perfect credit score is not necessary. The application is looked at as a whole, and a low credit score can be offset by stronger spots in the application.
When applying for a microloan, you should be prepared to talk about your business plans. In addition to looking at credit scores microlenders also evaluate the character of borrowers. Being completely prepared will help demonstrate your professionalism.
You may also want to consider a personal loan as a way to finance your startup. You can obtain a personal loan through a bank, credit union, or one of a growing number of online lenders. Rates and terms vary, but some have high annual percentage rates, not to mention origination fees from 1%-5%.
One lending platform worth considering is Avant, which accepts applicants with a minimum credit rating of 580. There is an origination fee but it does not charge fees for paying a loan off early. You can apply online and get a response within minutes. If the loan is approved, you will sign a contract online, and your money can be in your bank account within 1 – 2 business days. See Avant‘s profile for the latest rates and terms.
Some online lenders and marketplace lenders are also offering loans to startup businesses. In most cases, you need to have very good credit (600 – 799). Watch out for origination fees and prepayment penalty fees.
One of the more popular online lenders for startups is LendingClub, the largest online marketplace in the United States.You need a credit score of 600 to apply for loans ranging from $1,000 to $40,000, with varying repayment terms and APRs. If you’ve managed to get your business off of the ground and it’s at least 24 months old, LendingClub can offer business loans of up to $300,000 with rates starting at 5.9% APR.