Starting a business? You’ll need capital to hire staff, buy equipment, rent office space, and market your new company. Oh, and pay yourself!
You might be lucky enough to have the funds in hand to start a business. However, if you can’t bootstrap your business, you might consider applying for a business loan.
Let’s look at the benefits and drawbacks of using business loans to start a business.
What Are Startup Business Loans?
Business loans are generally used to cover a company’s expenses. For an established business, business loans might purchase new computers to replace old ones, expand staff, or acquire another business.
A startup may have all these expenses and then some. You may need money to renovate a space, apply for business licenses, and buy inventory or raw materials. You’ll need a way to cover all of your startup costs.
That's where startup financing comes in. Using business loans to start a business could help you get off the ground, but the truth is that not every lender wants to take a chance on an unproven business.
You’ll need to specifically seek out business loans that cater to entrepreneurs.
Pros of Business Loans for Startups
Here are a few advantages of business loans for startups.
- Money for operating expenses. A business loan provides the necessary capital to launch and grow a new business. You're going to have many expenses, including unanticipated ones. You can start off on the right foot if you have money to cover these costs.
- Money for owners’ salaries. Also, there’s no way to guarantee profitability is just around the corner. Having capital to cover your own salary is just a smart move.
- Keep full control. Unlike investors and venture capitalists, a business loan lender won’t require a piece of your company in exchange for the cash. Startup business loans let you keep control and ownership.
- Borrow only what you need. There are many types of loans to choose from. If you only need to borrow a little money, you might opt for a microloan: a loan up to $50,000. If you want access to funds to borrow as needed, a line of credit might be a better fit.
- Structured repayment. You can choose the repayment structure that works for you. For instance, you could choose financing with payments that fluctuate with your revenue. Or you could choose a term loan that tells you exactly when the entire loan will be paid off.
- Build business credit. If you handle it responsibly, a business loan could help you build a credit profile for your company, which could make it easier to get financing in the future.
Cons of Business Loans for Startups
While there's a lot to love about taking out a business loan to start a business, there are downsides you should keep in mind.
- Harder to get. Many traditional lenders won't lend to a company that has been in operation for less than two years. That could make it difficult to qualify for some loans.
- Time to fund. Some loan programs take longer to process, which means it may take weeks to receive funds.
- Collateral. Some loans require collateral, which is something of value that you pledge as a guarantee that you’ll repay the loan. It makes sense when you’re borrowing, say, for equipment. But for some SBA loans, the SBA will put a lien on your home. That means if you can’t repay the loan, you could lose your home.
- Personal guarantee. If you have to provide a personal guarantee, the business loan could show up on your personal credit reports and affect your ability to get financing for a personal reason.
Common Requirements for Business Loans
Lenders will review several factors in your loan application to decide whether you qualify for a startup loan. Here are a few common examples.
- A personal credit score in the high 600s, if not higher
- In business for at least six months
- Financial projections
- Your business plan
- Your ability to offer collateral
- Your federal employer identification number (FEIN)
- Any licenses or certifications your business is required to have
- Your loan proposal, including how you plan to use the money
- Your recent tax returns
- Revenue, if you have any
Alternatives to Business Loans to Start a Business
If a business startup loan is not right for your situation, other options exist.
Online-Only Loans
There are many online business loan providers that don't require you to have a certain annual income or time in business. They may consider sales projections, the company’s assets, or other criteria.
Fora Financial is one online lender that requires you to have been in business for just six months to apply.
Equipment Loans
If you're looking to buy computers, a company car, or machinery for your new business, equipment loans may be easier to qualify for than traditional financing. The equipment serves as collateral for the loan, so there may not be requirements for time in business or revenues.
Flexibility Capital offers equipment leases, which is another way to get the equipment you need even if you don’t yet have a long credit history.
Equity Financing
Equity financing, either through angel investors or venture capitalists, is a way to get the capital you need to start a business. This isn’t a loan. Investors typically want you to give up part ownership of the company, and possibly some of the decision-making power in exchange for the money.
Grants and Competitions
Business loans aren't the only source of financing you could consider. Grants for new and established businesses can provide money you don't have to pay back. Be prepared to fill out several grant applications, since competition is fierce. Look to your local government and small business organizations to find out if there are grants or business competitions you can enter.
People start businesses all the time, and there is funding out there to help make it happen. Talk to one ore more loan officers to find out what options might be most appropriate for your situation. If you do choose to talk to multiple lenders, stick with lenders who can give you an idea of what you might qualify for without doing a hard inquiry on your credit that could cause your score to drop.
