What is a Startup Loan?
A startup loan is any loan used to help start a new business. A business is usually considered new when it has existed for 2 years or less. In theory, just about any kind of loan could be used to help finance your new business. However, certain kinds of loans are better suited for the purpose. SBA micro loans, for example, are for small amounts (up to $50,000), which makes them easier to obtain than larger loans that require a strong credit history. Equipment or real estate loans are also startup-friendly, since the equipment you purchase acts as collateral. This makes them a secured loan, meaning the lender has a right to the equipment in case the borrower defaults, which lowers the risk.
The SBA’s Community Advantage Program is also a good option for startups requiring larger amounts (up to $250,000). This program is geared toward helping establish new business owners from underprivileged backgrounds. In a similar vein, new businesses that are likely to help develop a community, either by filling in some need or creating jobs, could be approved for an SBA 504 loan, even though these are usually for larger amounts and used by already established businesses.
Equipment Startup Loan
Marijuana Startup Loan
SBA Startup Loans
Startup Micro Loans
Startup Small Business Loans
Interest rates will vary depending on the kind of loan you take out, since they’ll be affected by things like the amount of the loan, whether it’s secured, your credit rating, etc. Smaller loans tend toward higher rates, while secured loans tend toward lower rates. SBA microloans, for example, typically have rates between 8% - 13%, while 504 rates are capped at 4.88% - 5.15%.
New businesses signal high-risk to lenders, and if your business is just starting out, you may have little or no business credit history. This means that your personal credit score is particularly important to lenders when considering startups. A credit score of 720 will put you in a good position to apply for a startup loan. A score of 680 might still get you approved for a startup loan, but you may need to make other provisions, like larger down payments or collateral. SBA-backed loans, secured loans, smaller loans, or loans that promise to aid the community will typically have less severe credit requirements.
For Bad Credit
Bad credit is a problem for borrowers because it is a problem for lenders. And it is a problem for lenders because it adds to their risk in lending you money. If your credit is low, the best solution (aside from improving it) is to look for other ways of lowering risk. The smaller the loan, for instance, the less the lender can potentially lose. By funding the cost of your business yourself as much as possible you can lower the amount you need to borrow, increasing the odds of being qualified for the amount you need.
In the same vein, taking out a loan with the SBA can be a good option, since a guarantee by the SBA puts the lender at less of a risk. Equipment loans also provide a guarantee to the lender, since the equipment acts as collateral. And depending on the kind of business you’re starting, funding the equipment costs with a loan might save you a lot of money, so that you can afford the rest of your business costs your on your own, while at the same time making the loan you need more accessible.
As for improving your credit, this can be done simply by paying off debts. Even a single outstanding payment is a significant blemish on your credit report. The more you incur debts and pay them off on time, the stronger your credit will become. Credit cards (both personal and business) can be used to build your credit in this way, so long as you’re always on time with your payments.
Secured vs. Unsecured
A secured loan is one where collateral is involved, meaning the lender will have something to claim if the borrower defaults. Equipment or real estate loans are examples of secured loans, since the equipment itself acts as collateral until the loan is paid off. When a loan involves collateral, it put lenders at less of a risk of losing money, since they have a guarantee to the value of the asset. And this allows the loan to have more lenient requirements in other ways, such as low interest rates and down payments. Startup loans will usually need to be secured, since there is already lots of risk involved with a new business. This is why equipment startup loans are a good option, since collateral is automatically part of the loan rather than an added requirement.
How to Get a Startup Loan
The two main things you will need to be approved for a startup loan is strong credit, and a good business plan. Since a new business will have little to no credit history, it’s your personal credit score that will interest lenders. Paying all your bills on time is essential to keep your score high. And because new businesses are notorious for being high-risk investments, lenders will need every reason you can give them to believe in your business. A thorough, well-researched business plan (along with all the necessary licensing and documentation) is essential to show lenders that your business is worth investing in.
If you're looking to explore your options for a startup loan, talking to an expert is the best way to make sure you're well informed and on track to making the best choice for your finances. After all, starting a business is a lot of work, but the kind that pays off big time, and it's worth taking the time and putting the effort into doing things right.