Starting up a business? You’ll need funding. Here’s our guide to the loan zone and what type of business loan you’ll need for your startup.
A whopping 90% of startups fail.
That’s a disappointing statistic if you’re wanting to start a business.
The good news is that 10% succeed. You just have to figure out how to be the 1 in 10 that watches their dream take flight.
One of the most basic things you need to get a startup going is funding. On average it can take 2 to 3 years for a startup to start becoming profitable. In the meantime, you’re going to need capital to get things rolling.
Are you still wondering where to get that money from? Check out our loan zone guide here to find the best type of business loan for your needs.
Conventional Bank Loans
Going to the bank for a loan may be the first option that comes to mind for many people. They tend to offer lower interest rates, making them a popular place to turn. However, getting a bank loan is not very easy.
They tend to have a lot of requirements, making it difficult for most entrepreneurs to qualify. Additionally, repayment terms may be shorter and not very favorable for the buyer in general.
As we’ve noted, 90% of startups fail. Thus many lenders are reluctant to issue loans to businesses that are just starting out. They tend to have a lot of requirements, making them difficult for entrepreneurs to qualify.
To make this easier, the Small Business Administration offers some options. To the lender, they offer a partial guarantee backing the loan. Thus, if you don’t pay, the lender still gets their money back. This makes them more willing to lend with looser requirements.
In return, the SBA has a set of guidelines that the borrower must follow. Depending on the type of loan you choose this could be restrictions on how the money is used, etc.
Equipment loans are a great option when you need to purchase equipment for your business. You can get them through private lenders, or you can opt for an SBA-backed equipment loan.
Regardless of what lender you choose, equipment loans are somewhat restricted.
As the name implies, you can only use the money to purchase equipment. The plus side, however, is that the equipment itself serves as collateral for the loan. Thus, it’s possible to get a better interest rate and more favorable terms.
Microloans, as the name implies, are useful when you need a smaller amount of money. Typical lenders don’t offer amounts over $35,000.
The SBA partners with community development financial institutions and other non-profits to offer these loans to entrepreneurs. They tend to be shorter term loans with lower interest rates. Some loans may have restrictions on what the money can be used for.
There are also independent microlenders that offer a nice range of options. As non-profits, many of them even offer other helpful services like financial literacy programs or business training.
With technology and the Internet opening up lines of communication, crowdfunding becomes an option. Rather than going through a middleman like a bank or a financial institution, it is now possible to go directly to investors for a loan.
This type of loan is popular among small business startups. You can offer shares in your company to investors in return for the capital you need to get going.
But you have to have a very strong portfolio.
Investors are taking a big risk with your business venture in a crowdfunding scenario. If your company goes under, or you don’t pay back the loan, they have little hope of recuperating their money. Banks provide them at least some assurance that they won’t lose their investment completely.
Line of Credit
A business line of credit is a very handy option to have. Many lenders offer lines of credit but banks often have the best rates. Of course, they are subject to the same strict requirements as bank loans so it may be difficult to get one. However, if you can qualify for one they are a great buffer.
You can get two types of credit lines–fixed and revolving. The revolving line works much like a credit card in that as you pay down the balance the credit becomes available to you to use again.
This is handy for emergencies or to help cover expenses during dry spells. You also don’t have to use all of it so you can have it there as a buffer in case you need it.
Business Credit Card
You can also just opt for a business credit card. These typically aren’t as difficult to qualify for and you can use them for all kinds of business expenses.
Apply for one with a low introductory rate to get the best value. Just be sure to keep track of when the rate goes up so you don’t get stuck with heavy, unexpected interest charges.
Also, consider the rewards options. Cashback is always nice and if you travel a lot for business, a travel rewards card may be beneficial.
The Right Type of Business Loan For You
There is a myriad of options out there for entrepreneurs to acquire funding. It’s merely a matter of choosing the right type of business loan for you.
Which type will best suit your needs is largely dependent upon your particular situation. Regardless, when you’re looking for a lender it’s always good to find a friendly one who works with you well.
To sign up with a lender who is also a partner in your success, feel free to check out our loan products and options today. It only takes a few minutes to get pre-approved for up to $500,000 in funding!