Getting your innovative idea off the ground can be challenging when you lack the financial backing it requires.
This is especially true in a crowded startup landscape with thousands of innovators competing for limited funding avenues. Many entrepreneurs view taking loans to get started as the most viable option. The lingering question then becomes how do you secure a startup loan? Who are the best lenders, and what are the best loan management practices? Let’s walk you through the intricacies of startup loans.
Understanding Startup Loans
Before calling your bank and filling out application forms, you must have a solid grasp of different loan types. This saves you a lot of trouble, including the embarrassment of auctioneers knocking on your door or, worse still, tanking your credit rating. Going blind is similar to opening a crypto exchange account without understanding “what is Bitcoin”?
A startup loan essentially functions like any other business loan. You contact a lender who assesses your creditworthiness and determines the amount you qualify for. The lender also sets the interest rate and repayment period based on their assessment. As with business loans, there are various sources of startup lenders entrepreneurs can turn to:
SBA Loans
The United States Small Business Administration offers several SBA loans that entrepreneurs can leverage. The administration evaluates businesses against set criteria, including the businesses must be profit-making and based in the USA. To qualify, entrepreneurs must also demonstrate that they are creditworthy and have exhausted financing options.
For startups, an SBA Microloan is the best option. It provides small loans of up to $50,000 administered through non-profit, community-based organizations. With this loan, founders can cover various costs, including paying for inventory, buying or leasing equipment, or using it as working capital.
Pros:
- This loan has capped interest rates between 8-13%.
- A flexible maximum repayment period of up to seven years.
- This facility has broad eligibility requirements.
Cons:
- Entrepreneurs can’t use this loan to repay existing debt.
- Real estate startups can’t use this loan to purchase property.
Online Business Loans
Online business loans are a great alternative for aspiring business wonders who practice prudent credit management. As the name suggests, you apply for the facility on your desktop or smartphone without visiting a brick-and-mortar lender. The advantage of these loans is that they have a prequalification process that allows you to view rates and terms to decide if you’d like to proceed with the application.
These loans are typically processed and disbursed much faster, even on bank holidays.
Pros:
- Faster prequalification, processing, and disbursement than traditional loans.
- Business owners have more flexibility on how they can use the funds.
- These loans less often require physical collateral, unlike traditional loans.
Cons:
- Online business loans often come with high interest rates and fees.
- The loans often have short repayment periods, which can be strenuous for startups.
Bank Loans
Another way to fund your startup is to visit your local bank and apply for a business loan. While these loans are harder to qualify for, they can be significant sums crucial for your startup’s growth. Household institutions like Bank of America require that your organization exist for at least two years and have a minimum annual revenue of $250,0000. You also have to provide collateral before receiving funding.
On the bright side, they tend to have more favorable interest rates and longer repayment periods than online business loans.
Pros:
- Favorable interest rates and repayment periods for startups.
- Gives entrepreneurs access to higher credit limits.
- Businesses can build their creditworthiness with bank business loans.
Cons:
- It requires a lot of documentation and lengthy verification to qualify for these loans.
- It’s not ideal for startups with limited operational periods and revenue.
Tips For Securing Startup Loans
You know where to look and have a pointer of the requirements to fulfill. How do you go about securing a loan for your startup? These insightful tips will lead you on a healthy and sustainable borrowing path.
- Assess your organization’s financial needs: A crucial step businesses must thoroughly undertake when considering loans is assessing their startup’s financial health. This involves analyzing running costs against revenue to make reliable financial forecasts. This helps to avoid over or under-borrowing and improves your approval chances.
- Settle on a suitable loan type: Depending on your field and startup stage, you must be clear on the type of facility you’re looking for as a business owner. This means understanding the restrictions that come with different types. For example, a real estate startup may find it difficult to operate under the terms of an SBA microloan.
- Evaluate your eligibility: An essential consideration to securing a startup loan is ensuring you tick the required lender boxes. Ensure your personal and business credit scores are healthy enough and your current debt obligation, if any, is manageable.
- Compare lenders: You should consider and analyze offers from different lenders to choose the best. Consult credit experts to help you form an informed opinion if need be.
Conclusion
The credit landscape for startups can be challenging terrain to navigate. Arming yourself with adequate knowledge makes it straightforward. Facilities like SBA loans, online lenders and business bank loans can fuel you to realize your dreams. Nevertheless, don’t ignore responsible borrowing practices and shrewd financial management in your journey.
