If your dream is to launch a successful company, figuring out how you'll raise money is just as important as figuring out what business to start. During that initial stretch when you're building up sales, you'll still need money to cover salaries, product development, overhead and other startup costs.
So where can you turn for startup capital? There is a large marketplace of potential loans to start a business—and the right fit can depend on a few different factors. Here's a closer look.
Types of Business Loans
Small-business loans. Standard small-business loans come from banks, credit unions and other financial institutions. After you qualify, you'll receive a lump sum of cash that you can spend how you wish; it's not connected to any specific type of business spending.
Equipment loans. If you'd like to buy a specific piece of equipment or other asset for your business, you could also take out a loan backed by that property. This means the equipment is built-in collateral for the loan, so if you fail to repay, the lender could seize the asset. In exchange, you could qualify for a lower interest rate versus unsecured business loans.
Line of credit. A line of credit gives you a flexible borrowing line, where you can borrow up to the limit, pay the money back and then borrow again in the future without reapplying. Chances are, the borrowing limits on these will be lower than a standalone bank loan, so it's generally better for covering smaller, working-capital needs.
Credit cards. A credit card follows the same system as a line of credit—you can spend to the card limit and will owe interest if you don't pay off your entire balance by the statement date. A business credit card can be easier to qualify for versus other options and you can earn rewards on your spending. However, the interest rate could be higher than bank loans.
Invoice financing/merchant cash advance. If your startup is already making sales, lenders can give you an advance on your upcoming revenue—meaning they give you money now and collect part of your future earnings. With invoice factoring, they collect a percentage of unpaid invoices. With merchant cash advances, they collect on your future credit and debit card sales.
Potential Lenders
Banks/credit unions. Traditional lenders like banks and credit unions typically have the toughest approval for startup loans. They may take several weeks or even months to review your application and will have tougher requirements, like an established credit score, collateral and a formal business plan. In exchange, they could offer larger loans at lower interest rates than other lenders.
Credit-card companies. A business credit card on its own can already cover many startup costs. And your credit card company can offer other types of financing, with services like prepayment for your vendors, standalone business loans and lines of credit.
Alternative lenders. Alternative/online lenders tend to have quicker and easier standards for startup loans, possibly approving an application within a few days. In exchange, they can charge much higher interest rates than banks and even credit cards.
Small Business Administration. The SBA is government organization and one of its services is helping companies qualify for loans. They guarantee part of your loan repayment to a bank or other lender so your approval odds are a little higher. In exchange, you'll owe an extra fee to the SBA while paying back your debt.
Finding the Right Fit
Consider your timeline. How quickly do you need money? If you need working capital immediately, you might look to your credit card, line of credit or merchant cash advance/invoice factoring. If you have time, it may be better to wait until you qualify for the lower rates on a bank or equipment loan.
Determine your financing need. How much upfront capital do you need to get your business going? Is it a few thousand dollars or do you need a five- or six-figure amount to buy equipment and facilities? Credit cards, merchant cash advances or alternative lenders save you the hassle of a long application, but there's a limit to how much you can borrow through these methods. For large loans, consider looking to the bank, equipment loans or the SBA.
If your dream is to launch a successful company, figuring out how you'll raise money is just as important as figuring out what business to start.
Rank trade-offs. Every loan will have some sort of tradeoff between costs. Are you OK paying a high interest rate or the SBA fee for an easier application? Are you comfortable putting up collateral and risking your assets for a lower rate?
Would you like the option to get out of debt earlier? Bank loans may charge a lower interest rate, but if you pay everything off ahead of the loan schedule, they could charge a prepayment penalty. Credit cards and lines of credit potentially charge a higher interest rate but let you get out of debt more quickly.
Tap existing relationships. As a startup, your business may not have the financial track record to qualify for a loan on its own. But if you have a long-term personal relationship with your bank, credit union or credit card company, reach out to them to discuss your options.
Based on your history together, they may be more willing to extend credit versus a lender that doesn't know you. And they could offer valuable insights to your business plan, including discussing what is a good business to start based on what they've seen with other clients.
Don't let a lack of financing get in the way of your business goals. By working through these options and strategies, you can choose the right loan to get your startup off the ground.
Photo: Getty Images
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