It takes money to make money. To get a new business up and running, you’ll need to pay for things like inventory, equipment, furniture, marketing expenses, and, of course, a location. Existing businesses are able to pay for those sorts of things out of their profits, but a brand new business might not have that ability. Many lenders are only interested in providing loans to established businesses, so what funding options are available to startups?
Equity financing is a way to fund your business without going into debt. With equity financing, you raise money by seeking funding from investors who then become part owners in your business. The level of ownership they would have in your business would be proportionate to the size of their investment. In many cases, business owners seek equity funding from their friends or family, but business owners also commonly seek investments from people who have experience running similar businesses or working in their industry.
One problem many business owners encounter when they’re applying for a business loan is that they don’t need loans large enough for lenders to be interested. To help fill this gap, some lenders and other organizations have started offering microloans, which are loans for relatively small amounts of money. These programs tend to be friendlier toward startups than regular lending programs.
Although the Small Business Administration tires to encourage lenders to take a chance on small businesses by agreeing to guarantee a percentage of loans made to approved businesses, most types of SBA loans aren’t very accessible to startups. However, the SBA does fund a microloan program, which is a better option for startups.
You have a lot of faith in your business plan and other people might, too. In recent years, many entrepreneurs have started taking their cases to sites like Kickstarter, GoFundMe, and Circle Up to raise the money they need to get their businesses up and running.
Since startups don’t typically have major assets, it can be hard for them to be approved for a regular business loan because they don’t have anything to offer as collateral. You need equipment for your business to be able to function, but it can also serve as a form of built-in collateral for an equipment loan.
Rather than turning to outside sources of funding, some entrepreneurs tap into their own personal resources to fund their businesses. Some people will use money from their 401(k), take out a home equity loan, or use their own credit cards to help their businesses. In some cases, people ask their friends or family for a loan, rather than asking them to become an investor like they would with equity financing. These methods involve a much higher risk of personal loss on your part since they put your home, retirement savings, and personal relationships in jeopardy if your business doesn’t succeed.
Applying for Startup Business Loans
What you’ll need to provide with your application will depend on the type of loan you’re interested in. Since you are looking to get a business started, lenders are going to be very focused on your personal credit score and your prior experience working in your industry. They will also naturally want to see a detailed business plan and will want to know how, exactly, this loan would help your business grow.