Most startups need business loans to kick off their business plan.
Other existing ones need business loans to expand their existing operations.
But one striking thing, no matter what your business needs a loan for, is how confused people tend to be in their search for business loans. Some incredibly successful entrepreneurs don’t have a clue as to how and where to begin.
But don’t worry! We’re here to help.
What is a Business Loan?
A business loan is a method of debt financing for a business that involves borrowing money from a lender to be paid back over time with interest.
Business loans help business owners start and grow their businesses, cover deficiencies in cash flow, purchase inventory, new equipment, and more.
There are many different types of business loans, including term loans, SBA loans, lines of credit, and other types of financing. The best fit for you will depend on your loan purpose, business history, and personal financial history. Business loans are typically issued by banks, credit unions, nonprofit lending organizations or online lenders.
Collateralization
Some business loans for startups involve collateralization of the loan with a business or owner’s assets or are financed and backed by the entire assets of the business and/or the owner’s assets. Thus, collateralized loans and small business loans overlap. But the difference is that you can use certain assets to secure the loan for collateralized loans.
On the other hand, a business loan may include these assets, as well as collateralization of the business or personal owner’s assets. Some benefits of securing business loans for startups include better rates and terms, higher rates of approval, and allowing for the leveraging of assets.
Where To Get Startup Loans
There are 34 million small businesses within the United States. According to the Small Business Administration (SBA), small businesses account for up to 99.9% of the businesses in the U.S and form the backbone of the US economy.
You will be contributing to the country’s economy positively by starting a small business. Therefore, getting loans to fund your startups can be pretty easy, provided you know where to look.
Uses of Business Loans
Before we go into the types of business loans, you need to know that an important part of the loan application process is understanding the purpose of your business loan. This will help you make the most of your funding.
Startup business expenses
When you start up a business, expenses typically include things like store or office space, licenses or certifications, inventory, payroll, and other purchases to help a business get off the ground. In this case, it’s important to ensure that the loan is paid out fast enough for you to start.
Because you only have a business plan that would show your projected revenue but no actual products or results, startup business loans are not easy to get and the process to acquire such a loan may be subject to things like checking your personal credit, your income, your financial history, etc.
Long-term business growth
When you keep in mind the growth of your business
For example, term loans can make large purchases more affordable and are best for investments that grow your business.
Need for short-term cash flow
A cash flow gap in business refers to the period between paying for inventory or other expenses, and when your customer(s) will pay you. Certain types of startups may experience gaps in cash flow and may opt for specialty financing or revolving funding like a line of credit or credit card.
Purchasing a business
When you acquire a business without starting your own from scratch you may get funding from the more traditional banks and credit unions, the SBA, and online lenders, which all offer loans to purchase a business.
Types of Business Loans for Startups
Medium-term loan
A
With traditional or
It is advisable to put up your property as collateral, and if you are confident that you can meet the deadlines for payment, this type of business loan is a good fit for your startup.
Equipment loans
With an equipment loan, you can secure a business loan which will help you get the tools you need for your company without spending from your business’s revenue. This type of loan offers you a credit line through a lender or banker and allows you to repair damaged equipment, replace outdated ones, or buy new ones that suit your business needs.
The lender will thoroughly examine your
SBA loans
These are loans granted by the Small Business Administration (SBA). They are ideal for startups who fail to qualify for conventional business loans. That is, through other lenders or a bank. Many business owners in different industries secure SBA loans to fund their growth. They will match you with many lenders within the space of two business days.
Then, you can decide to choose the one with the interest rate that suits you. Upon selecting the lender to take a loan from, you can complete the requirements and other documents without involving SBA. This type of loan is perfect for your startup, especially if you cannot get the support or assistance of a bank.
Invoice factoring
If you’re looking for
Nonprofit microloans
Nonprofit microloans are an excellent option for financing a startup. According to Fundera (a small business lending marketplace) microloans fall within the range of $500
Moreover, depending on your choice of company, with a
Equity crowdfunding
The purpose of equity crowdfunding is to aid businesses or startups in the early phases of development. You will agree to exchange your business shares for funds.
All you need to do is
Pros and Cons of Business Loans
The pros of getting a loan to start your business are clear; they help launch your business and help it grow, they are relatively inexpensive to start and payments are typically spread out so can be factored into your costs, and they can help build your business credit.
The cons typically include that, even though certain types of business loans can be very affordable, others can also be expensive, which could cause cash flow issues for your business. They can also affect your personal credit if you’re not able to make payments on your loan.
How to Improve Your Approval Chances
Each lender and loan instrument will come with its own requirements, but there are some things they all will check, regardless of where you apply and for what amount.
Personal credit score
Your personal credit score will be an important factor in evaluating your business loan application. Banks typically want to see a credit score of at least 680, while some online lenders require a minimum of only 500. Some alternative lenders have no minimum credit score requirement but will be quite a bit more expensive to even out any risks.
If your credit score is not up to par for a loan approval, there are several ways to improve it such as paying off outstanding loans and keeping your credit cards up to date.
Your business plan and documentation
Specifically for a startup, you will have to be able to present a complete and sound business plan, showing how you will set up your business, your expenses, and your projected revenue. This will show that you are serious about your application while it also will show how the load can be used to create revenue.
Collateral
If you can offer collateral, it will significantly strengthen your loan application and improve your chances of getting approved for a business loan because it will lower your lender’s risk of putting money into your business. It also helps them recoup losses if you default on your loan.
Down payment
Some types of business loans require an upfront lump sum to reduce the amount of money you will borrow, specifically in the case of a real estate loan. Such down payments can significantly improve your chances of getting approved and may save you money in the long run by reducing the amount of money on which you’ll pay interest.
Getting Started with Business Loans
It’s very likely that you’ll need to secure a loan to convert an idea into a business. One of the best ways to obtain the required funds is to combine an alternative lending strategy with more traditional loans.
Many people believe that there must be some collateral involved before a business can get a loan, and before the lender can approve the fund. And that may be true! But it’s important to look into all your possible options before jumping into one strategy over another.
You will need to have an edge to be able to secure a business loan as a startup. This is due to the competitive nature of startup loans.
Meanwhile, you can increase your chances of securing a loan amid the intense competition by following these steps.
Develop a very good business plan
In your application for a loan, a detailed business plan is usually required. This will highlight a detailed consideration of the startup expenses attributed to your business, and convince the lender that you have done your due diligence on the product or service you are delving into to ensure a profitable business model.
Keep your credit score up
You are more likely to secure a business loan when you have a good credit score. This will also qualify you for a lower interest rate, and ultimately, allow you to borrow more money. Thus, it’s important to be confident in your credit score before you apply for a business loan. You can raise your credit score significantly by checking your report to identify and correct any inaccuracies as well as track and limit your outstanding debt.
Get some money all by yourself
You will also need to have some funds ready on your own because banks, financial institutions, and other lending organizations will check your assets to decide whether or not to approve your loan. Getting some funds ready to pay a part of the startup costs to kickstart your company often appeals to lenders and in the long run, it can save you money on interest, as you can take out a smaller loan amount.
Business Loans for Startups with Ecwid
Securing a business loan for your startup is an important part of starting certain ecommerce businesses. In other words, you might want to use a business loan to finance a small online retail business. This is where Ecwid’s ecommerce solutions work well.
Tap into our wealth of applicable ecommerce features from social media selling to setting up an instant sales portal as you borrow and repay your business loans. At the same time, it’s important to note that the idea of funds or loans for startups is not only limited to selling goods online.
Different financing options might work regardless of the kind of startup you have. The bottom line is that your qualification for the loan depends on the type of financing you seek.
In addition, the favorable terms and low costs attributed to these loans work better when you have a reliable, solid ecommerce platform like Ecwid.
Our Verdict
Business loans exist to help your company grow.
But you must be aware of the available options out there to help you decide which one is best for your business, and which one matches your specific business needs as you grow and evolve.
Hundreds of billions of dollars are lent by business lenders as capital each year. Many also have numerous funding options.
So, be sure to seek out the most favorable option in terms of the low cost of capital and smooth serviceability, to maximize your potential growth and success.
