Small-business startup loans: Not the only way to get your startup going

You can have a great idea, a fantastic business plan and the professional chops to build a successful business, but if you don’t have the funds your startup might never get off the launchpad.

According to a 2012 survey from the Small Business Administration, personal savings and personal credit cards were two of the top funding sources for small-business startups, but 19% sought some form of capital. If you don’t have a lot of savings or assets to liquidate, or don’t want to risk wiping out what you do have, you may choose to look for a small-business startup loan.

But the same risk that makes you hesitate to put all your personal savings on the line to start a business can make lenders wary about giving you a business loan. Many traditional business lenders want your business to be established before they will lend to you.

The good news is, most small businesses don’t need a huge sum of money to get started. In fact, according to the Small Business Administration’s 2012 survey, nearly 40% of one-person small-business startups need less than $5,000 in capital to get started.

Let’s look at some of the challenges you might face in launching your startup, and financing options that can help you get your business off the ground.

• The challenges of small-business financing
• Basics of small-business startup loans
• Personal loans
• Business loans
• SBA loans
• Credit cards
• Tips to improve your chances of getting a small-business startup loan

The challenges of small-business financing

If you need money to get your small business started, you’re not alone. In 2017, just 31% of small businesses said they didn’t use financing, according to the National Small Business Association. And among those that sought financing, 73% of companies said they were able to get adequate financing, according to the NSBA. Still, 1 in 4 struggled to access financing.

Both startups and established companies often need to borrow money to buy equipment and inventory, expand operations or cover operating costs.

Businesses unable to obtain adequate financing reported a range of difficulties, including an inability to expand operations or increase supply to meet demand. A full 31% of businesses said not being able to get funds thwarted their company’s growth, while 13% of businesses without access to adequate financing actually had to let employees go.

Financing can be even more of a challenge for startups. In fact, according to the Small Business Administration’s 2012 survey, just 8% of small-business startups surveyed used bank loans for their startup capital, and 2% used a business credit card. The majority relied on personal savings (57%), while other startups turned to personal credit cards (8%), home equity (3%) or other personal assets (6%) for capital.

If you’re an entrepreneur, a lack of capital doesn’t have to hold you back. Funding options like personal loans, credit cards and loans backed by the Small Business Administration could help get you the cash you need to start, succeed and grow your small business.

Basics of small-business startup loans

If you’re seeking funding to start a business, your financing options can look a little different than what’s available to established businesses.

One of the big challenges that startups face is an inability to qualify for funding because their company has no business credit — or poor credit — and no cash flow. Because so many new businesses can’t qualify for small-business startup loans on their own, owners often rely on their personal credit to get funding.

Taking out a personal loan in your name for your business can be risky. If your company fails, you’ll still be personally responsible for repaying the loan — even if the business declares bankruptcy. Your personal credit could be damaged and the lender could come after your personal assets.

This doesn’t mean you shouldn’t use your credit to help your business get the money it needs. But you should be cautious about how much you borrow and have a plan for repayment no matter what happens to your company.

Exploring all your loan options and weighing pros and cons are also key. Let’s look at some of the most popular sources of funding for small business — personal loans, small-business loans, SBA loans and credit cards — so that you can decide what type of lending to pursue.

Personal loans

Personal loans can be used for multiple purposes, including starting a new company or growing an existing business. These loans can be obtained from financial institutions, like big national banks, small community banks, credit unions and online lenders.

Advantages of personal loans

• You can qualify based on your personal credit, including your credit scores, credit history and income, so you may not need to provide the lender with a lot of details about your business.
• If your credit is good, you may qualify for lower interest rates than you would with a business loan.
• You can borrow a small amount — according to the Small Business Administration’s 2012 survey, many startups need less than $5,000 to get going.
• With a fixed-rate personal loan, you’ll have a better idea of how much your monthly payments will be and how long it can take to repay your loan.
• Variable-rate personal loans, where your interest can rise or fall over time, will also offer fixed repayment periods, so you’ll know how long you could be in debt.

Disadvantages of personal loans

• Because you, not your business, apply for a personal loan, you’re personally responsible for repayment. That means if your business doesn’t succeed, you must still repay the loan.
• Interest rates can be high if your credit doesn’t qualify you for great terms.
• You may not be able to secure as much funding as you would with a business loan.
• Any credit you build, such as through on-time payments, with the loan won’t go toward building business credit.

A personal loan can be a way to get capital for your startup, but keep in mind that individuals with great credit scores are more likely to qualify for better interest rates. If your credit is less than stellar, you may still be able to get a personal loan, but it will likely be at a higher interest rate. What’s more, if your personal credit isn’t as good as you’d like, it’s important to understand how it got that way — and take steps to ensure you’re not carrying any poor personal credit habits into your business life.

Business loans

Small business loans are specialized loans intended for business purposes only. They’re available from online lenders, traditional banks and certain credit unions.

Advantages of business loans

• Business loans often have higher loan limits than personal loans, so your company may be able to get more funds for big expenditures if you qualify for a business loan.
• You can keep business and personal finances separate if you don’t have to guarantee the business loan. But note that depending on your business’s structure, you could still be personally liable for the debt.

Disadvantages of business loans

• Your company might not be able to obtain a small-business loan unless it has been operating for a while, owns assets and has established credit.
• You might need to have a business plan and financial projections to help prove to lenders that your company is creditworthy.
• Obtaining a loan can be easier if you seek a secured loan and your company has assets to use as collateral. But if you don’t repay the loan, the bank could seize and sell the assets guaranteeing the loan.

SBA loans

SBA, or Small Business Administration, loans aren’t actually loans issued by the SBA. Instead, these loans are made by partner lenders, community development organizations and microlenders. The SBA guarantees the loan to minimize lender risk and sets guidelines to make it easier for small businesses to get loans.

SBA loans can range from microloans to much larger fund amounts — even up to millions of dollars, sums most small businesses don’t need to get started. In fact, according to the SBA’s 2012 study, less than 3% of single-person startups need $50,000 to $99,999 to start a business.

Small businesses can apply for smaller amounts through the administration’s microloan program, which maxes out at $50,000. An SBA microloan can be used for operating funds, inventory and other startup expenses.

Advantages of SBA loans

• It’s possible to obtain funding from an SBA lender when other banks turn you down for financing thanks to the SBA’s loan guarantee.
• You can qualify for rates and fees similar to a comparable non-SBA loans.

Disadvantages of SBA loans

• SBA loans have strict qualifying requirements. For example, if you’re a startup, you should have experience in the type of business you want to start. And for a new business you should have cash on hand or business assets to the tune of around $1 for every $3 you want to borrow.
• Some SBA loans have prepayment penalties.
• The smaller your loan, the higher your interest rate might be. The SBA allows lenders to charge the prime rate plus 2.25% for loans of more than $50,000 maturing in less than seven years. However, for loans of $25,000 or less maturing in less than seven years, the cap is the prime rate plus 4.25%.

Credit cards

Business or personal credit cards can be a flexible source of small-business funding. You can use credit cards for big purchases, like equipment, or to cover ongoing operating expenses.

If your business obtains a credit card, you can also build credit for the company by paying your bill in full and on time. But you may need to use your personal credit when you apply for your first business credit card, and you may not be approved unless you have a good personal credit history.

If you get a personal credit card to help finance your business, avoid using the card for personal expenses. Make sure you keep your personal finances and your business finances separate.

Advantages of credit cards

• If your credit is good, you may be able to qualify for a card with a special promotional offer, such as 0% interest on purchases for an introductory period.
• Credit cards can be a flexible form of funding and may be easier to obtain if you have good personal credit.

Disadvantages of credit cards

• Nonpromotional credit card interest rates are typically much higher than rates for personal or business loans.
• Your credit card limit may be too low to provide all the funding you need. And remember, you’ll need to pay off your balances on time and in full to avoid paying interest.

Tips to improve your chances of getting a small-business startup loan

When you have a strong business idea you believe in, difficulty obtaining financing can be frustrating. Here are some tips that can help improve your chances of getting a small-business startup loan

• Develop a detailed business plan with financial projections. You’ll likely need this to be considered for a business loan, including SBA-backed loans.
• Work on improving your personal and business credit. Practice behaviors that will help your business credit scores, including paying bills in full and on time, and not maxing out your credit cards.
• Consider personally guaranteeing the loan. Until your company is established, you may need to put your own assets on the line.

Exploring your options for financing — including online lenders, credit unions and community banks — may also make it easier for you to find a startup loan or small-business loan, even if traditional lenders turned you down.

Bottom line

It is possible to find financing for a startup business. But just as in the world of personal credit, the best rates and loan terms will likely go to those with the best credit history and credit scores.

Having good personal credit could help get your small-business startup off the ground. Just be sure to borrow only what you really need, have a plan in place to repay the loan even if your business doesn’t succeed, and apply good credit habits to your business.