Small Business Startup Loans: Comparisons, Considerations, and Strong Applications

Crowdfunding

As technology and social media continue to grow, crowdfunding also keeps pace as a popular type of small business loan for startups. The Securities Exchange Commission (SEC) approved a new section of the JOBS Act in 2015 called Title III . What Title III did for small businesses seeking business capital was loosen the purse strings and allow companies to raise up to a maximum of $5 million in a rolling 12-month span. Title III also changed up who is allowed to invest in companies, in exchange for equity. Equity was only available to accredited investors with a lot of money (at least $1 million net worth). Now, companies can optionally offer equity to both accredited and non-accredited investors through online crowdfunding platforms in exchange for an investment.

On the other hand, some crowdfunding platforms are donations-based, taking the complications of equity out of the equation.

Equipment Loans for Startup Businesses

New companies might find themselves looking for small business loans for startups more than making payroll and keeping the lights on. There are all sorts of unforeseen expenses when it comes to starting your own business. A large part of these expenses is equipment costs, especially for businesses that depend on specialized equipment to provide services.

Equipment loans for startup businesses are also known as equipment financing. The reason they call it equipment financing is that the equipment for which you use the loan also acts as collateral for the same loan. This built-in collateral helps to mitigate the risk associated with the loan, making it much easier for startup businesses to qualify. Even better, equipment loans for startup businesses come in both short-term and long-term varieties; so your company can decide how much it needs and for how long.

Government-backed loans

Government-backed loans for startups are financial products that are partially guaranteed by government agencies, primarily through the Small Business Administration (SBA) in the U.S. and the Canada Small Business Financing Loan (CSBFL) program in Canada. These are designed to help new businesses secure capital that they may struggle to obtain from traditional lenders.

Small Business Administration (SBA) Loans

SBA loans are government-backed loans with small businesses specifically in mind. The most important thing to remember about SBA loans is that these are long-term loans meant to get small businesses off the ground and up and running.

Because SBA-guaranteed loans are operated by the U.S. government, they have strict eligibility requirements that can make them difficult startups to come by, including:

• Your type of startup must operate for profit
• Do business in the U.S. or its territories
• Have a reasonable amount of owner equity to invest
• Be willing to use alternative financial resources, including personal assets, before seeking financial assistance and startup capital.

It’s also important to note that these loans are for businesses that are in it for the long haul. We’re talking about 10 or 15 years. This is great for a local business looking to gain a foothold but might not be ideal for a startup looking to find money fast.

Canada Small Business Financing Loan (CSBFL) Program

The Canada Small Business Financing Loan (CSBFL) program is a government-backed initiative designed to help small businesses in Canada obtain financing for purchasing or improving business assets like equipment, real estate, or leasehold improvements. The program is managed by Innovation, Science and Economic Development Canada (ISED), in partnership with financial institutions across the country. Below are key features of this financing, according to the Government of Canada:

1. Loan Amount: The maximum loan amount is $1 million with a maximum of $500,000 for leasehold improvements and equipment.

2. Eligible Businesses: Small businesses with annual revenues of up to $10 million are eligible, though there are some restrictions regarding business type (e.g., the agriculture industry is not eligible).

3. Government Guarantee: The government guarantees 85% of the loan, making it easier for small businesses to access financing that they may not be able to secure through traditional lenders.

4. Repayment Terms: Maximum repayment terms for loans is 15 years and 5 years for a line of credit.

5.Use of Funds: Loan funds can be used for a variety of purposes, like purchasing equipment, improving existing facilities, buying commercial real estate, intangible assets, and working capital for startup costs or business expansion. Lines of credit can only be used for working capital.

Equity Financing

Anyone who has watched “Shark Tank” or “Dragons’ Den” is familiar with the idea of equity financing.

Equity financing is when you raise money by offering an ownership interest in your company. Let’s say your business is valued at $1 million, and you are hoping to raise $100,000 through equity financing. For the $100,000, you offer an investor a 10 percent ownership stake in your company.

Equity financing can be beneficial because your new partners are more invested in the success of your business. That’s because it’s also partly their business now. Equity financing can also keep you off the hook for repaying the loan in certain situations if your business fails. A downside of equity financing can be the loss of control in your business. As someone that worked hard to build your company from the ground up, it can be hard to let go and not have full say in how things run.

Venture Capitalists (VCs)

This type of financing is typically sought by high-growth startups with innovative ideas and the potential for significant returns, but who may not yet be able to secure traditional loans. In addition to capital, venture capitalists often bring valuable expertise, networks, and mentorship to the startup, helping to accelerate its growth. While VC financing can provide substantial funding, it also means giving up a portion of ownership and control, and typically requires meeting high expectations for performance and growth.

Angel Investors

Angel investors are affluent individuals who provide capital for startups, often in exchange for convertible debt or ownership equity. Unlike venture capitalists, angel investors are usually more willing to take risks on nascent companies with high growth potential. They can also offer valuable mentorship and networking opportunities, making them an attractive option for startups needing both funding and guidance.

Commercial Bank Loans and Business Lines of Credit

Small business loans or lines of credit for startups are forms of debt financing. It’s money you borrow with the expectation that it will be paid back over time with interest, and often with fees attached. With a loan, you receive a lump sum; with a line of credit, you can draw against it as needed up to a limit.

Securing a loan or line of credit from a traditional lender can be a boon to startups because they offer the lowest interest rates, but you may have an easier time catching a unicorn at the end of a rainbow. To qualify for the lowest rates and payback terms on a traditional business loan, you must have an impeccable credit score and at three years of accountant-prepared financials that either show profitability or a very clear path to profitability via financial projections.

Requirements may differ between unsecured and secured business loan options. An unsecured business loan requires no collateral but may be more difficult to qualify for. A secured loan requires collateral to guarantee the loan.

Many lenders specialize in small business financing or alternative lending, so their requirements are easier to meet, such as at least 6 months in business, $50,000 in annual revenue, and a personal credit score around 600. (As opposed to a traditional bank, which might require 2 years in business, $100,000 for their annual revenue requirement, and a credit score of 680). However, it’s also important to consider how quickly and easily you’ll be able to get funded–the process can take months, with piles of paperwork along the way.

Business Credit Cards

When all else fails, sometimes there’s only one thing left to do: charge it! We kid, but taking on debt through credit is never something that should be done lightly. That said, a business credit card can still be a valuable resource for startups looking to make ends meet. The key is to manage your balance to keep from overspending so that you can make the payments without issue.

Personal Financing

As the business owner of a startup, much of your business is relying on what you, personally, bring to the table–at least in the early days. While it can be difficult to qualify for traditional small business loans for startups offered by your bank, you might have better luck applying for a personal loan instead.

If you have a fantastic credit score and a sound credit history, there’s a good chance you can qualify for a personal loan to find the money your business needs. However, it’s important to keep in mind that personal loans can be risky. When you take out a personal loan, you’re the one responsible for the repayments.

Factors to Consider When Choosing a Small Business Lender

1. Short and long term funding needs. No doubt you’re aware of how you’ll use the funds in the short term if you’re searching for ways to fund your startup, such as payroll, inventory, materials, equipment, or taking on a big contract to grow your business. However, it’s also important to think about your long term needs when shopping for small business lender.

2. The amount of funding you need. A strong business funding plan will outline exactly how much financing you’ll need today, and in the future, so you can narrow down your options.

3. Your current creditworthiness. Your current business credit score (and in some cases, your personal credit score) heavily influences the funding options available to you and your likelihood of approval.

4. Your Debt to Income Ratio (DTI)

You may have a pretty good idea of how much money you need to achieve your goals, but if you haven’t set a budget yet, it’s time to do so. There will always be limitations on how much you can borrow and pay back with interest.

Figure out your debt-to-income ratio (DTI) with this formula:

Debt-To-Income Ratio = Total Monthly Debt / Gross Monthly

Income Ideally, your debt-to-income ratio should be about 36% or lower. Too high, and you may have problems paying off the loan.

5. Documentation you’ll need. The documentation you have available will also determine available financing methods. For example, if you’ve only been operating for a year, you won’t have three years of accountant prepared financial statements required by traditional banks. Here’s a list of documents to prepare for your applications:

• Business Plan
• Financial statements, projections and actuals, prepared by a CPA. Ideally, for three years, but otherwise for as long as you’ve been in business.
• Articles of Incorporation or other proof of business
• Contact info for your business
• Your government-issued color ID
• Bank statements

6. Important loan characteristics. For any financing solution you’re considering, look at:

• The terms, such as interest rate, repayment requirements, and how much funding you’ll receive
• What happens if you miss a payment, and your backup plan in that situation

7. Important lender characteristics. The organization you’re working with effects your overall experience and success. Consider:

• Whether you want to build a long term relationship for future funding as your business grows
• Their customer service throughout the application process
• Other businesses they have helped. Are they like yours?
• If they will work with you in the event of a missed payment

8. Recommendations from your network. Other entrepreneurs, CFOs, and other professionals you know might have recommendations for a quality financial partner. They could make an introduction that sets you up for success.

Tips to Improve the Chances of Getting a Small Business Start-Up Loan

Financial institutions are betting that you won’t default on your small business startup loan. That’s why it’s so difficult to qualify. But, there are several tips to improve your chances.

• Apply early. There’s nothing fast about the government and it can take months to get approval for small business loans for startups. Even banks and credit unions can sit on your traditional loan application waiting for credit scores and verifying the type of business, loan amounts, time in business, cash in the bank, if there’s business credit card debt, your personal credit score, and more. Funding times vary, but it’s always a good idea to apply early, because it can take awhile to get approved.
• Improve your credit history. Like personal loans, small business loans for startups look at your credit history (and your credit score) to determine if you’re a good (or bad) credit risk. You can improve your credit history by paying your bills on time and not taking on any more debt.
• Be prepared. Putting together a detailed business plan, including your financial and bank statements, that outlines your current financial situation and path to profitabilit, is the first step in improving your chances of getting approval for small business loans for startups. Lenders want to know you’re seriousness about the future of your business, and this proves you are.
• Get advice from an expert. Small business owners and financial experts have been in your shoes. They know the application process, the funding options for startups, how to read loan offers, and what it’s like to need business financing to ‘get the job done.” Or, get the job started.

How to Apply for Small Business Startup Loans

Once you have a short list of options narrowed down, it’s time to apply.

• Use a lending marketing place, like QuickBooks Capital, can save you time. Apply once and get multiple offers back.
• Evaluation pre-qualification offers against your short and long term funding needs.
• Interview lenders with strong offers to ensure they will be a true partner to your business.
• Complete your application with chosen lenders and get a firm qualification offer.
• Get approved, get funded, and put your capital to work.

How to Get a Loan to Start a Business if You Have Bad Credit

It can be challenging to get small business loans for startups. It can be even more challenging if you have bad credit, or a credit score under 580. It’s not impossible, but you won’t qualify for the same loan amount or the same rates or terms than if you had excellent credit.

There are alternative lenders that will offer short-term loans that are secured by collateral. But if you miss a payment or default on your loan, you risk losing your collateral. There are also other types of financing available if you have bad credit including:

• Invoice financing. While these companies do consider your credit score, the approval relies more on your customer’s creditworthiness rather than your own.
• Merchant cash advances. A MCA is a loan that provides a quick injection of cash that you repay with your future credit card sales. It’s a lot like a paycheck advance, expect it is for businesses instead of individuals. Unlike most loans, MCAs use a factor rate that typically falls somewhere between 1.2 and 1.4. They can be risky; many small businesses have defaulted on them due to high fees and daily or weekly loan repayments–which can ironically hurt your cash flow.
• Asset-based loans. These loans or lines of credit are secured by collateral, like inventory, equipment, or property you own. This type of loan is usually only used in the short-term to cover an expense or cover cash-flow issues.

Resources for Small Business Loans

• FundThrough. One advantage of getting invoices paid early is that it’s not technically a type of loan because it’s not debt. Rather, you’re selling an asset: your outstanding invoices. This can also make them safer than merchant cash advances, and they offer the same quick, easy process.