A Quick Guide to New Business Loans
Starting a new business means investing a lot of money up front for startup costs, such as inventory, rent, equipment, licenses, insurance, a web presence, and marketing. Applying for a new business loan can provide the funding you need, but the process is often long and complex.
To find the right new business loan for your small or growing business venture, begin by familiarizing yourself with your options. When you know where to look and how to maximize your chances of getting approved, you’re well on your way to making your new business dream a reality.
Understanding Types of Business Loans
You have several options when looking for a new business loan. Bank loans are the most common and the type most business owners think of when considering applying for a business loan. Banks offer two main loan types:
Obtaining a bank loan before your business is established can be difficult because you have little to show in terms of financial activity. If you can’t get approved by a bank, you may be eligible for another type of loan:
Small Business Administration (SBA) loans are bank loans guaranteed in part by the SBA to provide more security for the lender.
Alternative lenders, including online services, are specialized companies offering loans of various sizes.
Peer-to-peer lending, also called marketplace lending, provides access to a wide pool of potential investors.
Lines of credit offer a set amount you can borrow against to finance short-term expenses.
Finding Loans to Start a Business: Common Options
The type of lender you approach when applying for a new business loan should depend on the type of loan you want, the strength of your financial history, and how long you’re willing to wait to receive money.
Traditional bank loans are often the hardest to acquire and have a complicated application process. SBA loans are also known for their difficult qualification requirements, but potentially lower interest rates and longer terms may be worth the effort. Microlenders and nonprofit lenders provide short-term loans in small amounts with an application process similar to the one used by banks.
Alternative lenders offer smaller loans with higher interest rates and a more straightforward set of rules for applying. If your financial history is less than stellar, you may be more likely to qualify for a loan from one of these institutions.
Some people choose to forgo lenders altogether and approach friends and family or use crowdfunding to finance their business ventures. Use common sense if you decide to fund your business this way, and make sure you have a solid agreement with everyone who gives you money even if you know them well.
How to Get New Business Funding
Regardless of the type of new small business loan you decide to apply for, the lender will want specific documentation to review along with your application. Remember, your business is just starting out, and you don’t have some of the numbers an established company uses to prove financial viability. That’s why a strong personal credit history is important when applying for a business loan. You should also have detailed financial projections based on careful market research to show that your company will be able to make loan payments on time.
When approaching a traditional lending institution, you should bring:
The business loan application and related information
A solid business plan showing the purpose of the business, preferably reviewed by an attorney or a CPA to finalize the details
Proof of personal and professional experience applicable to the business to show why you’re able to make it successful
Personal income tax returns
Documentation of your personal credit history
Personal financial histories of partners or other key individuals involved in the company
Details of the loan, including how much money you want and why you’re applying
Legal documentation showing you’re eligible to do business in your state along with licenses, leases, partnership agreements, or franchise information
Company financial projections, such as cash flow and profit-and-loss
SBA loans may require additional documentation. Alternative lenders, on the other hand, don’t often ask for much paperwork. Each has its own set of requirements, so make sure you understand what’s required in the application process to improve your chances of getting the loan you need.
Because there’s always a chance that your application will be turned down, have a backup plan in place. Make a list of your top five choices of lenders, and move down the list as necessary until you find an institution willing to invest in your idea.
Pros and Cons of New Business Loans
Like all sources of business funding, new business loans have advantages and drawbacks. The biggest advantage is getting the cash you need to launch your business without cutting corners, giving you a strong start and a better chance of success. Having access to a range of options makes it possible to find low interest rates and reasonable payment terms. Interest payments may be tax-deductible on some loan types, and making payments on time improves your business credit score.
However, it’s also important to consider the potential downsides of getting a business loan:
The application process can be long and carries a high risk of rejection if you don’t provide enough details for the lender.
If you default on your payments, you could lose your collateral or a portion of your personal assets.
You start off with a heavy weight of debt.
Monthly payments could put a strain on cash flow.
Research all of your new business loan options to find a form of funding where the benefits outweigh the drawbacks.
Loans for starting a business provide the financial support you need to get your company off the ground and establish a reliable brand and a solid presence. Use common sense as you explore your options, and be smart with the money you receive once your application is approved. By focusing on growth and investing funds where they’ll do the greatest amount of good, you’ll put your new business on the path to grow from an idea into a success story.
If you’re ready to start applying, you’ll find a list of the top-rated lenders on this page. Browse reviews, links, and all the information you need to make an informed decision. Find your business lender, and start your business off right.