Almost 99% of businesses that are started in the United States are classified as small businesses, according to the Chamber of Commerce. In fact, such businesses with 500 employees or fewer, hire close to half of the country’s workforce. Indeed, nearly 120 million Americans work for the roughly 22 million small businesses that are individually operated across the country.
But despite the large number of small businesses that crop up each year, many fail to make it past their initial year of operation. About 20% of these businesses go under after their first year, while only about half of small businesses make it past the five-year mark, according to the Small Business Administration (SBA). And after that, roughly one in three survive to the tenth year.
Many businesses fail due to a lack of appropriate financing plans. In fact, studies show that one of the top 10 reasons individuals report a failed business is due to a lack of cash (29%) and pricing or cost issues (18%). Additionally, many business owners run into trouble when trying to take out funding, only to discover that their business does not have a long enough financial history to secure financing.
Businesses in this situation would be better served by a small business startup loan, which sometimes does not require the typical two-year financial history record that other types of funding ask for.
Up to $750,000
Up to 5 years
8% to 17%
In as little as two weeks
Startup Loans at a Glance
Small business startup loans are designed to give young companies working capital. Here’s what you need to know about such loans:
- Start-up loans for new businesses can range anywhere from $500 to $750,000. If you’re trying to secure a loan on the higher end of that range, your lender might expect you to have a well-constructed business plan. As a borrower, you should be ready and able to tell lenders how you plan to make money, when you plan to make money, and why you are better than your competition.
- Loan terms can range from one year up to five years. You should know that while you are paying back this loan, it might be harder for your business to secure another source of funding.
- You should expect to pay fees on your loan.
One of the main advantages of a startup loan is that, as a business owner, you typically do not have to give up equity in your company. This means you can still own just as much of your company as you did before you took the loan out.
Paying back your loan on time could also help you improve your business credit. A higher business credit score can help improve the chances that you will be able to secure a different type of business funding in the future.
While not always the case, you might end up paying a higher interest rate for your small-business startup loan than a more established business would pay for a different type of funding. This will depend on a number of factors, including your personal credit score.
Further, your startup loan will typically need to be personally guaranteed. That means you will be responsible for all debts and fees, in addition to being liable if you default on the loan. On top of that, some lenders will require collateral. Depending on how big of a loan you ask for, the collateral could end up being your house, meaning that if your business failed, you would end up losing your house.
Business Line of Credit
Individuals seeking alternative startup business funding options can consider opting for a business line of credit. This is different from other types of small business funding options because it can be acquired before there is an actual need for the funding. Most other financing options are taken out for a specific need. For example, short-term business loans are usually used to address a sudden expenditure while long-term funding tends to be used for long-term investments.
How Does a Business Line of Credit Work?
Business lines of credit work like personal credit cards do, except that business lines of credit typically have lower interest rates than those associated with credit cards. It is important to note that this can vary by lender. Lines of credit can be used as needed and the borrower only pays interest on the amount used rather than the total amount borrowed. Here’s what you need to know:
- The funding amount for a business line of credit can be large. The range starts as low as $1,000 and goes all the way up to $1 million.
- The funding term has a wide range, too. You could be expected to pay it back in as little as six months or up to 20 years.
- The interest rate can be lower than other types of funding. The average range is from 7% to 25%.
- Your lender will decide how much money you will have access to through your line of credit. You do not have to pull your entire line of credit every time you need extra funds. There will likely be a minimum withdrawal amount, though.
Business Line of Credit Requirements
Before requesting this type of funding, make sure you meet the basic requirements that a lender may look for. These include:
- A minimum of two years of operating experience
- Collateral in the form of real estate, inventory, or accounts receivable
- Proof that you have a profitable business with enough revenue to pay off debt
Each lender will have their own requirements. It is important to make sure you meet these before applying for a loan. Please note that it might be difficult to find a business line of credit for a new business, as one of the standard requirements is having an established company.
Startup Business Lines of Credit
Startups should seek out a line of credit from a lender that specializes in this vertical. It might be difficult for a new business to find any type of funding from a traditional lender, as one of the standard requirements is having an established company.
It is likely that a startup would need to put up collateral to qualify for a line of credit.
Business Line of Credit Rates
Interest rates vary by lender, circumstance, and other variables. That said, this loan product is reserved for established businesses with proof of profitability. These types of companies tend to enjoy lower interest rates.
Rates tend to be around 7% to 25%. Keep in mind that a loan beyond this range can be difficult to pay back.
Alternative Small Business Startup Loan Options
It can be hard to get a business off the ground without working capital. While there are many ways to go about getting necessary funding, each option has its own drawbacks and advantages. And some startup loans may come with unexpected expenses and fees that can end up limiting a new company in the long run. Those seeking alternative loans for new businesses can consider the following:
- Business Credit Cards: Business credit cards can be a good option for expenses that do not exceed $10,000, especially when you can pay back the invoice each month before interest starts accruing. An added benefit of using this type of financing is that it comes with rewards, like miles or cashback, depending on the card. Keep in mind, though, that a credit card can have higher interest rates than a line of credit. That said, the credit card will be much cheaper if you regularly pay off the card in full each month.
- Angel investor: Young companies can also gain funds through an angel investor. These types of funds often require you to give up some of your equity. Business owners should be careful with this option though, as angel investors could end up owning more of the company than owners might want.
- SBA loan: Individuals who are at the start of their business endeavors, or who may be struggling with current financial imbalances in their companies, can consider applying for grants for small business owners and small business startup loans, such as an SBA loan.
The SBA works with various organizations that can help provide funding to eligible small businesses. They also offer grants for research and development purposes, for those whose businesses might benefit from such resources.
- Individuals can also consider applying for microloans from non-profits or turning to local organizations that may offer additional funding to minority community members who want to start a business. These short term business loans can be beneficial to those who are disproportionately disadvantaged and may not have access to many financial options.
Frequently Asked Questions
Most lender applications will require the following information:
- Business plan
- Relevant industry and management experience
- Personal credit and finances
- Detailed outline of what the money will be used for
- Down payment
- Business credit, finances, and licensing
Most lenders will require a down payment to secure a startup loan. This amount can vary but usually ranges between 10% to 30% of the principal amount.
It may be more difficult to secure a startup loan with bad credit. However, some lenders may consider other factors, such as revenue, alongside credit score when determining eligibility.
The amount you may be approved for depends on factors such as the lender and your business’s annual gross sales, outstanding debt, and creditworthiness. As such, the amount you get will vary.
A startup loan can help build your new business’s credit score. However, make sure the lender you work with reports your repayments to the credit bureaus. Also, remember that missed payments and defaults can significantly damage your score.