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.
Small business startup loans are designed to give young companies working capital. Here’s what you need to know about such loans:
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.
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.
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. For such loans, lines of credit can be drawn for when funds are needed but do not require you to pay interest when you are not using it. To this end, credit lines can be used whenever extra funds are necessary. Here’s what you need to know:
Before requesting this type of funding, make sure you meet the basic requirements that a lender may look for. These include:
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.
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.
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.
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 business loans for new businesses can consider the following:
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.