Small Business Startup Loans: Where to Find Them and How to Get One

So, you’ve decided to go into business for yourself. Maybe it’s because you are ready to work for yourself.

Perhaps you have a vision for a business that you have wanted to do for a while, and now is the time. Congratulations! All businesses, once they have their mission, goals, and their framework, needs to then move towards startup loans. The question is, where you do find them and how do you get them?

How to Get Started When Looking To Finance Your Startup

Understand from the outset that you will need to start small, and depending on your financial needs, you will need to come up with a business plan if you want financial institutions to give you a look. A business plan helps you to discuss your new business, what products or services you offer, how you plan to earn money, how the company will be governed and staffed, what financing (if any) you already have or have access to. The average business plans cover the company’s first few years in business. Whether you need a lot of financing or not, a business plan is recommended, because it can serve as your business’ road map. In writing the business plan, businesspeople can also uncover weaknesses, misperceptions in the market, or other pitfalls before they occur.

Self-Financing Through Credit or Debit Cards

Because businesses start out small, and depending on the nature of your business, you may be able to finance your own inventory in a cycle; use money made from selling products to buy more inventory. While this can work for a while, you will need to purchase more inventory more quickly, because as you scale up your business, you must buy more products more quickly. Again, depending on your business, the next step might be to consider self-financing your start-up costs. You can use your own personal credit or debit cards to begin, and then switch to business credit or debit cards once you have a business credit history. While the upside to this is that you are able to finance your purchases yourself, and can then pay yourself back, the downside is that with a business or personal debit card, there are not interest rates charged, but the money immediately comes out of the bank account. With business or personal credit, the business owner has longer to pay off the amount on the credit card. In reality, the business owner can take as long as he or she wants as long as the minimum for the card is paid, which makes credit useful, but be careful not to overextend the card.

Small Startup Loans From Other Sources

Many small business startup capital comes from what is called “love money”, which means that you come to terms with your friends and relatives to borrow money for startup capital and repay it over a period of time. While a lot of people scoff at the “love money” angle,many billion-dollar businesses, such as Amazon, Microsoft and Apple started with “love money” loans from friends and family.

If your business is in science or technology, you may benefit from looking into venture capital companies. Many venture capitalists have startup loans for companies they believe will make it big. Do some research ahead of time to determine which venture capital companies might be a good fit for your business. Some venture capitalists may ask for a percentage of your business if they put money upfront for your business. Along the same lines of venture capitalists are angel capitalists, usually retired business executives who want to give other entrepreneurs a start. While venture capitalists usually don’t want to give startup loans of less than $1 million, angel capitalists will go in for a loan from $25,000 up to $100,000.

There are also crowdfunding sources, which may work for you if you have a specific product you want to sell. Lots of small companies put their products on crowdfunding sites to ask for startup loans, so that may be an option for you.

You may also qualify for government grants or subsidies, depending on your business. In order to qualify for these, you must have a business plan in place, and be able to demonstrate a need for your business.

Businesses have also relied on daily debit loans, which can be obtained online if the entrepreneur has decent credit. Merchant Cash Advances (MCAs) are another type of short-term loan (24 months and under) that businesses can use to finance inventory. The upside for MCA’s is that you have a longer time to pay off the cash advances. Again, in order to obtain an MCA, businesses must have a credit history. The downside to daily debit loans is that they often come with a high interest rate, which is lower for businesses with established credit than it is for businesses without credit. As with credit cards, debit loans have an established time frame to get the loan paid off.

Other Startup Financing Options

Lines of credit work differently than a cash advance or credit/debit cards. Usually, lines of credit charge the borrower a flat interest rate in order to extend them an agreed-upon amount of money the business can use for business expenses such as inventory. Lines of credit can not only be used for inventory, but also for other purchases, including improvements to buildings are additional equipment. Lines of credit generally charge a lower interest rate than credit cards, debit loans or cash advances.

If your credit is good, and you have business experience and a plan, you could qualify for a small business loan from a bank. However, the business plan must be solid, the business must have good credit and a demonstrated ability to show a profit in order to be considered for a loan. Many businesses look for small business loans for expansion of a proven business as well as purchasing additional equipment or even buildings to store their inventory.

In the discussion of small business loans, it never hurts to note that if you are going to start a business selling inventory, and you have a proven track record, you may be able to get a startup loan or a business loan from Amazon. In order to qualify for a loan from Amazon, you must have a good track record of selling on Amazon, which does not happen overnight, so this type of loan is only available to long-term, established Amazon sellers.

One last word about business grants – many organizations offer grants for specialized businesses. For example, there are grants specifically for women-owned businesses you may qualify for. Minority-owned business grants are also available. If you are a particular ethnicity, grants are available for specific ethnicities who are starting businesses to benefit their community, such as a Greek bakery that offers pastries made from Greek recipes.

Some Advantages and Disadvantages of Financing

As with financing in general, there are always advantages and disadvantages of using loans or credit to start up your small business versus grant programs, personal financing, or loans from family and/or friends. First, the interest rates may be higher depending on the personal or business credit history, which can make repaying the loan more difficult. Second, some of the loans or cash advances have a short turnaround time. This may not be a problem—unless the business faces a short-term issue with either capital or inventory. If the business cannot sell enough product or service to pay off the loans or advances when they are due, the business may run the risk of higher interest rates down the road—or worse, defaulting on the loan or credit card, which will make it much harder for the business to gain credit in the years to come.

For all of the disadvantages, there are also advantages to using loans or credit to finance your startup costs—the most important reason is that by increasing the amount of money on hand, the entrepreneur can increase their profit margin, which allows the business to grow more quickly. Businesses may also be able to use loans or credit to take advantage of opportunities that arise in any business, such as the ability to buy out a competitor’s inventory. Finally, by obtaining loans or credit through the business and using it wisely,entrepreneurs are building business credit they can use at a later date to purchase additional inventory or equipment for their growing businesses.

Here are a few more tips for loans and financing:

  • Be sure that you understand how long (or short) the term limits of business financing are, because what seems like an amazing deal to begin your startup may not be worth it once the interest rate and term limits are reviewed. As discussed above, if a business fails to meet the term limits of the loan, it will be difficult to obtain additional financing down the road, which is not something a new business wants.
  • Be sure that you are financing positively. While some business owners see financing as a one-time stopgap measure because of a shortfall or a cash-poor situation, it is always better to finance to encourage growth rather than to end a financial shortfall. Financing financial shortfalls begins a business in the negative, rather than financing for positive growth.
  • Focus on slow and steady growth. Many business owners have noted that while they wanted to grow as quickly as possible, for some of them slow growth was the better choice, as it allowed them to establish their reputation, ratings, and client base in order to be able to gradually increase their business. One entrepreneur noted that he used his personal credit card to finance a large purchase of natural haircare products from a competitor leaving the industry that he thought was a good deal for his business, because it was bargain-priced to move, only to have buyers return the product because it caused rashes. The seller was then stuck with inventory he could not move, as well as a large credit card bill. While growing quickly sounds attractive, in the long run, slow growth may be better for the business over time.

So… Where do I Start?

Let’s review the steps you will need to do in order to apply for financing.

  • You need to ensure that you are addressing a need in the market with your business. Is there a gap in products or services in your area that you can fill? Is the gap large enough to make your efforts profitable? Do you think your community will support your new venture? Be sure that you have researched the needs of the community before you begin. Ask business executives and other business experts to weigh in on your idea, as they may be able to give you insight into your prospective business.
  • Do your research. Research the competitors in your area. How much business do they do? What are their strengths and weaknesses? How can you capitalize on what they haven’t done? Research the products or services other businesses in the area have provided. How did they begin? How did they get and keep customers? All of these questions are important to know before you begin.
  • Create a business plan. You will need to have your goals and objectives for your business, both in the short term and the long term; your mission and vision statements, your preliminary figures for startup costs, projected revenues, expenses, and your plans going forward. Before most financial institutions or government organizations will consider financing, you must have a completed business plan.
  • Sell your business to whoever will listen. Talk to everyone you can think of who can help you finance your business. Ask your community where you can go to get financing, and ask for contacts. Consider their opinions, and then research additional options. The more options you have, the better you will be able to find sources for your financing.

Getting started with business financing can be difficult, especially startup financing, but if you do your research, and make contacts, you may find that you can get some start-up capital from various sources and be well on your way to making your business dreams a reality.

Get Insured in Under 10 Minutes

Get an affordable and customized policy in just minutes. So you can get back to what matters: Your business.

Stephanie Clarke