There’s nothing more exciting than starting a new business. You’ll have the freedom to be your own boss, make money, and meet new people. While launching a startup is fulfilling, expect to face challenges along the way.
One of the biggest challenges startups face is obtaining working capital to support growth. Securing small business loans for new businesses is challenging though it can sometimes be easier to get a personal loan. Banks and traditional lenders rarely grant loans to startups because of the lack of experience, business credit, and more.
Fortunately, there are ways for startup companies to secure the funds needed to keep your business afloat, such as the 5 C’s of credit. Here are some of the ways you can finance your startup:
1. Equipment Financing
Most startup companies find it challenging to qualify for a loan from banks and other traditional lenders. These lenders often have strict loan requirements that only established companies are able to qualify. If you specifically need funding to purchase equipment, check out equipment financing.
This type of financing provides you with the funds needed to purchase or lease equipment and machinery. It’s structured similarly to conventional loans where you pay fixed monthly payments over a specified period. However, you can only use the funds to purchase equipment, furniture, and company vehicles.
Startup businesses have a greater chance of qualifying for equipment loans because the equipment you’re going to buy secures the loan. This means that lenders have the right to seize your equipment in case you default on the loan.
2. Invoice Financing
Pending invoices can put a dent on your cash flow. If you have to wait for 60 to 90 days to receive payment, you can consider applying for invoice financing.
This type of financing allows you to “sell” your pending invoices to lending companies in exchange for upfront cash. Lenders typically advance 80% to 90% of the total invoice value so you wouldn’t have to wait for months before getting paid. Once your customers pay their dues, lenders will give you the remaining balance minus a transaction fee. It’s a great solution for companies that need additional working capital in a pinch.
Invoice financing requires little paperwork and you don’t need to have a strong credit rating. Lenders are more interested in your customers’ credit rating instead of yours.
3. Credit Cards
Since there’s an obvious lack of funding resources for startups, many small business owners use their credit cards to pay for business expenses. If your credit score is not that great, you may be limited to secured credit cards. However, this type of credit card often has higher fees compared to regular ones.
However, keep in mind that credit cards are a very expensive way to finance a startup company. This is especially true for business owners with bad credit because the annual percentage rates are based on personal credit scores. Additionally, studies show that small businesses that rely on credit cards usually fail.
4. Personal Loans
Startup business owners often rely on personal finances to fund initial growth. If you apply for a loan, lenders are also investing in the business owner just as much as the business itself. While it’s more challenging for startup companies to qualify for bank loans, you might have a better chance if you apply for personal loans instead.
Business owners with a great personal credit score and a strong credit history will likely qualify for personal loans. You can then use the money to fund your business. However, taking out a personal loan for business use can be risky. When you qualify for a personal loan, you’re the one on the line. If your business won’t do well, your personal credit will take the hit.
Final Thoughts on Small Business Loans for New Businesses
When applying for small business loans for new businesses, lenders will check your personal credit score, business credit score, and other factors that affect your business. Most of the time, bad credit will negatively affect your application. However, startup companies don’t have enough business history to set up a solid credit history.
If you can’t qualify for traditional bank loans, try alternative lending options. Alternative online lenders offer loan options for small businesses. The lenient requirements, online application, and fast funding make alternative loans a great option for small business owners.
Some of the loans alternative lenders offer are business term loans, business lines of credit, equipment financing, invoice financing, inventory financing, purchase order financing, and more.
Regardless of the option you choose, make sure to do your research when looking for loans and lending companies. Assess your business, as well as your ability to repay what you borrow.
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Review 4 Ways to Fund Your Startup Company.