How To Get A Loan For Your New Business
It’s the central conundrum of starting a business. It seems that everyone, from politicians on down, ritualistically extols the virtues of the American small business owner. They are the ur-icons of star-spangled capitalism and the sturdy foundation of our national exceptionalism, sitting square alongside mom, apple pie, and the ghostly visage of Dale Earnhardt. We can’t praise them enough in the abstract.
And yet, at a time when corporate profits are reaching all-time highs and companies like Apple are sitting on more cash than they know what to do with, it remains extremely difficult for aspiring entrepreneurs to acquire the capital they need to launch and grow a new business. Indeed, despite our valorization of startup culture, the rate of new business creation in the U.S. is near its 40-year low. If the ability for anyone to create a new business is what makes America special, the powers-that-be have a funny way of demonstrating their reverence for our putative ideals.
On the ground level, there’s an undeniable logic to the reluctance of lending institutions to loan money to new business owners. After all, most new businesses fail. Entrepreneurship is inherently risky. Furthermore, many small business owners don’t have great credit. Add to this the fact that if you’re just starting out, by definition, your business won’t have 2+ years of existence in the books — a bank requirement for most business loans. How can new business owners navigate this environment to get their hands on some capital?
Read on to discover the means by which you can give legs to your startup business.
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Friends & Family
I realize that this suggestion reeks of privilege. Most people in America — those from historically disadvantaged communities in particular — simply don’t have access to the same resources within their personal and family networks as do those from wealthier precincts. But if wealth does exist within your family or your circle of friends and you’re not too squeamish about the obvious perils of mixing business with your personal life, you might want to give it a shot. Just make sure to communicate your business plans and make them aware of the risks. Things might get awkward if your business goes south, but at least Aunt Dorothy is less likely than a bank to repossess your car!
(Obviously, I’m making assumptions about your aunt. For all I know, Dorothy’s a real hard-ass)
Personal Loans For Business
If your business is less than two years old, good luck getting a business loan. However, have you considered taking out a personal loan and using it to cover business expenses?
Your eligibility for a personal loan is based on your personal credit-worthiness and not that of your business. This is obviously good if your business is just getting started, but you will need to have good credit and a decent income, and you’ll be limited to borrowing $35K-$50K. On the plus side, personal loans are typically unsecured, meaning you won’t have to put up collateral. The lender can still take legal action against you if you don’t pay back the loan, but you won’t go outside to find your car being towed from your driveway by some goon.
If this option suits your circumstances, check out our guide to using personal loans for business purposes. And if you’re looking for an online personal loan vendor, here are some options for you to consider.
What if I were to tell you that it’s possible to obtain a loan online even if your credit score isn’t so hot? Enter P2P, or peer-to-peer, lending. It’s considered a form of crowdfunding, though unlike with Kickstarter, you have to pay back your contributors. While there is some overlap between this sort of loan and the kind I described in the last section, P2P lenders are typically more generous in who they will lend to than “traditional” online lenders. Let’s take a closer look at two of them.
Kiva U.S. (see our review), a nonprofit P2P microlender, offers crowdfunded microloans with 0% interest! That’s right — Kiva U.S. offers loans in which the lender doesn’t stand to profit at all. What’s more, they don’t even check your credit score. Kiva U.S. is based on “social underwriting,” meaning that instead of your credit history/income/etc. determining your credit-worthiness, the “crowd” issues you a loan using your reputation as leverage. It’s an incredible deal for those whose credit rating is in the crapper. Some of the drawbacks: you can only borrow up to $10K through Kiva, and the application process can take up to two months.
Accion (see our review) is another nonprofit lender to consider — one we here at Merchant Maverick are particular fans of. Unlike Kiva, Accion’s loans aren’t “free,” but with much higher borrowing amounts (up to $50K), terms and fees that rival just about anybody’s, complete transparency, a willingness to lend to startups, and a commitment to financial education, Accion is a great option for jump-starting your new business.
Other P2P lenders include:
- StreetShares (see our review)
- Lendoor (see our review)
- Lending Club (see our review)
- Prosper (see our review)
SBA loans are loans backed by the federal government in the form of the Small Business Administration. The agency doesn’t offer loans themselves but rather guarantees a portion of a loan issued by a lending institution. If you default on the loan, the SBA covers a portion of the loss. This makes the loan less of a risky prospect for the issuing bank (or other lenders).
While you may have trouble qualifying for an SBA loan if you’ve been in business for less than two years, it’s still worth a shot. Some online lenders streamline the process of applying for such a loan, thus hastening the ultimate decision on your approval. Here are some of the online services offering SBA loans:
Short-term loans are a relatively new product offered by many lending institutions. What makes them appealing to new business owners is that they typically require 3 months’ worth of business history to obtain.
Short-term loans differ in some fundamental ways from traditional loans. Fees are not calculated using interest rates, but rather are fixed, i.e. calculated once so that you’ll know the exact amount you’ll need to repay. Additionally, as you might have guessed, they have… wait for it… short term lengths.
Short-term loans have low borrower qualifications, no use requirements, and a rapid application and funding process, so it’s easy to see their appeal to new business owners. However, they probably shouldn’t be your first resort, as the fees tend to be quite high and the loan + fee must be repaid relatively quickly.
Read our piece on short-term loans to learn more.
It would be nice to get a loan that you didn’t have to pay back, wouldn’t it?
Business grants are awarded by the government (federal, state, and local) as well as certain NGOs and private businesses. Of course, if it were easy to get a grant, everyone would be getting them — and I’m guessing you probably don’t know very many business grant recipients.
Most grant programs are quite specific regarding the sort of businesses they intend to benefit, so it may take you some time before you discover a grant program that your business aligns with. You’ll also need to detail your business plans with a high degree of precision. Furthermore, many grant programs require a compelling, well-written pitch promoting the high-mindedness of your vision. Grants may be free money, but, ironically enough, you’ll have to really work for them.
It can be quite a job tracking down all the various entities out there offering grants to small businesses, which is why this Fundera article detailing 106 organizations offering small business grants is such a handy resource.
I discussed P2P lending earlier, which is a form of debt crowdfunding. However, when most people think of crowdfunding, they’re thinking of rewards crowdfunding. Let’s delve into rewards crowdfunding and its younger sibling, equity crowdfunding. Both hold significant potential for the budding businessperson.
Billions of dollars have been raised on rewards crowdfunding platforms like Kickstarter (see our review) and Indiegogo (see our review). With these platforms, you utilize social media to spread the word about your business and to ask for financial support. In return, you provide rewards to your backers. Most such platforms let you host campaigns in which you try to reach a certain funding goal within a defined length of time. However, Patreon (see our review) works differently in that backers sign up to support you on a continuing basis — per month or per creation — in exchange for access to a steady stream of exclusive content. Rewards crowdfunding is particularly well-suited to those in the business of producing items of singular value, like innovative gizmos, tabletop games, and art of all varieties.
With equity crowdfunding, instead of offering rewards to your backers in the form of gadgets or graphic novels, you offer equity in your company. Thus, the backer becomes an investor. Equity crowdfunding was only recently legalized by federal legislation, so the industry is still experiencing growing pains, but it is expected to grow as the relevant regulations are further streamlined. Equity crowdfunding is generally a more complex prospect than rewards crowdfunding — you have to accept the fact that you’re ceding partial control of your company to investors (to whom you will be accountable).
Crowdfunder (see our review) is an example of a pure equity crowdfunding platform, while Fundable (see our review) hosts both equity and rewards crowdfunding campaigns. A successful rewards crowdfunding campaign can set you up nicely for an equity raise, as it demonstrates to investors the viability of your product in the marketplace.
Check out this article on crowdfunding to get a more in-depth explanation of how you can use different types of crowdfunding to fund your business.
There’s never been a more challenging time in which to launch your own business. Our society is flush with pockets of obscene opulence, yet so little of that wealth makes its way to the burgeoning businesses where it would do the most good. Thankfully, we’re here to help you in your quest to fund your dreams. Here are some more helpful articles for owners of emerging businesses seeking funding:
- 10 Types of Alternative Financing for Small Businesses
- Small Business Loans 101: Finding the Right Lender
- Minority Business Loans
Not that you’ll need it, because you’re awesome, but: Good luck!