Starting a Business with Start-Up Loans

Starting a business requires capital. If you're looking to acquire money to finance your new business, consider getting a start-up loan. On average, start-up loans provide between $5,000 and $50,000 worth of capital to new businesses. In some cases, banks and other funding institutions may approve business loans as high as $150,000. For many, start-up loans can make business dreams a reality.

The Benefits of Business Loans

Start-up businesses that lack sufficient funding often go out of business within two years. Start-up loans often provide business owners with the capital required to not only get the business off the ground but also to keep it running. Similarly, they can help pay for the business’ residence, necessary supplies and other unexpected expenses associated with starting a business.
 
Another advantage to start-up loans is that they offer special advantages for the business owner who wants to maintain control over his business. For example, if a business owner turns to investors for funds, he may have to give them some control of his company. Alternatively, business loans allow owners to maintain their independence.

Start-up Loans: Possible Risks

While start-up loans provide a significant amount of money to many new business owners, not all people who apply for a start-up loan will be able to secure one. Here are some of the reasons that people are denied start-up loans:
  • Lending institutions want to see a return on their loans. Therefore, banks will hesitate to lend money to start-up businesses that operate in risky or low-growth fields.

  • Your personal credit is of great importance to lending institutions. If your credit history is questionable, you likely will not be approved for a business loan.

Another important risk to consider with start-up loans is that, unless a business already has a proven track record, start-up loans are considered personal loans. Thus, the business owner guarantees the loan and will be responsible for repayment.

The Myth of SBA Business Loans
A pervasive myth is that the Small Business Association (SBA) grants loans to start-up businesses. In fact, running a search on the Internet for "SBA Loans" produces thousands of results, with Web sites claiming to help businesses secure loans from the SBA.

Such Web sites are, at best, misleading. The Small Business Association does not finance business loans. Instead, the SBA stands as guarantor for loans made to businesses that meet the association's criteria. Lending institutions are more willing to approve riskier start-up loans if the SBA stands behind the business.

Keep in mind that the SBA doesn't guarantee every small business. The SBA is likely to extend its guarantee only to small businesses that have operated for more than three years. While this limits the SBA's help for early start-up loans, businesses that have operated for several years should check to see if they qualify for the SBA's business loans guarantee.

Types of Start-up Loans

Start-up loans are classified as either short-term or long-term loans. The two types of start-up loans are designed to cover very different expenses:
  • Short-Term Start-Up Loans: Short-term loans are intended to help the business meet daily and monthly expenses. General supplies, inventory and even employee wages may be paid using short-term business loans.

  • Long-Term Start-Up Loans: Long-term business loans are any loans that will not be paid off within a year. These types of start-up loans are generally reserved for large purchases, such as expensive machinery or equipment, property and similar long-term business investments.

Start-up Loans and Amounts

Determining how much capital to ask for when applying for a start-up loan may be easy if your business only requires financing for a specific item or piece of equipment. For instance, a person starting a snowplow business might only need financing for a snowplow.
 
More often, business loans are required to cover day-to-day operating costs. When this is the case, there is always a danger of underestimating business costs and not securing sufficient funding.
 
While calculating employee wages, utility costs and regular inventory purchases can be easy enough, factoring in the small day-to-day expenses that mount up can be more difficult to estimate. Remember the little details (postage costs, minor office supplies, etc.) when calculating your business needs.

Acquiring Business Loans

Acquiring start-up loans is a relatively simple process if you have a good personal credit rating. While much has been made of the importance of personal character, available collateral and businesses cash flow when applying for business start-up loans, these factors generally only factor into requests for large start-up loans.
 
For loans of less than $250,000, the single most important consideration is the business owner's personal credit history. In fact, with the increase in automated loan evaluation systems, credit history is often the only factor considered for small business loans between $5,000 and $150,000.