There are many things you should know when shopping for start-up business loans. Some business owners who are starting up a new business or expanding a fledgling business seek out loans to provide for cash flow and to make purchases of equipment, facilities, stock and other needs to get the business operational. However, not all loans are alike. There are many differences between loans that you should be aware of before you sign on that dotted line. Rates affect your payment amounts and length of time for loan repayment. If payments are too high, it could hurt your chances of success.
Be aware that there is a big difference between secured and unsecured loans. Secured loans are any financial product you obtain where you provide something of value as security for the loan. For example, if you pledge your vehicle as collateral (loan security item) and then default on repaying that loan, you are at great risk of losing your vehicle. The lender can place a lien on your property or even seize it and sell it to cover the balance owed on your loan. In addition to that unfortunate occurrence, they only need to sell the item for what is owed, not what the collateral is worth; you could lose big all around.
An unsecured loan is by far the better choice if you are creditworthy and can find a lender to work with. Unsecured loans are also called signature loans. Your best option for finding this is at your current financial institution. Banks and credit unions do not do “payday” loans, but they may do an unsecured loan for customers in amounts from a few hundred dollars to as much as $20,000 or more. This may be an option for some small businesses to take advantage of, and the interest rates can be very low, perhaps 8% compared to 400%APR on a payday loan. The loan term can be longer, 6 to 12 months versus weeks to one month with payday loans.
Another excellent place to look for business start-up funding is at your local Small Business Administration (SBA) district office. This government agency can connect you with lenders who will provide low interest loans and microloans, especially to owners of certain categories of businesses such as veterans, women-owned or minority-owned businesses. Some loans are government backed and have very low interest rates available to owners who otherwise might not qualify for traditional lender loans. Some smaller loans require the owner to fund a small percentage of the loan, such as 10% of loans up to $35,000 or more.
The SBA also has connections for small business owners with grant providers, venture capitalist organizations and other non-traditional funding resources for financing up to $5.5 million. Grants are available and preferable for some types of businesses. Grants do not need to be repaid, but there may be some qualifications, such as being a green business or filling a certain industry niche. Before applying for any loan or grant to start-up a business, be sure to put together all your facts; a business plan, list of personnel, estimated costs and a break-even analysis. The SBA can help you with creating these items, and they also offer training online and in-person from experts, at no charge.
The benefit to getting financial help with your start-up business is that you can get off to a good running start with adequate funding to keep your finances level. With proper planning and a bit of luck, you can repay your loans quickly and be self-sufficient and contributing to your local economy quickly.