Opening a business takes a tremendous amount of funding. If your current funds fall short, how do you get a business loan?
Friends and family
How good of a resource this will be will vary from person to person. Are you considered a trustworthy person savvy at business? Does it sound like a good startup idea? How well off and risk averse is your social circle?
Be sure to write down the terms of repayment. With this, you have a lot more flexibility than a loan with a financial institution. Perhaps you can have some sort of profit-sharing.
You might want to get it in legal writing. Although a lawyer will only cost a couple of hundred dollars, you could be saving yourself a lot of headaches in the future.
Peer to Peer (P2P)
There are a number of online platforms that offer low-interest loans. They connect lenders and borrowers for a small fee. P2P platforms do take into account your credit rating.
Home equity line of credit
Many businesses were started with a HELOC loan. The interest rate is going to be very low. Of course, you need a home first and one with a lot of equity.
These are readily available to most people. To get a high credit limit, you’re going to need a lot of personal income. This may not be a great option simply due to the interest expenses. The fees are going to be extremely high. And if you miss one payment, your rate will skyrocket.
The Small Business Administration has a loan for businesses. The microloan program starts at $50,000. This tends to be a lower interest option. You go through intermediary banks and the SBA usually guarantees the loan. It can’t be used for everything. For example, you can’t use it for a business acquisition. But many other things are covered such, as inventory, working capital, furniture, and machinery.
Short term business loan
Short-term business loans are also an option. Keep in mind there will be a lot of expenses: fees for applying, early repayment, bank wire, and termination. They might even charge you monthly service fees.
According to Lantern Credit, a short term business loan has a lot of advantages. The main benefit of them is that they are fast. Other types of loans take a long time to go through the approval process. For example, a home equity line of credit might take a whole month to be approved.
Short-term business lenders are also willing to lend to new businesses. The drawback is that they have higher interest rates. They might require weekly payments, which might be a problem if you have fluctuating sales.
Term loans are a popular type of short-term business financing. They have a strict repayment schedule and are typically repaid within 12 months or less.
Line of credit
A business line of credit is very similar to a credit card. You have a maximum limit and can charge up to that amount. You’re only charged interest on your balance. It’s very handy for taking care of cash flow.
Starting a business is a tremendous endeavor. Fortunately, there are plenty of borrowing options available.