If you're not independently wealthy, one of the biggest challenges when starting an LLC or other small business is obtaining the necessary capital to grow.
Not everyone has the personal financial wealth to support a small business venture on their own. Thankfully, there are many options today that allow you to follow your dream.
New Business Loan Options
Small business startup loans can go toward fundamental things like purchasing equipment, machinery, supplies, inventory or real estate. Thinking about what you need the loans for, how your business is currently structured and how quickly you need the money will help you decide which form of funding to apply for.
We’ve gathered a list of nine of the most common startup business loans to consider when creating your business:
1. Business Credit Cards
Business credit cards can be a cost-effective, short-term way of financing your startup as long as you aren’t trying to fund large capital investments. They can also be an essential tool for cash flow management. Many business credit cards come with zero percent APR introductory periods, as well as cash back or rewards programs so you can save on things like office supplies or travel.
The major downside to business credit cards is that they typically rely on your credit score; if you're just starting out in business, you'll most likely need to rely on your personal score. And if your personal credit score is anything below "good," your credit limit can be lower than you need (or you’ll have a higher APR).
2. Home Equity Line of Credit (HELOC)
A HELOC is a source of funding for homeowners with some equity in their homes; it’s essentially a credit line that can be drawn against as you need funds for your small business. With a HELOC, you pay interest only on the balance you currently owe. A HELOC might be right for a small business owner who has good credit and at least 20 percent equity in their primary residence.
One major asset to using a HELOC is that it will provide your small business with capital at a much lower interest rate (around 3-6 percent) than many other forms of financing. However, your home will be used as collateral, which limits the ways you could collateralize other potential loans in the future. A HELOC might be great if you don’t have an immediate use for all of the funds right away.
3. Peer-to-Peer Lending
A personal loan from a peer-to-peer website (P2P lending) will connect you directly with individuals and institutions that will let you borrow money through online services. Lending Club is an example of this type of financing.
The online technology lets you reach many debt/income investors you wouldn’t otherwise have access to. This type of loan is typically best for startups without much history — but you'll be personally responsible for the repayment since it’s a personal loan.
4. Equipment Financing
Equipment financing is a great option for those looking to purchase equipment, vehicles, or machinery, and you can obtain financing through equipment dealers, banks, and online providers.
This type of financing is best for small businesses that need equipment or machinery to play a major role in their operations. If you use equipment financing, your startup will then have more cash available for other business expenses.
5. Microloans From a Nonprofit Lender
These loans are better for startup businesses that don’t have great credit or collateral and need small amounts of financing to start their business (around $10,000 or less). Accion is one example of a nationwide nonprofit lender that provides these types of loans to startups.
6. SBA Loans
The Small Business Administration (SBA) is known specifically for its loan programs that target new or underserved businesses, specifically small businesses or startups. There are two types of loans to look out for: the Community Advantage Program and the Microloan Program. Some SBA loans can be more difficult to qualify for, since they require you to have a credit score of at least 680 and offer collateral.
These loans are typically offered to small business owners who have experience in the industry and management. The main benefit of an SBA loan is the low-interest rate and long repayment term, which makes your monthly payments lower than the typical loan. Startups are generally required to place a 20-30 percent down payment on an SBA loan, so they're better for partially self-financed startups.
Crowdfunding platforms like Kickstarter allow anyone to raise money for their project or small business venture. To receive a business startup loan through crowdfunding, the requestor will need to share their business plan and objectives with a large community of people asking for donations.
Fees range from 5-10 percent of the total money raised, so make sure to budget for that if you go this route. This type of fundraising is typically best if you are looking to launch your product for the first time, or if you have high-margin products or services. Successful crowdfunding requires strong marketing efforts to gain the right amount of exposure to reach your fundraising goals.
8. Venture Capital Funding
Venture capitalists are a group of investors who give you money debt-free in exchange for a percentage of equity in your business. They will likely take a more hands-on role in your business to help control the direction and maximize the opportunity for a quick ROI. With venture capital funding, you'll need to have a well-prepared business plan that includes financial projections, as well as the ability to scale your business quickly.
9. Angel Investors
Angel investors are wealthy individuals who give financial support to your business debt-free and early in your startup process in exchange for ownership stake. Angel investors differ from venture capitalists in that they give less money, but are also less likely to take an active role in your business moving forward. Angel investors typically invest less than $1M.
With this list in mind, you have a good starting point to find the funding option that’s right for your startup business. Once your financing is secured, Incfile is here to help you learn more about how to launch and manage your company as you grow. Check out our helpful resources to learn more.