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Start-Ups

Determining Loan Size and Needs in a Startup

By Barbara Beauregard   |    February 19, 2016   |    9:54 AM

Small Business Loans and Other Financial Resources for Startups

If you’re looking for a small business loan or other financial resources, before you apply you need to accurately understand how much you need to get to the next level. Let’s take a closer look at some of the most common ways of funding a startup business that don’t involve the murky dealings of angel investors or venture capitalists.

Business Loans

This is the most straightforward way to fund any small business. Banks provide business loans to new and existing companies to finance vehicles, equipment, office space, production material and a variety of other expenses. Business loans from a bank are generally for a short term of five to seven years. These types of loans almost always require a form of collateral to secure the loan, which is generally the vehicle, equipment or real estate being purchased with the loan. Keep in mind that your business structure will also determine who is ultimately responsible for paying back the loan. Expect to pay a loan origination fee and interest. Business loans offer a level of security because they have a fixed monthly payment and a fixed interest rate, although variable rate loans may also be available to you as a startup.

It is also worth shopping around among banks to find the best rates. If you don’t need to borrow a large amount, other financial institutions such as credit unions may provide a better loan rate. As you plan to apply for the loan, be prepared to provide a detailed explanation of how much money you need and what you intend to use it for, as well as a detailed explanation as to how you plan to pay back the loan. The bank will also want a great deal of personal information including tax returns, bank statements, credit history and other historical financial data.

Business Line of Credit

A business line of credit has less demanding requirements for qualifications than a business loan because it is a different financial instrument. It is closer in character to a business credit card in that it is an unsecured loan that allows you to access it as you need it rather than borrowing a lump sum all at once. Common uses for a business line of credit are refinancing debt, providing working capital and cash flow, and making payroll. It is typically closer to a short-term loan and may have a variable interest rate as well as an annual fee. Many banks only offer large business lines of credit so if you need only a small amount of credit, you may wish to use a different financial instrument.

Small Business Administration Loans

The Small Business Administration is the startup’s best friend. These government-backed loans are often an option for agile, brand new startups that can’t demonstrate a thorough financial history or otherwise qualify for a traditional business loan. To qualify for an SBA loan, your small business must be owner-operated, for profit, organized as a sole proprietorship (rather than a corporation or limited partnership), and fall within the size guidelines set by the SBA. The SBA also enables entrepreneurs to make lower payments on their loans over a longer amount of time. Keep in mind that the SBA doesn’t administer or grant these loans directly. The loans are administered by traditional financial institutions with the SBA acting as the guarantor. Special SBA loans are also available for specific demographics including veterans, women-owned businesses, and active-duty military. Read our white paper on the SBA’s Resources for a quality introduction to the agency.