Start-up loans: compare the options 2021


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1. SBA loans and non-profit microcredits

The US Small Business Administration’s microcredit program provides loans of up to $ 50,000 to small businesses looking to start or grow. The average SBA microcredit is around $ 13,000.

SBA microloans are administered by community nonprofit lenders and are generally easier to obtain than larger loan amounts. The downside: Funding may not be enough for all borrowers.

The SBA’s flagship 7 (a) loan program also offers financing that borrowers can use to start a business. Corn SBA Loans 7 (a) are difficult to obtain. They usually go to established businesses that can provide collateral – a physical asset, such as real estate or equipment, that the lender can sell in the event of default. Qualifications are strict, and while you qualify, apply for a small business loan may take several months.

Micro-lenders and not-for-profit lenders may be a less difficult route, especially if you have precarious finances. Many focus on minority or traditionally underserved small business owners, as well as small businesses in economically struggling communities.

Typically, you will get strong loan terms from these lenders, which in turn will allow you to grow your business and get better credit. This can help you qualify for other types of financing down the road.

2. Friends and family

Perhaps the most common way to finance a new small business is to borrow money from friends or family. Of course, if your credit is bad – and your family and friends know it – you will have to persuade them that you will be able to pay them off.

In these situations, the potential cost of failure is not just financial; it’s personal.

“Business is personal no matter what people say,” says David Nilssen, CEO of Guidant Financial, a small business finance company. “For most people it would be difficult to separate the two. “

Narrow down your list of friends and family to those who understand your plans, and do your best to make sure they’re comfortable with the risks involved.

3. Credit cards

Many entrepreneurs count business credit cards for startups as funding. You can use this option as short-term financing for business purchases that you know you can pay off quickly.

Let the balance linger and interest charges will pile up, quickly turning your credit card into a very expensive small business loan.

The annual percentage rates on your business credit card are largely based on your personal credit scores. If you have low personal credit, you will have a higher interest rate.

It should be noted that research shows that small businesses that rely heavily on credit card financing typically fail.

4. Personal loans to businesses

New small business owners can also access financing through personal loans, such as those offered by online lenders. Personal business loans can be a good option for borrowers with excellent personal credit and a solid income.

But as with credit cards, personal loans can have high APRs (up to 36%), especially for bad credit borrowers.

Nilssen says small business owners should consider personal loans “as an option of last resort.”

“Where they can work,” he says, “is when a business just needs a small amount of money for things like… early stage production or purchasing equipment. “

5. Crowdfunding

Crowdfunding has become a popular way for small businesses to raise funds, thanks to sites like Kickstarter and Indiegogo, which allow you to raise funds through online campaigns. Instead of reimbursing your donors, you give them gifts, which is why this system is also called rewards-based crowdfunding.

New avenues are also opening up for crowdfunding in actions, in which you call on a public pool of investors who agree to finance your small business in exchange for an equity stake. This has become an even broader option recently with new securities regulations allowing small business owners to reach family investors, not just accredited investors.

Crowdfunding is good for the entrepreneur “who has a product and wants to test the market and validate the opportunity,” says Nilssen. “No credit needed.”

6. Grants

Small business grants Private foundations and government agencies are another way to raise start-up funds for your small business. They are not always easy to obtain, but the free capital can be worth the hard work of some new companies.

Frequently Asked Questions

If you are just starting a business, you will likely need to borrow money based on your personal finances. Thus, having a good personal credit score will help you qualify for financing. A good credit score starts at around 700 (credit scores range from 300 to 850).

The short answer is yes. Because you’ve just started a business, you don’t have an established track record for banks and other lenders to assess.

Find and Compare Small Business Loans

NerdWallet’s interactive small business loan tool helps you find financing that meets your individual goals. Sort by the age of your business, your credit score, and how much you need. The lenders were chosen based on factors such as reliability and user experience.

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