Traditional banks only offer limited business loans for start up business. Credit requirements can be stricter than other lending institutions, and collateral is usually needed to get the cash you need to start your business. A Small Business Administration (SCA) loan is a flexible option for new business starts. Here's how the SCA loan works.
First, if you have assets that qualify as collateral such as real estate, artwork, gold, jewelry or recreational vehicles, you can apply for a secured business loan. Real estate is the most common type of collateral used because it tends to appreciate in value and offer the most equity. If you can't secure this type of loan, check out the commercial paper option. Commercial paper is a type of short-term lending solution that offers higher interest rates and flexible repayment terms.
Second, if you don't have collateral and you plan on using your personal credit history as a guarantee for funding your business, you'll want to check into unsecured startup financing. This type of financing will require no collateral but will also be a lot more expensive. Fees for unsecured startup loans are based on the credit history of the applicant, so if you have poor credit, you won't be able to get help for your startup. Be sure to take time to improve your credit before applying.
The last option, startup funding through personal savings or friends/relatives, isn't very common. Unfortunately, most people don't have a good history of saving to fund their business, so they fail to qualify for traditional business loans or credit lines. Instead of trying to get funding without a business plan, apply for a personal loan backed by your personal assets. This loan option will be a lot less expensive than startup financing, which is why it's often chosen by entrepreneurs. If you do qualify for funding with a personal loan, however, make sure you repay it in full and on time to avoid damaging your credit.
Regardless of your choice for funding, be sure you understand the terms and conditions of the funding agreement. See if you have any prepayment penalties for early pay-outs, exit fees for renewing the loan, or other charges. Be aware that venture capital funding companies will often want to see business credit scores and/or financial statements from your past businesses to determine whether you can repay the loan. Therefore, if you have had poor business credit score in the past, you may want to consider waiting until your business credit score has recovered to apply for venture capital funding. If your past business finances aren't in order, this may not be an option.
Be sure to thoroughly research all loan options before choosing one. There are many different lenders offering these services, and some lenders won't accept small businesses unless they have strong credit scores. However, if you've already started operating your business and you don't foresee problems down the road, you should be able to get a loan to start a business from most lenders. However, even if you're unable to get a loan to start a business with venture capital, many new businesses fail because owners didn't prepare for a slow market or high default rates.
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