For most new startup businesses the task of securing some startup funding capital can be extremely daunting and in reality where to start is the most difficult thing to know. Most new entrepreneurs immediately think of going to their local bank and seeing if they will qualify for some money, let’s begin by looking at that experience and then other options after that.
When you go and see your bank it’s important to understand that most banks do not lend to brand new businesses since they are unproven and a high risk. That means the only option you will find at a bank will be the infamous SBA option. SBA has 3 loan types, the 7(a), 504 and the express. The 504 and express almost always are exclusively for established businesses with 2 to 3 years of profitable business tax returns. The 7(a) is the only option that can realistically be used for startup businesses.
Qualifying for a 7(a) loan can be a difficult task, in reality it comes down to a lot of things like your business plan, industry type, your personal credit, but indeed the most important factor will definitely be whether you have any assets or collateral. Acceptable collateral types will generally be significant equity in your home or other real estate properties, newer equipment with a strong value and generally a 401k or IRA. So if you have those types of collateral then you stand a good chance at securing a startup SBA 7(a) loan.
You will also need some type of down payment usually 10 to 25% is what most lenders want, for new businesses the percentage is usually much closer to 25%. So you have to ask yourself what percentage of new startups actually have that type of collateral and down payment available for their business to secure startup funding? Since I have personally spoken with thousands of new business owners in my experience it would seem that less than 5% of new entrepreneurs have those kinds of qualifications, assets and collateral. So if you don’t possess those items then what other options are there?
In reality the best option will be a mixture of unsecured credit lines. These credit lines do not require extensive income documentation or collateral, in most cases you just need a 680 credit score to qualify for them. The monthly payments are low and affordable and they are flexible tools. Even if you are successful at securing an SBA loan, an SBA loan will often not be able to go towards working capital, so in reality you will still need additional funds for working capital like paying payroll, marketing and other costs. For most startups unsecured credit lines are your best bet.
ABOUT THE AUTHOR:
Leo Kanell teaches entrepreneurs how to secure affordable capital for their new or existing businesses. For more info go to https://www.leokanell.com