- March 30, 2016
- Posted by: Admin
- Category: Commercial lending, Finance & accounting
In order to get a small business off the ground, a lump sum of cash will be needed in the beginning. These startup loans can come from one of many different lenders, and the loan type is dependent on the lender and the borrower.
The Small Business Administration, or SBA, was created in order to help small businesses receive the financing they need to grow and they have created a few different loan types. One option available is the SBA 7(A) loan. This requires secured collateral and a down payment of 10 percent; however the interest rates are fairly low. The SBA 504 loan is similar, but can only be used for land and building developments. SBA microloans are another option. These loans only provide up to 50,000 dollars and will also require completion of business training classes.
If equipment is already owned by the startup company, then it can be used to fund the small business. The equity in the equipment can be used as collateral for a loan. There are a few bonuses to this. First, is that if a borrower has poor credit, this loan is still an option as lenders have more of an incentive to lend money when there is collateral at stake. Second, there can be huge savings come tax time as the loan can be written off as an operating expense.
Friends, Family and Plastic
While it may be easier to get startup loans from friends and family, there are pitfalls to watch out for. Missed payments may be forgotten and interest may not be amortized correctly. When borrowing money from a friend or family, a third party can help structure the loan for all parties. Personal credit cards can also be used for startup funds. As long as there is a high limit on the card and a relatively low balance, credit can be run-up until enough money is obtained.
Borrowing Against a 401(k) or Life Insurance Plan
Borrowing money from a 401(k), while risky, can provide one of lowest interest rates possible, since the money is technically being borrowed from the borrower’s account. Borrowing from a 401(k) is quick and there is no credit check. Up to 90 percent of a life insurance policy can also be borrowed, and at a low interest rate, however there are tax implications to review.
Even crowdsourcing and purchase order financing are viable options for startup loans. The point is that the money to fund a business can come from many different sources and a traditional bank is not the only option.