Borrowing money for a job is never easy. Even if you have an increase in business profits, the process is long and complicated. If you are borrowing for a startup, things get even harder.
Most lenders are not ready to start a business. That doesn’t mean you can’t borrow, but it might not work out just as you imagined. If you have already given up on traditional banks and credit unions, there are still several ways to explore.
GFI Loans: Before giving up on traditional lenders, ask about using loans and lines of credit guaranteed by the US Good Finance Investment (GFI). These loans provide a guarantee for the bank, which means less risk for the bank.
Qualifying and getting approved is a complex process – lenders typically require you to provide detailed information about your business and your personal finances.
You should also plan on providing a personal guarantee that promises your home, investment accounts or other assets as collateral for a loan (and putting personal loans on the line). Still, this may be the best option.
Most startups need to get more creative. Traditionally, you would rely on friends, family, and other willing investors. Fortunately, today’s entrepreneurs have more options available that depend not only on your embedded connections or your sales opportunities.
Your personal finances are probably the most important factor in getting approved
Unfortunately, your personal finances are probably the most important factor in getting approved. You are trying to get funding for your business, but lenders cannot look at your business history because there is no (or very small) history to look at. What’s more, the vast majority of startups fail in the first few years.
As a result, your personal results are important – though there are exceptions. If you get funding from non-traditional lenders (such as people you know, venture capitalists or crowdfunding), your credit is less important.
Online lenders are a good option for cheap loans and quick approval. Especially if you have good credit, non-bank lenders (including lenders) should be at the top of the list. There may not be as many choices for loan terms, but money is available and financing is relatively easy – so you can move on to more important things.
Credit cards have long been a choice for entrepreneurs with limited options. Unfortunately, credit cards are seriously expensive, and heavy debt at a high-interest rate can put you down quickly. If you are able to find attractive balance transfer deals (and are confident that you can pay it all off before the end of the promotional period), credit cards may still work. Just remember that it’s hard to predict the future.
When using credit cards, it is best to apply for them on behalf of your business. Of course, they will only be approved based on your personal loan, but using a business card is a step towards building a business loan.
Plus, it looks more professional and helps you present an “established” image – showing banks, suppliers and others that you are serious about your business.
Venture capitalists are investors who have the money to help you grow your business. These individuals and organizations are hard to find, and you have to come up with a compelling case before handing over the money. However, your business can be a great fit for an investor. With venture capitalists, you will often have to give something in exchange for money (not surprising). Read all agreements carefully and understand clearly what you are paying for. You may need to give up ownership, some decision control, or something else.
Crowdfunding is an option if you can excite people about your product, service or business.
Individuals can provide money, usually without ever reviewing your loan – so this is a good option if you have personal credit. In return, you will often provide products or services, although other options may be available. For more details, read about the basics of popularizing Sean Cole.
Other loans: If none of the above options are sustainable, you may be able to borrow personally. Again, most banks will still use your personal loans (just review your plans with a local lawyer before mixing your business and personal affairs). Unsecured personal loans are a good option to avoid the promise of collateral.
Some entrepreneurs even tap into their home equity using other mortgages – but it’s risky. If your business fails and you cannot repay the loan, you can lose your home in foreclosure.