If You’re Considering a Startup Loan, Read This First
Are you thinking about a startup loan to launch your new business? If so, check out this guide to help you decide on the best options for your business.
What are Startup Loans?
Startup loans are traditional sources of small business funding, as opposed to crowdfunding and investors. While those types of funding can be useful for business owners, not everyone has the resources or the desire to utilize less traditional options to start a business.
Startup loans allow business owners to work with traditional lenders to offset the financial burden involved with starting a business by offering funds up front for necessary purchases that could not otherwise be afforded or that would create a significant use of funds that may need to be spent elsewhere.
There are different types of startup loans including the line of credit and equipment financing.
Line of Credit
A line of credit startup loan is similar to a business credit card. These types of products are typically interest free for the first 9-15 months, and can make covering your startup expenses much easier and affordable than loans with interest payments.
After this, the interest rates are similar or lower than credit cards with rates between 7.9% and 19.9%, and like a credit card, you only pay interest on what you use, rather than the total of the line of credit. The difference? A line of credit lets you pull out cash, which is still a huge necessity in business.
You are not required to use the entire line of credit at once, and you can continue to draw from it until you reach the total. Because this type of credit is revolving, you can also pay down what you previously borrowed and withdraw that amount again.
Lines of credit do require high personal credit scores, typically over 700, so if you’re preparing for this type of loan, it’s important to ensure that your credit report is in great shape.
Equipment financing is a loan that allows borrowers to use the equipment they are purchasing with the loan as collateral. This means that lenders are able and willing to take a bit more risk and offer a lower interest rate than with some other types of loans.
The great benefit of this loan is that rather than fronting the cost of equipment before your business opens, you are able to pay off the cost as your business grows and makes money.
Another benefit is that the depreciation of the equipment is a tax benefit you can claim over several years.
Equipment financing also requires good credit, typically with a personal score over 680. In addition to a credit report, borrowers also need a vendor quote for the cost of the equipment and a statement that explains how the equipment will be used.
- These types of startup loans help businesses get off the ground without as much initial financial burden on the business owner.
- Because lines of credit and equipment financing are both paid back over time, businesses can generate more revenue to offset the costs of the purchases.
- These are traditional types of loan with little paperwork required.
- You have to have an excellent personal credit score to qualify for a startup loan.
- You can’t use them for all working capital needs.
- You may tie up credit, which may prevent you from applying for other loans in the future.
Who are they best for?
Startup loans are best for small business owners and entrepreneurs who are looking to start a new business, but may not be able to afford the cost of starting and running the business up front. They are also great for individuals who have great credit, but don’t have or don’t want to use other funding options, such as investors and crowdfunding.
Lines of credit may be ideal for business owners who will need to make several purchases over time, but may not have cash readily available at a given time to do so. They are also ideal for individuals who may be able to pay back the loan within the interest-free period to reduce costs.
Equipment financing may be ideal for business owners who need to purchase expensive equipment to start the business or that will make the business more profitable over time. They are extremely helpful for individuals who cannot afford the upfront cost of equipment, but who can pay the cost back once the business is running.
If you are starting a business and are looking for funding options, it may be worth it to look into startup loans, especially if you have good credit. With both types of loan, you can make the investment you need to make your business a success without breaking your budget.
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