Is it smart to take out a business loan to start a business?
If you want your business to be one of the success stories, it's important to start your business strong. That can include ensuring you have enough funding and a steady source of cash flow to pay for costs like equipment, payroll, supplies and real estate. That's where applying for a startup business loan helps.
Backed by the US Small Business Administration, SBA loans for startups are designed to help business owners grow their companies and cover expenses like equipment. There are several types of SBA loans with maximum amounts ranging from $50,000 to $5 million. SBA loans are backed by the US Small Business Administration.
| Pros | Cons |
|---|---|
| Longer terms | Documentation requirements |
| Attractive interest rates | Not ideal for startups |
| Flexible use | Lengthy waiting periods for approval |
| Borrower incentives | Slow funding times |
Most Business Debt
Any type of business loan could impact your personal credit if you personally guarantee the business account or your social security number is linked to the debt. The lender will likely report a defaulted business loan to both the business and consumer credit bureaus in these cases.
Securing a small business loan isn't easy for every business. Many factors are used to evaluate a business, but those with a high annual revenue and healthy credit score may have an easier time getting approved compared to a new business with a low annual revenue or poor credit score.
For a 5-year term at 8% interest, expect $100k business loan monthly payments around $1,800.
Both personal loans and small business loans are effective ways to cover expenses to get your small business off the ground. Your choice may come down to how much money you actually need, where you can get the lowest interest rate and whether or not you want to put your personal credit on the line.
Poor credit, insufficient cash flow, lack of a business plan and other issues can prevent you from securing a small business loan. It can be disappointing when you get denied a business loan, but a denial doesn't mean it's the end of the road.
Defaulting on a business loan can result in severe consequences, including legal action from the lender, seizure of collateral, and damage to the business's and owner's credit ratings.
Many statistics say that large banks approve SBA loans at rates as low as 20-30%, while smaller banks approve SBA loans at around 40% or less. All this to say: SBA loan approval rates hover at half or below all loan applications that are submitted.
What credit score is needed for a business loan?
| Term loan | While banks and credit unions typically require a score of 670 or above, online lenders may only require a score of 500 |
|---|---|
| SBA loan | Lenders offering SBA loans require credit scores between 620 and 680 |
Lenders use your time in business as a quick measure of success. The longer you've been operating, the more likely you are to have money to repay your debts. To qualify for a business loan from a bank, you'll typically need to have been in business for at least two years.
If your LLC has debts taken out in the company's name, only the LLC's business credit report will be impacted by whether you repay your debts on time. An LLC loan will only impact your personal credit if you cosign or guarantee it. If you don't do so, your personal credit report will remain unaffected.
How much can I realistically get for a small business loan? This varies widely based on your qualifications and the lender's terms. Generally, you could secure anywhere from $5,000 to $5 million.
A down payment for an SBA 7(a) or 504 loan ranges from 10 percent to 20 percent. For loans from banks, credit unions and alternative lenders, you may see down payment requirements that range from 10 percent to 30 percent — and some lenders that don't require any down payment.
Depending on the lender and the type of financing, you can typically borrow anywhere from $500 to more than $5 million. Exactly how much a lender will offer your small business, however, will depend on your company's financials, time in business, and credit profile.
Per the Federal Reserve's latest report, the average small business loan amount is approximately $663,000.
The maximum loan amount for an SBA 7(a) loan is $5 million and the maximum repayment period is 25 years, though most loans carry a repayment term of up to 10 years.
Business loans come with a range of terms, anywhere from three months to 25 years. The type of loan you open will determine what terms you have access to. For example, short-term loans will have shorter term lengths, like three to six months, and SBA loans boast terms of up to 25 years.
- Best for SBA loans. U.S. Small Business Administration. Max Amount. $50,000. ...
- Best for Quick funding. Headway Capital. Max Amount. $100,000. ...
- Best for Short-term loans. OnDeck. Max Amount. ...
- Best for Bad credit. Fora Financial. Max Amount. ...
- Best for Equipment loans. National Funding. Max Amount.
Why is it so hard to get a startup business loan?
Getting a startup business loan can be challenging without a track record of success in your company. Lenders want reassurance that you will repay what you borrow, and there's no way to gauge the risk of default if you haven't yet launched your business.
While money can make it easier to start a business, it's certainly not necessary. If you don't have a lot of cash at your disposal, you can still fulfill your dream of becoming your own boss. As long as you're persistent, work hard and take advantage of all the resources available to you, you're likely to succeed.
What disqualifies you from a small business loan? Reasons you may be disqualified from a small business loan include a low credit score, poor cash flow, no collateral, significant debt, a bad business plan or having a business in a risky industry.
Fortunately, you have options. While many lenders require a certain amount of time in business, annual revenue or collateral to get a business loan, not all do. Financing options like microloans or business grants are startup-friendly and may give you the financial push you need to launch.
Securing business loans with no revenue can be challenging but not impossible. Lenders may consider factors like personal credit score, business plan, industry experience, and collateral. Options include personal loans, business credit cards, microloans, or crowdfunding.
