Did you know that according to the U.S. Bureau of Labor and Statistics, 20% of startup businesses end up closing on the first year, 50% within the first five years and only a third of startups survive until the 10th year?
Among the many reasons for business failure, lack of capital or funding remains a common reason for company closures. Opening a new business is easier when you have enough funds to work with. But the question is: Where will you get the funds you need?
In this article, we’ll walk you through the different types of startup loans for small businesses and offer tips on how you can improve your chances of getting your application approved.
What are the Available Financing Options for Startups?
Startup loans are financing options that new businesses may qualify for. It’s worth noting that established companies can also take advantage of this financial resource if they need it.
Because of the risk they present, startup businesses will have better chances of qualifying for loans if they apply from alternative lenders. These lenders are usually more willing to take on the risk associated with subprime borrowers, like new businesses without an established credit history.
To increase your chances of qualifying, here are five startup financing options that small businesses can apply for:
Business Credit Cards
Business credit cards are the most accessible financing options that startups can qualify for. Banks and other credit card providers usually look at the business owner’s personal credit score and don’t require any collateral (though you may be eligible for better terms if you submit a deposit). Some offer a 0% introductory rate and may forgo any annual fees.
With a business credit card, you’ll have the freedom to choose wherever the funds go – be it to buy equipment, supplies, or pay for a service. The only limitation is that the vendor should accept credit cards as one of their payment methods. Business credit card providers may charge higher interest rates., especially if the business has a poor credit standing.
Business Line of Credit
A business line of credit is a revolving credit. It works like business credit cards wherein the lenders will grant a credit line with a set credit limit. The business owners can then take out the amount they need, repay it, and then withdraw again if the need calls for it.
Like credit cards, it also offers the flexibility of use. With one, you can pay for the following short-term business initiatives:
- Improve cash flow
- Emergency/contingency fund
- Reorder inventory
- Increase working capital
- Payroll
- Purchase equipment or office supplies
Once approved, you can get as much as $250,000, depending on your personal credit score (ideally, 680 or better), business history (3 to 6 months), and income (at least $25,000 annual revenue).
Inventory Financing
Unsold inventory ties up working capital. Without enough capital, it can be difficult for businesses to sustain their day-to-day operations. That is why some businesses often turn to inventory loans for help.
Let’s look at how inventory loan works. Suppose you have a warehouse full of unsold stocks, and you’ve just paid a significant amount to your supplier. Then, you realized that you have to pay your employees the following week. If you apply for an inventory loan, you can use your inventory as collateral for the loan and boost your cash flow. With additional security, lenders will be more willing to extend the loan to startups.
On the downside, if you are unable to pay off the balance of the loan, you’ll risk losing your entire inventory. The lenders can seize it and sell it at a much lower price and use the proceeds to cover the loan balance.
How to Improve Your Odds of Approval: 4 Tips
Although lenders may be willing to work with high-risk businesses, there is still a chance that they could reject you because of your poor credentials.
If you want to increase your chances of approval, here are four tips you can follow:
Maintain a good personal credit score
With the business’ lack of credit and financial history, the lenders will often turn to the borrower’s personal credit score to assess their eligibility. That is why it’s vital to maintain a good personal credit rating.
How do you do this? Here are some of the best practices for keeping your credit score in a good range:
- Pay your bills on time
- Check your credit report regularly
- Pay off existing debts
- Limit loan applications that incur a hard inquiry on your credit report
- Work with lenders and vendors that report to the credit bureau
Present collateral
To reduce the risk associated with lending to startup businesses, lenders may require borrowers to pledge collateral. Collateral can be an intangible or tangible asset that financing companies can use to tie up the loan. In the event of a default, they can repossess the asset and use it as payment for the financing.
Ideally, you should present high-value collateral to get better loan terms. It could be a real estate property, car, or a piece of expensive equipment. Lenders might also accept collateral such as accounts receivables, inventories, or purchase orders.
Sign a personal guarantee
A personal guarantee is a person’s legal promise to pay the business’ financing if the company becomes unable to do so. By signing a personal guarantee agreement, you will be adding security to the funding. This lessens the risk the lenders are taking for funding high-risk businesses (i.e., startups). In the event of a default, the lenders will have the right to seize the business owner’s personal assets to pay the loan.
Present a business plan
A business plan isn’t just a roadmap that you can use to run your business. It can also be a valuable tool that you can use to secure financing for your startup.
Remember, your business plan should convince the lenders to invest in your company. That means, when writing your business plan, you should be able to discuss your growth and marketing strategies in detail and how they will contribute to the success of your company. Lenders will also focus on the numbers, so be sure to include at least two financial forecasts for your company. One for when the company is experiencing a worst-case scenario, and another for when the business is doing well. Pro tip: Always use professional PowerPoint templates when creating your plan.
Get Your Start-up Funded Today
Starting and running a business can be one of the most daunting things you’ll ever face in your life. While it can be challenging to obtain funding for your startup, it doesn’t mean that it’s impossible to obtain one with your credit standing.
Business credit cards, lines of credit, and inventory financing are just some of the business financing options you can qualify for. All of them provide flexibility of spending so that you can use it for any business need. That said, before applying for financing, be sure to assess your needs first. With enough preparation, and maybe some guidance from startup advisors, you might just be able to qualify for funding with excellent terms.
