One of the most frustrating and daunting aspects of starting a new business is financing it. Getting approved for a traditional bank loan is almost always difficult for untested business owners, with long applications and approval processes and high collateral requirements in order to secure financing.
Happily, the growth of the online alternative lending market has allowed for other funding options, many of which are friendlier to the newbie business owner. Here are three debt financing alternatives you should consider as you launch your brand-new business.
A Credit Card Line
If the first thing that comes to mind when you think of business financing is that traditional bank loan, it may come as a surprise that credit cards are a very popular form of funding for business owners. It makes sense: business credit cards have lower interest rates than many other forms of financing (such as short-term loans or cash advances), a quick application turnaround, and high credit limits.
If a business credit card sounds like the option for you, consider using a service such as Finance Factory or LenCred. Both services pre-qualify you based on your business and personal credit, then submit applications on your behalf to a number of different business credit card providers to create one lump sum line of credit. When you're ready to liquidate your cards, the service will help you do that, too.
Some words of caution: don't choose your funding based solely on who offers the biggest credit line. Do your research to make sure the terms are a good fit for your business in other respects as well. The APR may be high, or start at no or low interest only to skyrocket after an introductory period. (If you know you can pay off your balance before that period's up, though, you could save quite a bit on interest!)
A Startup Equipment Loan
Most businesses need some type of equipment to get going, though the type, amount, and cost of equipment obviously depends on the industry. Rather than using up the capital you do have on machinery, vehicles, computers, or the like, consider seeking an equipment loan. Because the amount is generally fairly small and the equipment itself is considered collateral, getting approved for an equipment loan can be easier than for other forms of funding.
Equipment loans typically have a fixed interest rate (usually between 8% and 30%); the length of the loan will depend on the type of equipment. The payments will be fixed over the repayment period, as well. Due to interest, you will wind up paying more for the equipment in the long term than you would have without the loan, but this type of funding can help get you up and running very quickly.
A Personal Loan
If your personal credit is great, but your business is too new to have much of a credit track record--or not open at all yet--consider a personal loan. As personal credit history is the most influential underwriting criteria for personal loans, if you've got a strong credit score, this is a great way to get the funds your business needs. However, keep in mind that these loans tend to be smaller in size, so you might not get all the funds you need to get your business off the ground.
The other thing to note is that combining the above options is a potential way to use debt financing to fund your startup. Perhaps they'll all be for smaller sums, but combined could be just what you need. No matter what, when you're borrowing many a startup, you need to make sure you have a clear path for paying the debt back. You don't want to start your business in financial trouble.
By thinking beyond traditional bank loans, you can find a financing option that's a great fit for your business. Just make sure that you're well-informed and diligent about your various options and the terms involved.