Running your own start-up business can be overwhelming. You have this need to share your services with the world, but finances and juggling a million different responsibilities can make that feel impossible. This is especially true when it comes to finding the right loan for you.
A loan can jumpstart your business, but you can end up with even more stress down the road if you make the wrong deal. Here are five essential tips to help you find the right loan for your start-up business.
1. Determine the type of loan you need
The first thing you need to do for your start-up is to determine what type of loan you need. They are not one-size-fits-all, and the unique needs of your business should be considered. Here are some common types of loans you may need:
- Term loans: These are essentially a one-time loan of cash you will pay back over a period of time. You will typically make a monthly payment, and your terms may include an interest rate. This is the most common type of loan.
- Business lines of credit: This type of loan does not need collateral. It is more like a credit card, with your start-up being provided with a credit limit from which you can make withdrawals. This type is great for someone who does not know precisely how much money they need.
- Equipment loans: Let’s say you just need a loan to cover a large equipment purchase necessary for your start-up. Equipment loans specifically help you purchase machinery or equipment as long as it retains value.
These are just a few examples of the different types of loans and how they can vary. By narrowing down the type of loan you need, finding the specific provider for you becomes much easier.
2. Determine what you can afford
It can seem like a bit of a letdown, but you need to be realistic about what you can afford. This helps to narrow down the type of loan you need and the exact terms you can accept. For example, it can be tempting to apply for a big term loan that gives you a large amount of cash upfront. However, you need to be pragmatic about the monthly payments and interest.
The unfortunate truth is that start-ups are in a dangerous position. You need to bring in money and stay in business or risk having a failed start-up and a loan to repay. Find the right loan for you by setting up a budget and long-term plan for repayment.
Being honest about what you can afford also helps you avoid getting sucked into a bad deal. For example, if you just go into a loan discussion with a wide ballpark estimate, you can easily find yourself borrowing too much or agreeing to a bad deal of monthly payments.
3. Build up and stay on top of your credit score
When it comes to making yourself a good candidate for a loan, your credit score is essential. Unfortunately, many people overlook their credit score, especially when they want their start-up business to be front and center during a loan discussion. The reality is that a good credit score will increase your chances and that any provider willing to move forward despite a bad credit score might not be the right loan for you.
You can order your credit score for free once a year from any of the following companies: Equifax, Experian, and TransUnion. So the best thing you can do is improve your credit score and find loans suited to the score you have.
4. Find collateral ahead of time
The concept of collateral can be scary, but you need to be informed on the process to find the right loan for your start-up. Collateral is essentially one of your assets being promised to your lender for as long as you have an outstanding loan. If you can’t repay the loan, your collateral will be seized to pay. Common collateral includes a fully paid-off car, your home, or business equipment.
A general rule is that your collateral must be of similar value to your loan. So, choosing the right loan for you also means determining the collateral you can offer. If you do not have assets that match the amount of money you are requesting, it is more than likely not the right loan for you.
When searching for a loan, determine your collateral ahead of time. This helps avoid any spontaneous decisions or entering a promise that you can’t keep. Think through what you need to keep your start-up running if you can’t repay your loan; for example, your car should not be collateral if your business depends on making deliveries.
5. Research loan programs for you
There are many opportunities available for different business owners, so doing some local research can ideally give you good options for loans. For example, many lending programs offer assistance for start-ups owned by veterans, women, or people of color. If you fit into one of those categories, there could be a great loan for you just waiting for you to apply.
These are not the only types of programs out there! Potential programs can include supporting start-ups that benefit the local community or belong to a specific industry. Unfortunately, the worst thing that research can turn up is that you need to go the traditional route for loans. At best, it will offer the support and loan preparation you need.
Find the Right Loan For You Today!
With these tips, you can feel comfortable finding the best loan for your start-up. Once you determine the specifics, such as what type of loan you need and how much you can afford, the rest starts to fall into place. Of course, you want a loan that will help your business soar, so choosing the right one for you is crucial.