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Have an idea for a small business but no money to get started? These 5 different ways to borrow money can help you get it off the ground.
Are you looking to start a small business? Smart move!
Every year, over 500,000 new businesses open their doors for the first time. However, it’s one thing to plan on starting a business, and it’s quite another to actually bring the idea to life. What stands between most entrepreneurs and their dreams is startup capital.
If you’re in this situation, you’re certainly exploring ways to find the money you need to start the business. A common and effective method is getting a loan.
Click here for a guide to the different ways to borrow money when you’re starting a small business.
1. Borrow from Your Local Bank
If you’re anything like most people, you have a current or savings account at a local bank. Did you know you can leverage the relationship you already have with the bank to secure a small business loan?
Local or community banks are always looking to lend money to people who want to set up a business in the community. However, you need to meet the bank’s lending requirements.
In most instances, you need to have a good credit score and an active bank account. The bank will also ask you to provide your business plan as part of the application requirements.
As long as you meet the lender’s approval requirements and your business plan is solid, there’s a strong chance your loan application will be approved. Some banks will finance 100 percent of your startup capital needs, while others will finance a portion of it, often on condition that you’re in a position to raise the rest from other sources.
Because banks give a big focus to your personal credit, it’s important to ensure it’s looking good before submitting an application. If it’s bad or poor, take steps to rebuild it first.
2. Borrow from a Credit Union
As community banks, credit unions are open to lending to small entrepreneurs. One of the conditions, though, is you need to be a member of the union you’re looking to borrow from.
As such, if you already have credit union membership and a good savings record, don’t shy away from approaching the institution for a small business loan.
If you aren’t a member of any credit union, find one and sign up. Focus on settling on a union with a reputation for making loans to small business owners.
After joining, save, save, save. The more you save, the better your savings record will be, and the higher your chances of securing a loan.
Don’t forget to prepare a detailed business plan. Without this document, it’s difficult for any lender to evaluate the nature and potential profitability of the business you’re planning to start.
3. Give the Small Business Administration a Try
The SBA is a federal government agency that backs or guarantees loans made to small businesses by certain lenders across the country.
As an entrepreneur looking to start a new business, an SBA loan might not be the first thing that comes to mind, especially because many of these loans are designed for businesses that are already in operation.
However, there’s a chance you can get loaned, as long as you meet certain requirements. For instance, if you’ve tried raising business capital from other sources with no success, and you can prove it, a lender offering SBA-backed loans is under obligation to consider your case.
That being said, it’s really advisable to ensure you have an operational business before applying for any type of SBA loan. SBA loans can give your business a major boost because they typically have the lowest interest rates. There’s no need to rush for these loans when you have no business yet and hurt your chances of getting future approvals when you have a real business.
4. Borrow from Private Lenders
A private lender is an organization that uses the money of its owners (shareholders) to offer loans to members of the public. Unlike traditional banks, these lenders typically aren’t regulated by the Federal Reserve.
Therefore, they develop credit products with terms and conditions that are significantly different from traditional loans. For instance, their interest rates are usually way higher than what a bank would charge on a similar credit or loan type. The repayment timeframes are also shorter, often 1 year or less.
The good bit is private lenders offer a wide range of business loans, ranging from terms loans to working capital loans, equipment loans, and business lines of credit.
Borrowing from a private lender should really be a measure of last resort. Since you’ll incur a higher interest rate and considering the short time you’ll have to settle the loan, it’s easy for your business to fall into a debt trap.
5. Borrow from Friends and Family
Sometimes the people who hold a solution to your problem are right there with you or just a phone call away.
Borrowing money and friends is an ideal way to raise startup capital. You can either reach out to them individually or set up a social group where you’ll invite them to lend you money. With today’s communication technologies like WhatsApp, pooling funds has never been easier.
However, just because they’re friends and family doesn’t mean you shouldn’t treat the process seriously. You still need to show them your business plan and have a proper repayment strategy, so that they can confidently lend you money.
Explore the Different Ways to Borrow Money for Business
In a perfect world, everyone should be able to start a business using their own funds. But this world is far from perfect, which means you’ll need to reach out to people and organizations that have the money. You now know the different ways to borrow money and bring your business to life.
Keep reading our blog for more tips on small business financing.