Getting a Loan for my Small Business
If you’re tired of living the nine to five life for a big business that you couldn’t care less about, you’re not alone. More and more American workers are ditching the common narrative in favor of forging their own path. Research is showing that, in spite of stereotypes, Millennials are both interested in and actively working on starting their own small businesses. A recent study calculated that Millennials are starting twice as many small businesses as Baby Boomers have.
Whether you’re working on starting your own business to finance an early retirement or you’re looking for a side gig to supplement your usual income, starting a small business can be a daunting task. In order to cover some of the initial costs of starting a business, many entrepreneurs choose to take out loans.
How Loans Help Small Businesses
These days, it’s not enough to have a good idea and a passion for implementing your idea. To make it in the business world you need a lot of things, quite a few of which cost some money. Here are some things that a small business loan could help pay for:
- Office space. Although working from home can be tempting, it’s not always legal or even feasible. If you’re renting, there may be a clause in your lease that prevents you from operating a business out of your home. More importantly, though, once your business really gets up and running, you can’t expect to hold client meetings in your garage. Office space is critical, but putting down a deposit and paying rent isn’t cheap. A loan can help with this until your revenue stream gets moving.
- Equipment. These days there are very few jobs that can be done without any tools whatsoever. Almost every small business will need a few computers, some desks, and chairs. You could have other equipment costs based around your business needs and a small business loan can help pay for these.
- Staff and freelancers. You know that your app idea is the coolest thing since sliced bread, but consumers don’t know that just yet. Hiring a marketing director could be necessary for your business to get off the ground, but you can’t pay a salary until you start selling your product. This would be a great time to take out a small business loan.
As we can see, there is no shortage of needs when it comes to starting a small business. Taking out a loan can help you to satisfy those needs.
How to Get a Small Business Loan
Loans are ubiquitous in modern society, but there is no such thing as a one-size-fits-all loan. Instead, we’re used to taking out loans for particular needs, such as education, buying a car, or purchasing a home. However, just like you can’t take out student loans to buy a boat, you can’t use a mortgage to finance your small business. Instead, you want to take out a loan specifically for your small business. Being clear about the purpose of the loan will help you to work out reasonable terms with a lender and avoid scams.
Why Small Business Loans are Hard to Get
However, small business loans are much more difficult to get than student loans or mortgages. In order to understand why, let’s talk about what motivates lenders. Any lender for any kind of loan plans on getting their money back. In the case of mortgages this expectation is usually quite reasonable. After all, the bank will check your credit score and confirm your employment before signing off on the mortgage.
The thing is, people who take out mortgages often have steady employment when they purchase their homes. By its very nature, a small business loan is usually given to someone who doesn’t have a stable nine to five job that they can use to pay it back. If the entrepreneur does have a steady job, they probably expect to depart it once business gets rolling. For this reason, lenders are often skeptical when it comes to lending to small businesses. It can be especially difficult to get a small business loan with bad credit.
Making it Easier to Get Small Business Loans
This doesn’t mean that getting a small business loan is impossible, though. In order to help small business flourish, the United States government has stepped in. For some of the costs associated with starting a small business, the government will support lenders. This means that if you start a small business, take out a loan, and default on that loan, the government will help the bank cover their losses. This helps lenders feel more at ease when lending to entrepreneurs.
SBA 7(a) loans are the most common form of guaranteed loan and can be used for things like business-related real estate and equipment.
You may also look into loans that appeal to your specific circumstances. Some lenders are particularly interested in helping minorities in business get loans. These minorities include veterans, women, and members of the LGBTQ population.
Alternatives to Small Business Loans
Even if you don’t have the money to start a small business on your own, loans aren’t necessarily your best option in every situation. Here are some other possibilities to consider:
- Crowdfunding. Appealing to the general population to fund a novel idea is becoming more common among small business owners. Sites like CircleUp will help bold entrepreneurs to connect with a wide variety of investors and gain financial support for their ideas.
- Small business grants. Sometimes, if you fulfill the right conditions, there may be investors interested in offering grants for your small business. Unlike loans, grants do not have to be paid back. This option may be especially promising for minorities in the business world.
- Small business credit cards. Technically, a credit card is a form of a loan. However, unlike other small business loans, credit cards are relatively easy to get ahold of. Opening a credit card for your small business can help cover small miscellaneous costs associated with running a business. Paying your credit card bill will also help to build your business’s credit score.
Starting a small business is hard work. By taking out a small business loan you can ease the burden on yourself and acquire the things that you need to get your great business idea off the ground.
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Nick Cesare is a writer from Boise, ID. In his free time he enjoys rock climbing and making avocado toast.
This post was updated September 7, 2017. It was originally published August 15, 2017.