Getting your small business started: Everything you need to know before applying for funding

20% of all small businesses fail within the first year. We have all heard this statistic. But, did you know that lack of working capital is the biggest reason most small businesses fail? 

Many small business owners have to deal with a lack of capital and struggle to keep their enterprises afloat.

Do not be part of that statistic. 

If you are a business owner dealing with cash flow issues, there is a solution. Apply for funding!

Where can small business startups get financing?

Loans for business startups are always available. Close to home, business people have the option of borrowing their seed money from family and friends.

If people close to you are not an option, you could approach financial institutions for a startup business loan.

Considering there is always a risk of losing your capital to a terrible business idea, you should think of ways to reduce your risks when borrowing money for a startup.

A good option is borrowing from other lenders. Here are a few examples. 

• Angel investors 

If you don’t mind giving away a part of your business, you could approach an angel investor for financing. 

Funding from angel investors is easy to access, but it requires startup owners to let go of a part of their business. They also ask for a higher rate of return than most lenders.

However, angel investors are a great lending option for any business owner without collateral or enough income to get a loan from large financial institutions.

• SBA loans

There are loan programs run by the Small Business Administration that help businesses get funding without collateral.  Business owners can use these programs to access financing fast. 

Apart from offering funding without collateral, SBA also provides disaster assistance and surety bonds to businesses. They also provide useful information on how to plan, launch and manage a business.

• Lending marketplaces

You can also access loans from financial institutions that connect borrowers to lenders. These institutions are known as marketplace lenders. 

Marketplace lenders don’t require security for loans. They determine one’s ability to pay back money using scoring algorithms. 

Some benefits of accessing loans from lending marketplaces include the availability of many lenders, quick access to loans, and easy application processes that can be completed online.

• Merchant card advances

If you are confident of future excellent earnings from your startup, you could get startup financing through merchant cash advances. 

These lenders require borrowers to have strong sales that are likely to continue into the future since earnings act as a guarantee for the loans.

You don’t require any collateral to access funding through merchant card advances, and loans are easily accessible. However, you’ll have to pay high interest rates, and the loan requirements may be restrictive. 

• Business grants

Some organizations provide grants to people starting small businesses or looking for funds to grow them. 

Grants are better than loans because you don’t have to pay the money back nor do you have to give collateral. You are also not required to pay any interest or fees for grants. 

Grants are primarily available to businesses working on projects in particular areas such as medical research and those owned by persons from disadvantaged communities such as minorities, disabled persons and veterans.

How to ensure you get a startup loan from lenders

 

While there are many avenues you can use to get a loan for your small business startup, how you do it will determine whether you get it. 

The best way to avoid rejection is by knowing how to apply for them and being thoroughly prepared. Here are some tips;

Know what they are looking for

If you want to qualify for a loan, you must meet the criteria set out by the lender. 

For example, some will require you to give them collateral, while others will ask for a guarantor.

It’s important to meet these requirements before you apply for the loan. Having all the documents required all lined up also ensures that the loan application is processed quickly.

Some loan requirements you can expect are;

• A positive bank statement
• Proof of filing taxes on time
• A good credit rating

Choose the right people to ask for funding

When looking for funding, you have various options. 

As outlined above, lenders differ in terms of their requirements and how they expect you to pay back their money.

Some ask for collateral and charge high-interest rates, while others are more lenient. 

It’s up to you to do your research and find the institution whose requirements you are most comfortable with.

Find out what your loan will cost

Most loans will cost you in terms of interest and fees. Before you apply for one, compare loan offers from various lenders to pick the one that charges the least.

Keep in mind that some loans may seem like they cost less at face value, but once you read the fine print, you’ll realize they are pretty costly.

Therefore, checking all conditions attached to a loan is important to avoid signing up for a financial commitment you cannot handle.

Consider the risks

Whenever you borrow money, you need to consider that paying it back will be a problem, if your business fails to prosper. 

Losing the money you invest or any collateral you’ve put up to get it is not the only risk. Failing to pay back a loan may also affect your credit rating. 

Keep these factors in mind when determining whether you can handle a startup loan or not.

Final word

These are low-risk avenues you can use to get financing and also some factors to consider before applying for a loan. 

Use this information to find the best financing for your business that offers as little a risk as possible. 

If applying for a loan on your own is too complicated, consult a financial expert to help you with the decision. 

 

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