Whether you’re looking for a bank loan or asking for funds on Kickstarter, financing a startup is half the battle of being an entrepreneur. Luckily, there are many options for financing your business, such as startup business loans. There are also financing and loan options geared toward African Americans and other minorities that cater to a community’s specific needs.
In this guide to startup business loans, you’ll learn what they are, what types of business funding are available, and how to apply.
What is a Startup Business Loan?
A startup business loan is a type of financing for a new or expanding business offered by lenders (e.g., banks, credit unions, and other financing institutions) that follow the guidelines set by the Small Business Administration (SBA). Though loans are available outside of the SBA, SBA loan programs help match entrepreneurs with lenders willing to help new businesses with little financial history and greater risk.
You can find lenders partnered with SBA loan programs through the SBA’s Lender Match referral tool. If you want to secure a startup loan, follow these basic steps.
- Use the lender referral tool and answer several survey questions so the tool can match you with appropriate, potential lenders.
- In just a few days, you’ll receive an email from interested lenders. You can contact those lenders and set up a time to discuss financing options for your business.
- Before submitting a loan application, you will have the opportunity to discuss rates and loan terms with the lender.
- Put together the paperwork necessary for your loan application, complete the application, and submit.
Do I Qualify for a Small Business Loan?
The qualifications for a startup business loan aren’t as difficult as you would think. Does your business meet the following criteria?
- Businesses must be for-profit, so nonprofit organizations are disqualified.
- The startup must do business in the United States.
- The individual(s) must prove they have invested their own time and money into the company.
- The individual(s) must prove they have not been able to secure loans from other lenders.
Being able to prove this information will make it much easier to apply for a small business loan.
What Documents Will I Need to Apply for a Business Loan?
Once you’re ready to apply for your startup business loan, gather all of the necessary information required by the lender, such as:
- Business Plan—A business plan shows potential lenders your company is capable of generating enough revenue to reduce the risk on the financial investment.
- Requested Loan Amount—Calculate the amount of money your startup will need and how it will be used to ensure that funds are going to business expenses.
- Credit History—Your credit history tells the lender how reliable you are in paying back your debts. Some lenders may be less likely to give a loan to an individual(s) with bad or limited credit history.
- Financial Projections—Your financial projections give the lender an idea of how you will pay back your loan. Expect to show projections for the next five years.
- Collateral—Often, to ensure that you pay back your loan, a lender will put a lien on a tangible asset, such as a home or car.
- Industry Experience—Your industry experience demonstrates you have the appropriate knowledge to run a sound and successful business in your field.
Types of SBA Loan Programs
Depending on the amount of money you need and what the money will be used for, there are different loan programs to meet the needs of entrepreneurs. The SBA offers several loan programs, including:
- General Small Business Loans—Also known as 7(a) loans, these loans can be used to start a business, expand or acquire additional businesses, purchase equipment and materials, purchase real estate, and refinance existing debt.
- SBA Microloans—The SBA Microloan program offers loans between $5,000 and $50,000 for small businesses and some non-profit childcare centers. The SBA provides funds to intermediary lenders (typically non-profit community organizations) that have experience with lending and management assistance.
- Real Estate Loans—These are also called CDC/(504) loans. They can be used for the purchase of buildings and real estate, land, construction and repair of new or existing facilities, and long-term machinery or equipment.
- Disaster Loans—These loans are open to businesses of all sizes for the repairs to certain assets that have been damaged or destroyed.
Microloans can be an excellent option for very small companies, especially due to the willingness of these lenders to provide funding to women of color and other minorities.
Small Business Startup Loans for Minorities
Roughly 70% of African Americans turn to family, friends, and their own bank accounts to start a business. Loans are not always easy to secure, and the process can be intimidating. But, there are resources and loan programs available to African American businesses, as well as businesses in underserved communities.
SBA Community Advantage loans and 8(a) loans make funding more accessible to communities that lack the resources necessary to start small businesses, including minorities.
Community Advantage loans typically grant between $20,000 and $250,000 to small businesses. Whether it includes African American communities or not, these loans are provided to small businesses by certified community lenders (no need for a bank loan). The applicant must have:
- Reasonable credit history or a cosigner with good credit
- Some collateral, though not as much as a typical small business loan
- 30% invested capital
- At least two years of experience in the industry
- Proof their business will be able to generate enough revenue to provide for their own living expenses
Outside of SBA programs, there are a number of specific loan funds for minorities and African Americans that small business owners can take advantage of, including:
- Union Bank’s Business Diversity Lending Program—Minority and women entrepreneurs who own at least a 51% stake in a company can secure up to $2.5 million. The company must be at least two years old and generate less than $20 million in annual sales.
- The Business Center for New Americans—People of color who are immigrants or refugees in New York City can secure up to $50,000. New businesses may apply, and no minimum credit score is required.
- The National African American Small Business Loan Fund—African American-owned small businesses in New York City, Los Angeles, and Chicago can secure loans from $35,000 to $250,000. Financial consulting is also available.
- Accion—This is a nonprofit, community organization that offers loans between $300 and $1 million for mature and startup businesses. More than half of its borrowers are from minority communities. Startup business loan interest rates will depend on the applicant’s credit score.
Additional Funding Options
If you don’t want to rely solely on startup business loans, there are still plenty of other funding options for your business. Let’s take a look at several of those options and why they may be a good or bad idea for your startup.
It’s easier to get a general bank loan (rather than an SBA loan) if your business has been around for a few years. If you’re looking for a startup business loan, then you will need good credit and enough collateral to nearly match the amount on the loan. This level of collateral, as well as the credit score requirements, can make bank loans much more difficult to secure than SBA loans.
On the other hand, establishing a relationship with a bank can be good for building your business credit and managing your money. Banks often offer important financial assistance and consultation.
Small Business Grants
Grants are a great way to secure funding without having to pay back a debt. Unfortunately, grants tend to be allocated to nonprofits (e.g., educational or arts nonprofits) and federal or government institutions. Therefore, grants should probably not be your first option for financing a for-profit business.
With that said, there are opportunities to secure grants for businesses that operate within specific, niche industries. For example, businesses that improve economic development or push research initiatives may have an advantage in getting federal or local grants.
Grant programs, such as the Small Business Innovation Research Program (SBIR) and Small Business Technology Transfer Program (STTR), provide funding to businesses that explore new technologies or use technology for research. Tech startups would be an appropriate type of business to apply for these types of grants.
Credit cards can be a rather dirty word when it comes to business funding, and that may be due to high-interest rates and late payment fees.
According to the Federal Deposit Insurance Corporation, credit cards should only be used to fund “short-term cash flow problems” while you are waiting on guaranteed income. Abuse of credit cards can damage your business and personal credit, so it’s best to look at other options first.
Crowdfunding is a high-tech method for funding your business, but it’s accessible to just about anyone with an Internet connection. If lenders won’t give startup business loans, then it may be time to turn to individual investors and donors on crowdfunding platforms.
Crowdfunding can mean pulling money from anyone interested in your product or service, which is the case for platforms like Kickstarter or GoFundMe. Meanwhile, equity crowdfunding platforms are open only to accredited investors. These platforms may require a minimum investment amount, which can provide significant capital for your company. These platforms may include CircleUp or SeedInvest, for example.
Sometimes, crowdfunding also refers to the sale of shares or stock in a company. However, this would require the business owner to understand and comply with securities laws, which govern how financial information is reported to the public. If this isn’t your area of expertise, then it’s best to learn more about the online crowdfunding platforms previously mentioned.
Venture capital and “angel” investors specialize in funding startup businesses, especially tech startups. Similar to share sales, this method should not be pursued without some knowledge of investor relations and perhaps legal consultation.
Angel investors, which are usually wealthy individuals, and venture capital firms put up large amounts of capital with the expectation of high returns on investment. Unlike a loan, you will not be in debt to these investors, but your business should demonstrate the potential for serious growth and significant returns. You may also have to give up some control of your business to these investors who want to own a stake in the company.
How Do You Secure Money from Investors?
You’ll need to network and woo wealthy investors. This is perhaps one of the disadvantages of relying on investor capital. If you don’t have the connections or the resources, it can be difficult to access investors or know how to pitch to them. However, you can start by researching venture capital firms and investor listings online.
Once you find investors, the process is not dissimilar to applying for a loan. You will have to present your business plan, financial statements, business structure, board and governance structure, products/services, and financial projections to those investors. If an investor is interested, you will then decide on terms and conditions in an official term sheet.
Overall, your business will most likely benefit from multiple sources of funding rather than just one. Each funding method should take into account your company’s unique operations and financial position.
Time to Apply for a Startup Business Loan?
Now that you’ve been introduced to startup business loans and how to get them, you can begin the “shopping” process. Always look for low-interest rates, repayment terms, and other fees before agreeing on a lender. And, most importantly, consider all of the different avenues you can choose to fund your business, whether it be an SBA loan program, a bank loan, or even a wealthy investor.