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Wednesday, November 30, 2022

Types Of Loans You Can Take Out To Start A New Business

There are a lot of challenges in starting a new business, especially if it’s your first one. It requires plenty of time, planning, patience, and most of all — money. Fortunately, aspiring entrepreneurs like you don’t have a shortage of options when it comes to funding. Financial institutions offer various kinds of loans that you can apply for to get the money you need in your business venture.

When Does A Loan Make Sense?

Taking out a business loan is common for growing established businesses, but not for starting one. It can be extremely difficult for new businesses to get approved for a business loan, but it’s not impossible. That being said, your best bet will be to take out a personal loan. However, you should first determine if taking out a personal loan to fund a business makes sense in your situation. 

Types Of Loans
  • If it’s your only option – a loan is a form of debt and is by no means a trivial financial decision. If you have access to tools that can let you kickstart your business and forego applying for a loan, you should take it. Otherwise, a personal loan makes sense.
  • If it’s cheaper than a business loan offer – If you somehow managed to get a business loan offer, but think that the rates are far from ideal, a personal loan with better rates makes more sense. 
  • If you know how to repay it – regardless of what type of loan you seek, you should only take out one if you have a plan to repay it. Even if a lender gives you a good offer, you’ll be in trouble down the road if you don’t know how to repay it. Will your business funds be able to cover it? Or will you have to foot the bill?

Here Are 5 Types Of Loans

Personal Business Loans

You’ve failed to get a business loan offer and you’ve determined a personal loan is your only option. The first thing you need to do is check your credit score; make sure there aren’t any anomalies.

You will need to set your credit history straight since personal loans are based on it, which is what makes them ideal for new businesses or those who are starting from scratch. A good credit rating can give you a better rate while a bad rating yields the opposite. Lastly, a personal loan can damage your credit score if things don’t go smoothly, so be aware of the risk.

Title loans

If your only choice is a personal loan, but you have bad credit, you can also consider taking out a title loan. Most personal loans are unsecured, which means they don’t require any collateral. However, they require borrowers to have a good credit rating. Title loans, on the other hand, are secured loans. They don’t mind bad credit but require collateral. As the name implies, a title loan requires an asset that has a deed of ownership or title to secure the loan. 

Taking out a title loan is fast and efficient if you already have collateral. At the very least, the lender will only need to verify your documents and appraise your asset for the amount you want to borrow. 

SBA loans

Businesses in the USA have access to the SBA loan, which is the U.S. Small Business Administration’s startup-friendly microloan program. SBA loans offer up to $50,000 for those who want to start a business or small businesses that seek to expand. However, most of these loans go to already-established small businesses that can provide collateral.

In addition, these loans are limited, so there’s a chance your business venture might not be accommodated. If you do manage to get an SBA loan to start a business, you will benefit from some of the lowest rates in the market and long repayment terms. 

Microloans

SBA loans aren’t the only microloans you may consider for your business. If your finances are a bit rough, mission-based and nonprofit lenders might be the better option. These loans typically cater to minorities or small business owners in disadvantaged communities. Since they are mission-based, you can expect better rates than traditional lenders and additional services such as consulting and training. The only downside with microloans is the smaller loan amounts, which makes them less attractive for starting larger businesses.

Online business loans

Securing funds to start a business is one thing, keeping it funded for growth is another. Several months after your launch, you might find yourself in need of more funding for expanding or promoting your small business. In this situation, online business loans are a good consideration.

Online lenders typically offer loans for small businesses that are less than a year old. Typically, your business will need to be in operation for at least six months to qualify. Online business loans can offer a short-term loan, a business line of credit, or an equipment loan; it will depend on your lender. The downside — you will get less money, shorter terms, and higher interest rates.

Conclusion

Starting a new business is no walk in the park, especially if funding isn’t secured. There are many funding options available, but they all involve varying degrees of risk. This is why it’s critical to have a repayment plan regardless of the type of loan you decide to apply for. Depending on how well you plan, a loan can either be an ingredient for your business’s success or something you will regret down the line.

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