Startups are in a unique, and often precarious, position in the business world. As a new business, there are seemingly never-ending expenses. And often there is just not enough income to meet all the needs of starting a business. This is where small business loans and alternative lending can play a vital role in success or failure.
However, startups often have a hard time getting a small business loan for operational funding. Most banks and financial institutions won’t even talk to a small business until they’ve had at least two years’ worth of operating experience. But there are some very good sources for alternative lending.
Let’s take a look at a few.
Why Startups Have Limited Options for Small Business Loans
Startups may be at a disadvantage when it comes to getting traditional small business loans. This is because the goal of lenders is to minimize their risk and ensure they will see a return on their money. This usually means minimum requirements for time in business, as well as a good business, and sometimes personal, credit history. This is where working capital loans come in.
The Best Working Capital for Startup Businesses
Business Line of Credit – A business line of credit can be a useful option for a startup. Essentially, it is a loan that behaves like a credit card. You are approved for a lump sum amount and then you draw from that sum as needed. The good news is that you only pay interest on the portion of the credit line that you have used, not on the whole amount. This can save tons in interest fees over a traditional small business loan.
Equity Financing – Some businesses are caught between a rock and a hard place. Meaning, they have orders coming in fast and in order to service their customers they must spend cash on things like inventory and pay. While not an option for every startup, equity financing can be a win-win for all parties. In exchange for equity in the business, an investor invests cash into your operations. While it may not be appealing, this type of financing is an alternative to traditional funding sources.
Invoice Financing – Invoice financing lets you use your own incoming revenue for business funding. In essence, this is a short-term business loan against your outstanding invoices. When they are paid, a portion goes to repaying your loan.
The Bottom Line for Startups
The best thing any startup can do to open up options for business loans is to maintain a good business credit score. Building a solid credit history by using your company credit card and paying your bills on time will go a long way to making your startup appealing to lenders.
ViewRidge Funding can help you look at all the options you have as a startup. Give us a call at (888) 241-7241 or fill out our Get Started form today.