Starting a business takes more than just passion. It also requires money, which is why small business owners rely on small business loans to start or expand their companies. The amount of these loans can vary, as can the eligibility requirements. This guide will explain how to get a loan to start a business and how much each loan is worth.
Types of Small Business Loans
There are several types of small business loans that you can use to start a business. These include:
SBA 7(a) Loans ($5 million)
The U.S. Small Business Administration (SBA) offers loans through a 7(a) program, allowing small business owners to obtain capital to cover equipment, real estate, and other costs. SBA 7(a) loans can be as high as $5 million, with interest rates between 2.25% to 4.75%, plus a base rate.
SBA Microloans ($50,000)
Small business owners might also consider a microloan through the SBA. These smaller loans go up to $50,000 and tend to be reserved for select business owners such as minorities, women, and those starting businesses in disadvantaged areas. Loan terms can be as long as six years, but interest rates can climb as high as 8% to 13%.
Online Term Loans ($500,000)
Traditional and online-only lenders can offer online term loans, usually for $250,000 to $500,000. However, startups may not necessarily qualify for the highest amounts or the best loan terms. Borrowers can expect an annual percentage rate (APR) of 9% or more, with terms varying between financial institutions.
Business Lines of Credit (Limitless)
A business line of credit isn’t a loan in the same sense as the other small business loans listed above, but it can still be a helpful way to fund your small business. Many banks already offer business services that may include a business line of credit (LOC).
This works the same way as your personal credit card. A bank grants the borrower the ability to access financing up to a certain limit, known as the credit limit.
Borrowers only have to pay interest on the amount that they spend month to month. But the real advantage is that you can pay off your balance and continue using your LOC indefinitely, giving business owners functionally limitless access to funding.
Business Loan Eligibility Requirements
The next step is knowing how to get a loan to start a business. The process varies depending on the type of loan that you need. To qualify for the highest loan and the most favorable terms, you may need to meet some relatively strict eligibility requirements.
Typically, lenders will ask to see things like your:
- Personal credit score
- Business credit score
- Business plan
- Recent financial documents
- Financial projections
- Business licenses
- Professional licenses
- Legal documents (articles of incorporation, partnership agreement, etc.)
- Driver’s license/photo ID
- Professional resume
Additionally, you may be asked to personally guarantee the loan. This means that you take on at least a portion of the business loan if your business should fail. This allows the lender to recoup a portion of the loan and may qualify you for favorable interest rates or a higher loan amount.
On the other hand, it can also jeopardize your personal assets if your business fails.
What Kinds of Loans Do Franchise Owners Need?
Franchise owners need a small business loan just like any other type of business owner. The good news is that franchisees typically have an easier time landing a small business loan. That’s because franchises have a strong industry reputation and carry less risk for the operator and lender alike.
For example, the SBA has business loans specifically reserved for franchisees. These loans can also be easier to obtain since your business model and financial projections are provided by your franchisor — or at least you’ll have considerable guidance.
Some franchises even offer in-house financing. This means that rather than go through an outside lender, the franchise itself can assist with funding to cover franchise fees, startup costs, and more. Your franchisor can also show you how to get a loan to start a business with their company.
Start with the Right Franchise
Before considering these loan options, you might start by finding the right franchise. Franchise Gator can help with that. Use the franchise locator tool to find opportunities in your area, and start dreaming of a new career as the operator of your very own business.