Securing Funding to Start Your Small Business
You’ve decided to take the plunge and start your own business; but where do you start to secure funding? If you don’t know your personal and business credit scores, now is the time to find out. A good credit score puts you in a favorable position to secure funding from any source, and a poor credit score may mean you will have to get more creative about funding.
If you don’t have a service that provides you with credit scores, you should know that federal law requires each of the three national consumer credit reporting agencies – Equifax, Experian and TransUnion – to provide you with a free credit report every 12 months.
Other ways to increase your chances of securing a loan include creating a business plan, creating a project cost sheet detailing what your startup costs will be, and projecting your financials – with assumptions for the next five years. Preparing this information prior to meeting with a lender can help you determine how much your funding need is and will show lenders that you are serious and willing to do the work required to make your business a reality.
Determine How Much Funding You Need
Before you apply for a loan, you will need to determine the purpose for your loan request and come up with a total amount of your funding objective. A clear explanation of your loan purpose to potential lenders signals that you have done your homework, which may improve your chances for obtaining an approval from a lender. Plus, you may eliminate the potential for stress or other repercussions as a result of borrowing more money than you actually need.
Types of Funding for Business Start-Ups
- Equipment financing: Similar in structure to conventional loans, an equipment loan will pay for the purchase of capital equipment and machinery. Lending standards on equipment financing may be more lenient since your equipment will be pledged as collateral.
- Business credit cards: In addition to a convenient way to make business purchases, business credit cards give you access to an unsecured line of credit. Business credit cards also separate your business expenses from your personal expenses and help to establish credit for your business.
- SBA 7(a) loans: There are several types of loans offered through the SBA. The most popular is the 7(a) loan program which offers loans up to $5 million. In 2020, 17% of the over three billion dollars in money lent through the 7(a) loan program went to startup businesses.
- SBA microloans: These are term loans with a maximum of 72 months, made by approved organizations such as community development financial institutions (CDFIs) or other non-profits. The maximum loan amount is $50,000, with an average loan size of $14,000.
- Other microlenders: The SBA is not the only source of microloans, which are also available through non-profit organizations such as Accion and Kiva. Keep in mind that these are “micro” loans – meaning that a typical loan is in the $500-$15,000 range.
- Invoice financing: If your customers pay by invoice, you can avoid cash flow issues with this type of financing. For a fee, you can obtain an advance payment against your invoice versus waiting to collect the payment from your customer. This is faster than many other loan options and doesn’t require as much paperwork.
- Crowdfunding: A “crowd” funds a business or cause rather than an institution or individual. Most campaigns run via internet platforms or apps and have a set time frame for when money will be raised. There are four kinds of crowdfunding campaigns:
- Donation-based – contributors give money without receiving anything in return.
- Equity funding – backers get ownership shares of the business.
- Debt-based – donors are repaid with interest.
- Reward-based – contributors receive tokens, products or services in return for their donation.
- Personal and family funding: Personal credit cards, savings, home equity, 401K/IRA savings and family loans, and gifts of cash are viable funding options, but using personal funds or loans carries a much higher personal risk. If you use personal funds to start your business, you should begin establishing business credit so that eventually the business will stand on its own.
Government Backed Loans and Funding
Government loan programs may be a source of funding if you have had trouble qualifying for a traditional bank loan. Start the application process by creating a loan package with a participating lender, like Allegiance Bank. The federal government will guarantee a portion of the loan and will repay the lender in the event of a default. Because of the reduced risk to the lender, this may increase the likelihood of loan approval.
Use these resources to learn more about government-supported business funding:
- Small Business Administration (SBA) – Different types of loans to start, expand or purchase a business
- U.S. Department of Agriculture (USDA) – Information on government-guaranteed loans for rural businesses
- GovLoans – Information regarding the different types of federal loans and how to apply
- Small Business Lending Fund (SBLF) – An initiative of the U.S. Treasury Department that provides capital to qualified community banks and community development loan funds (CDLFs).
- Covid 19 Small Business Loans – It’s worth mentioning that if your business has been adversely affected by Covid-19, the Small Business Administration (SBA) offers programs that can help your business rebound. These programs are ending or may be coming to an end, so you should consider applying for these as soon as possible.
Small Business Banking at Allegiance Bank
The first step to secure a business loan from Allegiance Bank is to open a business account at one of our 27 locations in the greater Houston area. Whether you’re starting your business or have plans to expand your existing business, Allegiance Bank offers a robust suite of loan options to help your business get where you want it to be:
- Working capital revolving line of credit
- Working capital term loans
- Equipment financing
- Owner-occupied real estate loans
- Commercial real estate loans
- SBA guaranteed loans
To learn more about securing funding for your small business or Allegiance Bank’s small business banking services, contact us and one of our banking experts will get in touch with you. The Allegiance team includes some of the brightest and most committed banking professionals in the industry, which means we are passionate about guiding you to the full-service banking solutions you need to meet your business goals.