This is a guest blog post by Hira Saeed, Community Leader, Startup Weekend Karachi who writes about startups, AI, Chatbots and Big data.
So, you’ve got this brilliant idea that will solve all the world’s problems. Great. The catch is that no idea comes without costs. The most popular way of funding startups is fundraisers and crowdsourcing. Platforms like Angellist, Fundable, Gust and Startups.co. are geared towards connecting investors and startup founders to raise capital for their startup idea. Yet, fundraisers and crowdsourcing leave you at the mercy of others to raise capital to put your ideas into action. What if I tell you that there are other ways to obtain money to kick-start your idea, especially if the amount that you are seeking is not that high? The answer is simple: small business loans and personal loans.
Small Business loans
Small business Administration loans or SBA loans offer loans to small businesses at a low-interest rate – ideal for funding a startup. These loans are Governmental and can be applied to through many associations like Fundera. Fundera allows small business owners to apply for a loan from all of the industry’s top lenders—and compare rates for them to find the right deal. SBA loans offer very low down payments compared to other loans, the longest payment terms and reasonable interest rates. Loan amounts of between $5000 to $5 million can be taken out over a loan term period of 5 to 25 years. SBA loan interest rates start at 6.5% and you can get the loan in as little as 3 weeks. Sounds good, right?
How does it work?
SBA loans are funded by the Small Business Administration or SBA. The SBA is a federal agency dedicated to helping entrepreneurs to improve their small business, take advantage of contract opportunities, and to get better access to small business loans. You can get an SBA loan from any bank that participates in SBA funding. The SBA uses federal money to guarantee a percentage of those loans to the banks, so the banks have more incentive to lend money to small businesses. It means less risk for the lenders, so the banks are more lenient with their strict credit criteria. Talk about a win-win situation.
Apart from needing a good credit score – you are working with a bank after all – applying for an SBA loan can take some time. The bank will want to see your credit and financial statements and may sometimes want you to use collateral to secure the loan. The process can take anything from three weeks to months. You will need to fill out an extensive documentation for your loan application. This may include financial statements, information on your collateral, a description of your business and a statement of how you will use the loan money. The banks will look for entrepreneurs with good credit, a solid business plan and a demonstrated ability to repay the loan.
Get a personal loan
If you think that jumping through the hoops of getting funding via a business loan will not result in approval, you might want to look into a personal loan as funding for your start-up, if the amount that you need is not too large. You can take out a personal loan for as little as $250-$5,000. You can apply for a personal loan at many banks and financial credit institutions. One example is Creditloan, an institution that provides easy-to-use tools to help you compare your personal loan interest rates and estimates your monthly payments as defined by the Federal Truth In Lending Act.
How does it work?
Personal loans can be used for anything that you like; you do not have to submit a business plan or a description of your business to get funding for your startup. The lender, usually a bank, will set a fixed interest rate and a fixed period of down payment. Once the money is approved, it will be paid directly into your bank account. You can use the money to start your business, as long as you pay the monthly instalment. Different credit providers have different criteria according to which they evaluate potential borrowers. Some institutions are willing to overlook credit records, so if you don’t have a good credit record yet, it is a good idea to find out to what extent your credit score will impact on the decision.
What is the catch?
There is no catch, really. You can use the money for anything that you like – including funding for your startup company. Most banks worldwide offer personal loans. It’s worth investigating what different credit companies in your area offer in terms of personal loans.
While crowdsourcing and fundraisers are still popular ways to collect funding for your startup, you never know how much funds you will be able to generate through these sources. Taking out a small business or personal loan from a reputable financial services provider, you know exactly what you will get and how much interest you will have to pay. If you are looking at borrowing a small amount of money, a personal loan or an SBA loan may be the way to go if you want security in funding the capital for your startup.