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Start-up Loans vs. Small Business Loans: What’s right for you?

It takes money to make money. How often have you heard that? Although some businesses don’t need start-up capital or funding to facilitate growth, most companies require financial assistance at some stage or another. Fortunately, there’s no shortage of options available for small businesses looking for a cash boost. Depending on your needs, you could use anything from a credit card to crowdfunding, to start-up loans or small business loans to get the necessary funds.

Most commonly, startup or small business loans are the options that entrepreneurs choose. These loans are ideal if you’re not looking for investors or outsiders to join your team, or don’t want to leverage personal equity. While both options get the job done, choosing the one that best suits your needs depends on the specifics of your business.

Comparing Start-Up And Small Business Loans

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The biggest difference between start-up and small business loans is that your personal credit history and finances are important factors when it comes to start-up loans. This makes it very similar to a personal loan, as your affordability is the basis of the qualifying criteria, and not necessarily that of the business.

If you have a good credit history, this loan is easier to obtain approval for. You can then further split up these loans to meet the needs of your business. You can obtain vehicle finance, mortgages, and installment loans.

Start-up loans are more flexible in terms of their uses, as you don’t have to link the funds to one specific purchase. In contrast, business loans relate to buying specific items, and using the funds for anything else will be near impossible. The terms of a business loan tend to outline exactly what the funds are for, and you cannot allocate them elsewhere.

The Approval Processes for Loans

Start-up loans are usually easier to qualify for and require less documentation. On the other hand, it usually takes longer to approve small business loans, and they require a mountain of paperwork.

Start-up loans rely on your personal credit history and financial status, so assuming you have a stable income, you should be good to go. You can, of course, use your business plan to support the application, although a new business will lack the proper financial backing to make much of a difference. These loans are often smaller and rarely exceed $50,000, with repayment terms capped at seven years.

Small business loans will look at both your personal and business credit scores, which makes them more suitable for already established businesses. One of the most important factors taken into consideration is how long your business has been operational, and its performance during this time.

This application process will require proof of profitability and cash flow. You’ll also need to state how you will use the loan. Sometimes, you may need to submit your business plan as a supporting document, along with any relevant legal documents, proof of your company’s structure and registration, tax certificates and any operational licenses and permits.

While the application process is more intensive and requires extra paperwork, small business loans tend to be far higher than start-up loans. These loans can exceed $1 million, and you can usually pay them back over a period of up to 25 years.

Advantages Of A Start-Up Loan

  • The approval process is far quicker
  • Funds are available sooner
  • Less paperwork required
  • You can use the funds on almost anything that your business may need

Advantages Of A Small Business Loan

  • The application links to your business, not your personal finances
  • You are not liable for outstanding payments
  • It can build your business’ credit history and work towards building a healthy credit score
  • The amount you borrow can be far larger
  • You can pay it back over a longer period
  • The interest rate will be lower

Choosing The Right Option For Your Business

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When choosing between a start-up and a small business loan, you need to factor in your business goals, credit history, and business history. You also need to calculate the amount of money you need, the interest rate you can afford, and your repayment terms. Take the following into consideration when deciding which funding avenue to pursue:

  • Established businesses looking for low-interest rates: As mentioned, small business loans are ideal, but the application process will take longer and it can be difficult to get approval. You may need to put up assets as collateral, and both your personal and business credit scores will be vetted.
  • New businesses looking for low-interest rates: The government offers small business loans such as the 7(a) program to encourage entrepreneurship and boost the economy. While approval tends to be easier and interest rates are low, the turnaround time on approvals can be lengthy. You also won’t need to put up collateral, and the government will often sign as a guarantee on the loan.
  • New business with good credit: You won’t qualify for a small business loan if you have a new business with no financial history. This is where a start-up loan becomes your best bet.
  • Instant cash flow: Start-up loans and personal loans often pay out far quicker, and you can complete the approval process online. Be sure to read the fine print before committing to anything, though. While the payout process may be quicker, the interest rates may not necessarily be favorable.
  • Bad credit: If you have a poor credit rating, there are alternative options that will secure your business credit. However, always do your research beforehand, and ensure you can meet the lender’s repayment terms.

Funding Your Business Doesn’t Have To Be Difficult

Funding is not all about loans, as you might be eligible for specific, additional funds or credits. But when deciding between a start-up loan and a small business loan, the easiest way to choose between the two is to look at the age of your business. If you have a well-established business, with a positive financial history and ripe for growth, a small business loan is a very viable option.

For newer businesses still trying to establish themselves, start-up loans seem to offer more positives, although they come with risk at a more personal level. However, as an entrepreneur, risk is all part of the process, and a start-up loan could be exactly what your venture needs to turn risk into reward.

 

small business coach