What You Should Know About Small Business Startup Loans

The number one reason small businesses fail before they even open is lack of funds. If you are thinking of opening a small business, you should seriously consider where your startup costs and maintenance costs will be coming from. There are several sources of funds that you can consider to help your business off the ground and most of those funds, if they aren't coming directly out of your savings, come in the form of loans. What should you know about small business startup loans? First, there are several types, each of which will be discussed below:

• Unsecured Loans
• Secured Loans
• SBA Loan Guarantee Program

Unsecured Loans

One way to get cash quickly for your small business startup loan is to obtain an unsecured loan. An unsecured loan is simply a specific amount of funds given to you without collateral. These are generally a smaller amount than you would take out when collateral is involved, they have a shorter payback period, and higher interest rates. An unsecured loan could be in the form of a credit card, a line of credit, or borrowing money from a friend. The downside of unsecured loans is that you probably won't be able to secure enough money just from these types of loans for startup and maintenance cost until your business starts generating profit. Another downside to this type of loan is the interest you will be paying on it can be on average 25% especially if the loan comes from a line of credit or credit card. These types of loans can be good if your credit is poor or your business plan has high risk. When unsecured loans are used along side other types of small business startup loans and are paid back quickly, they can really come in handy.

Secured Loans

Small business startup loans can also be obtained though a secured loan. A secured loan is a loan in which the borrower, you, pledges assets as collateral for the loan to secure it. Collateral can include things such as your car, home, or other property of worth that you own. In the event that you default on your loan, the person you borrowed from gets to keep the assets you put up as collateral, so be careful when taking out this type of loan. With a secured loan, the amount of money you can borrow can be quite a bit more than with an unsecured loan, and typically the interest rate is lower. The payback period can also be longer. Only take out a secured loan if you are sure you can pay it back, or if your business is low risk, as the consequences of defaulting on your loan can be severe.

SBA Loan Guarantee Program

Since most banks don't or won't give small business startup loans without a full-proof business plan, you will want to talk to the U.S. Small Business Administration (SBA) first. The SBA can provide you with a loan guarantee. An SBA loan guarantee says that if you default on your loan, the United States Government will reimburse your lender up to a specified amount. You are still responsible for the full amount of the loan, but this gives your lender an assurance that they will at least be paid part of what they loan out regardless of what happens to you and your business. With an SBA loan guarantee in hand, the banks that will accept the loan guarantee will be happy to talk to you. The SBA does not provide small business startup loans, though they do provide disaster loans and special circumstance loans, so when you approach them, they will refer you to a loan institution. They can also help you in securing business grants, which is better than taking out a loan altogether.