How Start-up Capital Works

Helping Your Chances

Banks are skeptical about lending money to start-ups. They like to see a couple of years of profitability before they dole out cash. They will require some form of collateral such as vehicles, buildings, real estate, or other hard assets. Occasionally they will loan based on your inventory or accounts receivable, but it's not their preferred relationship. They aren't interested in the potential of your business, only your business's ability to pay off the loan. They call this asset-backed borrowing, and you can actually use many things to back your loan. For example, you can use the equity in your home, or even your children's college fund. (However, you may want to take a moment to consider your kids' athletic prowess and/or scholastic strengths before risking the college fund.)

Another option is to have someone cosign the loan or credit-line for you. You may have a friend or relative that doesn't necessarily have the money to invest in your company, but would feel comfortable enough to cosign. Just make sure that person have a good credit record. You may also be able to find someone who will cosign for a small fee. Check with your legal or financial advisors.

The Small Business Administration (SBA) can also help you get a loan for your new business. The SBA is a U.S. government agency that backs and guarantees loans made by banks to small businesses. The backing by the SBA gives the local lender a higher level of confidence in the likelihood of collecting on your loan. With less risk, they are more likely to approve the loan. In the event you default on your loan, the SBA has guaranteed the lender that the SBA will pay up to 90% of loan back itself. The guaranteed percentage depends on the type and the amount of the loan The SBA offers many types of loans, including loans for veterans, equipment and facility updates for pollution control, and many other business situations that affect local economies and communities. As a small business owner seeking a loan, you (and anyone else who owns at least 20% of your business) are required to also personally guarantee the loan. Your business must also qualify as a small business. By the SBA's standard, most businesses in the United States are considered small.

With a standard SBA-backed loan (7(a) Loan Guaranty Program), you can borrow up to $2 million; however, the SBA will only guarantee the first $1 million. If your loan is $150,000 or less, the SBA will guarantee 85%. If the loan is for more than $150,000, then they'll guarantee 75% of it.

The drawbacks of going through the SBA are the large amounts of paperwork and time delays that the approval process usually takes. Expect the process to take several months.

The SBA Express is a new option offered by the SBA. It provides a 36-hour approval process for loans up to $150,000. It only guarantees up to 50% of the loan, however. Lenders can also approve unsecured lines of credit for up to $25,000 under this program.

Microloans are another option backed by the SBA. These loans are small -- maxing out at $35,000. The average amount of a microloan is about $10,500. The maximum term for the loan is six years. The SBA will forward your loan application to your local SBA-approved lender, and the final credit decision is made by the local lender. In this type of loan program, the lender is required to provide you (the borrower) with business training and technical support. In fact, the lender may even require the training as part of the loan application process. You may have some difficulty finding lenders who participate in microloan programs simply because of the small profit in it for them; but if it meets your needs, it's definitely worth a shot.

The SBA offers many other loan programs that aren't mentioned here. Visit the for more information, as well as a listing of your local SBA-approved lenders. Most local lenders have SBA experts on staff, so you can begin the loan process directly with them.

If you need more than $500,000 and haven't had luck with banks, try commercial finance companies. They will usually take on higher loans than banks. Keep in mind, however, that their interest rates will also be 2% to 5% higher than banks' rates. They are a good choice if you see your loan needs increasing in the future, or if you have a high debt-to-worth ratio.

Our next section has a checklist of important things to remember when applying for a loan.