The majority of businesses find the first two years after inception to be the most difficult period during the life of their company. A contributing factor is that cash can be sorely needed while building a customer base. Accessing the cash needed to grow within the first 24 months can be a steep hill to climb.*
How to access the funds needed to grow your business in the early days of operation:
Can You Get Venture Capital Funding?
Business textbooks teach that there are two ways to access funding when a business is started, equity financing & debt financing.
Equity financing means giving away a portion of the ownership of a business in return for funds. Debt financing refers to taking out a loan. When people speak of equity financing, they usually are referring to what's known as "Venture Capital."
For all the glamorization of venture funding for startups portrayed on television shows such as "Shark Tank", according to Forbes Magazine, of the more than 600,000 businesses that are started each year, only about 300 actually receive venture funding. This means there is a 99.95% chance that a new business will not have access to venture capital.
With such dismal numbers, if a new business needs funding beyond what can come from the owner(s) personal assets, it will be financed through loans.
What Loans are Available for a Startup?
The reason why there are so few lending options available to a business within its first 2 years or operation is because about one half of new businesses fail within the first 5 years.There are, however, some avenues in which newer businesses can receive financing:
Bank and Credit Union Financing for New Businesses
One avenue for some startup business owners to receive financing is through their bank or their credit union. In most cases, this means accessing a loan that is guaranteed by the government via the Small Business Association, or SBA. SBA loans have low interest rates and long payback periods, but there are also several drawbacks to SBA loans.
With respect to startups, SBA loans require large down payments (10 to 20%). Additionally, the borrower must almost always provide ample collateral (meaning something the lender can claim if you don't make the payments). For most new business owners, this will make it necessary to have substantial equity in your home as well as a willingness to use it as security for the loan.
Secondly, the SBA lending process is a major undertaking, often requiring completion of courses that can take several weeks, more than 25 hours’ worth of paperwork including business plans and financial pro forma (projections). This process can take several months to secure.
Lastly, SBA approval rates are dismal. While the government doesn't publish the percentage of SBA loans that are approved, it is known anecdotally that more than 80% of all SBA applications are denied. If the statistics were to include only startup businesses, the percentage of applications denied likely would exceed 80%.
Equipment Financing for New Businesses
Younger companies often look into equipment financing and leasing. This is a viable option for some businesses, but there can be significant drawbacks as well.
Here are the most common issues for newer businesses looking at equipment leasing:
- Newer businesses often need to supply a substantial down payment and/or collateral in order to qualify for an equipment lease.
- The financing amount younger companies are approved for is often too small for companies to have the means to purchase quality equipment.
- Newer businesses are often restricted to shortened financing terms, often 30 months or less, sometimes making payments too high to be manageable for a newer company.
- Some equipment leasing rates for startups are very high, often 70% or higher if calculated as an APR.
Another drawback to equipment leasing for some is that there are prepayment penalties. This means a new business can be locked in to the entire financing term at a potentially very high rate. Lastly, many equipment financing contracts are only reported to credit bureaus if you are late. This does not function to build your business or personal credit, which is very important when starting out.
Daily Payment Loans
There are some daily payment lenders, who will lend to younger businesses (3 months or more time in business). These loans can be structured out of a daily withdrawal from your bank account (known as "ACH") or from a fixed percentage of your daily credit card sales.
In either case, this sort of financing can be particularly onerous for newer businesses:
The amount that can be borrowed is typically restricted to 10% or less of your annual sales, which for many newer businesses will not provide enough cash to meet their goals.
Payback periods for young businesses are often restricted to time periods as short as six month, making payments high enough to put a serious crimp in profits.
Rates for the products available to newer businesses are very high, often topping 100% with no savings available if the loan was to be paid off early.
Lastly, daily payment lenders do not report to credit bureaus (unless you pay them late). This will not provide the opportunity to build business credit.
Term Business Loans for Startup Companies
For many startups, a term business loan, like the one offered by Zion Finance - Lend Up, could be a good option.
Zion Finance - Lend Up offers loans to businesses owners with as little as 2 months’ time in business. As opposed to SBA financing, which can take hours of paperwork and weeks to months to finalize, small business term loans with Zion Finance - Lend Up are fast. They can be applied for in minutes and most loans feature same-day or next-day funding.
While SBA loans typically require a superior credit profile, Zion Finance - Lend Up offers loans to borrowers with a personal FICO credit score of 500+. The amount you can borrow with Zion Finance - Lend Up is up to 2X your monthly revenues. If you are currently bringing in $15,000 per month in sales, you might qualify for a loan up to $30,000. Unlike equipment leases and daily payment loans, Zion Finance - Lend Up has no prepayment penalties, so you may pay the loan off early, and we report to both business and personal credit bureaus so that you may use the loan to build credit.
Lastly, an important feature is that loan terms can go up to 10 years so that payments can be manageable as a business grows.If you have been in business for 2 or more months and need funding, Zion Finance - Lend Up may very well be a viable choice to fund your business.
WE CAN HELP YOU WITH A QUICK LOAN!
Do you need a quick loan today? Zion Finance - Lend Up can help you with the loan you need, we offer personal loans and loans for business development. To apply e-mail: zionloanfirm.ltd@aol.com
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