Small Business Financing

The questions we see most often concern small business financing. Many people have an idea for a business and their knee-jerk reaction is to go looking for a small business loan. After all, they’re vaguely aware of something called a small business administration loan. In this article, we’ll explain the different financing options that are available for small businesses and startups, and then we’ll explain why you’re better off without them!

Small Business Loans

When you go looking for small business loans, the first thing you’re going to find are big businesses trying to capitalize on your need for funds. There are lots of people out there who promise you dozens of leads on funding in exchange for your eternal soul (or at least that’s what it will feel like once your voicemail and email fill up with sales calls).

The most ironic thing about small business loans is that they often want you to have been in business for six months to a year. In other words, if you want to start a business, you have to have a business. Ouch.

Personal Loans

If you haven’t been in business for a while already, then you’re essentially asking a bank for a personal loan. That’s not necessarily a bad thing! If you have equity in your home or a decent credit history, you can get loan money and essentially do whatever you want with it – even… start a business.

Personal loans (used here to mean “not business loans”) can be obtained either as a “unsecured loan” or a “secured loan.” Basically, banks want to be sure that they can get their money back. They do that by taking a “security interest” in something you own. If it sounds like something a mafia member might say when euphemistically suggesting-without-saying that they will break your knee caps if you don’t pay, well… I’m glad we’re on the same page.

A “security interest” is, in common parlance, something the bank can legally steal from you if you don’t pay. Banks can secure loans in any kind of property. When it comes to non-business loans, we’re typically talking about a security interest in a house (aka “a mortgage”) or a vehicle. Any other kind of personal property is generally “secured” with a loan from a pawn shop. Unsecured loans are called “personal lines of credit.”

If you own a home, you can get a home equity line of credit. If you don’t want to put your home on the line, you might be able to get a personal line of credit. But remember! Interest rates are the price the bank charges for using their money, and interest rates are going to be a function of how risky the bank perceives the loan to be. A personal line of credit is generally going to have a higher interest rate than a home equity line of credit.

Small Business Administration Loans

OK, but what about that sweet government handout money? The federal government in the United States is always just giving money away, right? Maybe the Small Business Administration can help.

What did Ronald Reagan say about the government helping again? Yeah, no exception here. Of course, the government isn’t just going to hand a small business owner money. They’re going to make sure that the banks that want to make money off of the small business loans are guaranteed to get their money. In other words, the SBA “backs” the loans provided by banks to small businesses. And you generally still have to already have a business.

The SBA has an online tool to help you determine if your business is a “small business” for the purposes of a loan. I’m gonna go out on a limb and guess that if you’re reading this, your business qualifies. (If I’m wrong and you did more than $38,000,000 in business last year, you might consider making a donation to support this site instead of asking for a government loan. And you might try reading our articles on management if you’re still desperate for funding.)

“We don’t need no stinking loans!”

But you should know by now, none of this is compatible with the Small Biz Guerrilla philosophy. Most of the time, we don’t need loans. We need to prove out our concept.

If you’re just starting out, you need to establish a “Minimum Viable Product” (or “MVP” for short). Many times people reach for financing as a crutch. They’ve never started a business before and they assume they need to get a bunch of money together and launch.

If you have been in business for a while, you might (might!) be at an inflection point in your business. Maybe you’ve secured a big contract and need to expand in a hurry. In this case, a loan might be just the thing you need (and we want to hear your story!). So then why are we roasting banks and loans? Because this situation is very rare relative to the number of people who just want to take a shortcut to business ownership.

Don’t let a lack of funding be a crutch. If you’re just starting out, you might need to put in some good old fashioned hard work. Like Steve Jobs and Steve Wozniak working in their parents’ garages, maybe you just need to enlist your free time, enlist your friends and family, and start working. Success (and financing) will follow.

Small Business Financing Resources

To read more about the ideas discussed in this article or to get yourself up and running with small business loans, check out these helpful products.

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