The average loan to start a business varies depending on the source of the loan. If you are in the process of starting a small business, it will be necessary to give some thought to where you will obtain the financing you'll need. For many entrepreneurs approaching traditional lenders is not the best method. A number of options are available to help fund a new enterprise. Many people get started with funds from personal sources, such as savings, insurance policies or retirement plans. Others must seek financing from third-party lenders.
Securing financing to start a business enterprise can be challenging. Generally, lenders look for fool-proof business plans, collateral and other guarantees that the money will be repaid. A popular source of capital for startups is the Small Business Administration (SBA). The SBA does not actually lend the money, but works with lending institutions. In some cases the bank will lend the money based on the borrower meeting their lending criteria. If other cases, the SBA guarantees a portion of the loan because the borrower may not measure up to the lender's standards.
The SBA has several loan programs, including the Microloan program and 7 (a) Loan program. The Microloan program is basically intended for people with little or no assets. It is also a source for people with bad credit. The 7(a) program can be used for startups, as well as established enterprises.
Another alternative that is becoming increasingly popular for business funding are Peer-to-Peer (P2P) clubs. These organizations consist of members who lend money to other members for a variety of uses, including starting a business.
According to the latest available statistics, the basic SBA loan which can be used to start a business averaged is $167,000 for the 7(a) loan program. The SBA micro-loan program lends an average of $13,000. The average loan, including those for starting a business is $9,000 for Prosper.com; $21,000 for Virgin Money and $15,000 for Lending Club.
Some things you will need to consider with any type of loan for starting a business are the terms, interest is six 6 years. The interest rate may range from 8 percent to13 percent. For the 7 (a) Loan Program, the borrower can negotiate the interest with the lending institution; however, the SBA does impose a cap on the rate the lender may charge. The interest rate depends on the Prime Rate. For P2P clubs, the interest charge is usually a fixed rate, which can be different for each P2P entity. Typically, these loans have a maximum term of five years.
Whether you are seeking financing from a traditional lender, or decide to deal with peer-to-peer organizations, it is imperative to properly prepare your loan package before making a presentation. Many loans are rejected because the package is incomplete or not structured properly. Be sure that you evaluate your needs and quantify the amount the loan you are requesting from the lender.
When you prepare your loan package, make sure that you include basic financial information, background data and projections about your business and the industry. You'll also need to have a realistic and reasonable plan for repayment of the loan. For a new enterprise, this means that you'll need viable cash flow projections. Be sure to include any assumptions your figures are based on.
Another area of consideration is collateral. Most lenders will require security as a form of secondary repayment in case of default. When starting a business, collateral usually takes the form of personal assets, such as a car, a home, or other property. Another alternative is to have a guarantor to also be responsible for the loan.
According to Bryce T. Roberts, who is the managing General Partner for O'Reilly AlphaTech Ventures located in San Francisco, the best way to start a business is by using your own capital. He states: "If you are truly just looking to get started, I would look in your own bank account and among your family and friends." Most people who start a business do so by using credit cards, home equity loans or lines of credit based on their home equity.