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Start Up Business Loans

The creditor does not acquire any ownership claim in the debtor's business


In the current economical structure avenues for small and local business are rapidly increasing. This is resulting into different types of financial supports from different institutions to patronize the fresh attempts to start new business.

Credit in the form of a loan, is a prime and most widespread way of finance for a new business. As a creditor agrees to lend money to a debtor in exchange for reimbursement in future, with accumulated interest, it becomes a loan. The creditor does not gain any ownership claim in the debtor's business.


There are many types of institutions that offer start-up business loans –

i) Banks: These include traditional savings banks, savings and loans, and commercial banks, and highly approachable for start up business. Banks, according to their loan offers, can be generally divided into following categories -

a) Large commercial banks are potential sources of financing for the best credit risks. For start-up businesses this conventionally is not an apt resource for financing.

b) Small community banks are still the best lenders for the standard new businesses. Start-up businesses may establish an ongoing working relationship with such a bank.

ii) Credit unions: Are financial institutions managed and under the ownership of a group of workforce of a company or other organization. This generally offers generous provisions to their members, but also makes mostly consumer loans. Though the amount may not be large, yet this may be helpful in initial business.

iii) Consumer Finance Companies: This offers small, secured, higher-interest personal loans to higher-risk borrowers. Because of this cost, consumer finance companies are not the usual lender of choice for start-up businesses.

iv) Commercial Finance Companies: these companies typically prefer to put forward loans which are secured by commercial possessions, these types of loans are handy for conventional businesses, not start-ups.


Most banks also offer some general types of loans like:

i) Working Capital Lines of Credit: Not suitable for start-up business. A line of credit offers a maximum amount of money accessible, to use whenever required, for different cash needs of a business.

ii) Credit Cards: This is a higher-interest, unsecured revolving credit.

iii) Short-term Commercial Loans: For almost all startup businesses this will have to be secured by adequate collateral. For startups and comparatively new small businesses, most bank loans are generally short-term.

iv) Long-term Commercial Loans: Not suitable for start-up business. This is usually available against real estate or other major assets and the longer the term of the loan means a risk to the lender.

v) Equipment Leasing: Not suitable for start-up business. Most banks require a solid operating history before engaging in leasing agreements with small businesses.

vi) Letters of Credit: A letter of credit is an agreement of payment upon verification that contract terms between a buyer and seller have been accomplished. This is most suitable for businesses engaged in international trade.

There are also other avenues for conceiving money to start a business –

a) Asset based Financing: To generate working capital or to achieve definite short-term cash requirements, small businesses may use certain short-term assets as collateral for commercial loans.

b) Trade Credit: The suppliers and the customers signify probable sources of financing through a range of credit and pricing options. Start-up businesses may benefit from shopping for potential suppliers as a business location is picked out. Many new businesses rely a lot upon a single dealer with whom they can achieve a long-term relation of credit purchases. It is wise to present the proposal to several possible suppliers, taking care to outline how much inventory is required to get started and how much is to be bought from the supplier in the future.

c) Insurance Companies: A substantial cash surrender value in a life insurance policy

provides the chance to borrow it and then re-lend the money to the business at the same interest rate. At this condition the business may take an interest deduction on the loan without earning any taxable interest income on the contract. When the money is borrowed against a policy, it is not obligatory to repay the loan principal, but only to pay interest on the loan.


The process of approval of a loan involves the collection and submission of a large amount of documents. For start-up businesses a bank will usually request, at a minimum, the following documents:

i) A personal financial report (usually lender's own form) and personal federal income tax returns (one to three years)

ii) Projected start-up cost estimations

iii) projected balance sheets and income statements (minimum of two years’)

iv) projected cash flow statement (minimum of the first 12 months)

v) Verification of ownership interests in assets and collateral

vi) A business plan that includes a narrative explaining the specific use for the requested funds, how the money will assist the business, and how the borrowed funds will be repaid (repayment sources and duration of repayment period). Any assumptions used in developing projected financial statements should also be identified. A personal resume or a written statement of pertinent past business experience is also submitted. Letters of reference also increases the chance of a loan approval. Sometimes with the documents, details of breakeven and other financial projections in the form of a graph are requested.

The elementary characteristics a potential lender examines are:

i) Credit and cash flow history of the borrower

ii) Projections for the business

iii) Available Collateral to protect the loan. Startup businesses generally use the equity value in real estate as its source of collateral.

iv) Character of the borrower. This has an important significance in start-up business. It indicates successful prior business experience, an existing or past relationship with the lender, referrals by the respected society members, references by the professionals (e.g. accountants, lawyers, business advisors) who have reviewed the primary proposals, and community involvement.

v) Loan documentation including business and individual financial statements, income tax returns, and often a business plan, supporting the first four items listed.

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