Business loans and funding for start-ups: You have options!

Ben Bruner, Iowa Construction Law, Dickinson Law Firm, Des Moines Iowa, Iowa Banking Law, Iowa Startup Group

Posted on 11/01/2017 at 12:00 AM by Benjamin Bruner

Nearly every start-up company needs capital, or will need capital, in order to launch operations or take the company to another level of development. Even the best ideas and plans need money behind them in order to a reach a level of success. Often times though, access to capital via personal funds is tough to come by as a start-up founder. Thus, young companies typically need to look towards raising investment capital or third party financing or both.

Small business loans can be perfectly healthy for start-ups and can often times be a lower cost alternative to investment capital. They can carry with them less outside oversight of the business operations by the lender as compared to a private investor. This allows the founders to retain flexibility and control of the business plan, management decisions and ultimate direction of the company.

The availability of small business loans is greater than you think. There are likely multiple loan options that are available for your company depending on your particular business, needs and situation. The following information is an attempt to provide you with a very general overview of some of the loan options and programs that may be available to you as you explore capital options for your start-up.

Small Business Administration (“SBA”) Loans

  • Microloan Program: This is a loan program for new or developing small businesses which can be used for working capital or the purchase of inventory, supplies, furniture, fixtures, machinery or equipment. SBA Microloans limits are capped at $50,000, with the average loan being around $13,000. The loan repayment term is generally capped at 6 years but otherwise can vary based on factors such as the loan amount, purposes for the funds, and the needs of the borrowing company.

  • 7(a) Loan Program: This is the SBA's flagship lending program and is the most common and flexible loan program for small businesses. Most pertinent to startup companies, these loan funds may be used for starting your new business, the acquisition, operation or expansion of an existing business, or even for working capital. Additionally, depending on the need of your business, 7(a) financing may also be used for debt refinancing, construction or renovation of buildings, or to purchase equipment, machinery, furniture, fixtures, or real estate. 7(a) loan limits are capped at $5 million, and loan maturity periods vary from 10 years (working capital) to 25 years (fixed assets).

  • 504 Loan Program: This is a loan program that provides businesses with long-term fixed-rate financing for major assets, such as equipment and real estate. 504 loan proceeds typically account for 40 percent of the total project costs, with a participating lender financing up to 50 percent, and then the borrower typically is responsible for the remaining 10 percent portion. The 504 funds can be used to purchase land, machinery; to construct or renovate buildings; or to refinance debt in connection with an expansion of operations. Unfortunately, the 504 funds cannot be used for inventory or working capital. 504 loan limits are capped at $5.5 million, and loan maturity periods are 10 years or 20 years. 

Conventional Bank Loans and Alternative Lender Loans

  • Working capital loans: Working capital loans provide businesses financing to help run their day-to-day operations (i.e. rent, payroll and debt payments). The benefit of a working capital loan is that it gives small businesses the ability to fund daily operations and cover any gaps in working capital expenditures. Working capital loans are short-term loans and would not be used to purchase long-term assets or investments.  

  • Equipment loans:  Equipment loans provide businesses financing to purchase new business equipment (office equipment, computers, machinery, vehicles, etc.) by using that equipment as collateral.  Equipment loans are relatively easy to obtain as compared to other loans, and help to preserve cash flow as there is not a large down payment required, and certain tax write-off benefits can be enjoyed.

  • Lines of credit: Lines of credit provide small businesses money for day-to-day operational needs much like a working capital loan. Comparatively though, a line of credit provides for greater flexibility as the borrower only borrows what it needs and accordingly only pays interest on the amount borrowed.  Typically, lines of credit are unsecured and thus do not require the borrower to pledge specific collateral to the bank.

  • Business Credit Cards: Business credit cards provide startup companies with quick access to a revolving credit. The availability and terms of this type of credit depend heavily on the credit worthiness of the business and its individual owner or owners. It is important to be aware of the interest rates and fees associated with the credit cards being used to finance the startup operations.

  • Franchise Startup Loans: Franchise startup loans provide startup companies financing to help open or expand a franchise. The terms may vary, but typically these loans may be used for working capital, to pay franchise fees, construct or renovate stores or restaurants, or buy equipment.

  • Merchant Cash Advance: Merchant Cash Advances provide businesses a lump sum of capital that is then repaid using a portion of that business’s daily credit or debit card transactions. The amount of the advance/loan is dependent typically on monthly transaction volume and the repayment terms can vary based on the lender. Merchant Cash Advances can be relatively easy to obtain, but the interest rate on the borrowed funds can be quite high.  

  • Professional Practice Loans: Professional practice loans allow for professional service providers (i.e. legal, accounting, healthcare, architecture, insurance, etc.) to purchase an existing practice, real estate or new equipment. The funds may also be used for renovations to a building or to refinance debt.

  • Crowdfunding: Crowdfunding is a relatively new and popular way for small businesses to raise capital for a certain product, venture or project. There are numerous online platforms that facilitate different types of crowdfunding (i.e. equity, debt-based, rewards-based, etc.) and the avenues for such funding are constantly expanding. 

  • Grants: Small Business Grants are available from private foundations and federal, state and local governmental agencies and can provide another avenue to obtain “free” startup funds for a small business. Typically, these grants focus on specific groups of small business owners (i.e. veterans, women, etc.), can be tough to identify or qualify for, but are well worth the investment of time spent researching the availability of the same.

The Start-up Group understands that capital is critical to your company, which is why we specialize in practical, cost-efficient ways to help you understand what loan options and programs are available for your specific needs. These different options and programs are all unique, and we’d be happy to assist you in exploring and analyzing the different options that may work for you!

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If you have questions about small business loans or funding in general, please contact the Dickinson Law Firm at (515) 244-2600 to speak with an experienced attorney.

This material is not intended, nor should it be construed or relied upon, as legal advice.  Please consult with an attorney if specific legal information is needed.

- Ben Bruner


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