3 Facts about Small Business Loans for Young Entrepreneurs

Many young entrepreneurs assume small business loans are just like personal loans except they are extended in the name of a business instead. This is not accurate. In fact, the structure of business loans is very different from the structure of personal loans. Most business require ongoing financial assistance even once they are profitable to fill orders, pay vendors and expand. This means permanent arrangements for debt and credit need to be put in place. It can be a challenge to meet these long-term financing needs at the beginning of a business's life cycle. 

#1 Business Plans Matter

Personal loans are given based on income and credit alone. Very few other factors will matter if a person is financially stable at the moment he or she seeks a loan. Business loans have different considerations all together. A lender attempts to learn a business's relative chance of success prior to distributing funds to a new entrepreneur. Lenders get this information from a business plan.

A business plan is not just a description of what a business will do. It must detail how the business will go about its work, industry research that has been completed, estimates of cost to provide services, marketing estimates and even financial modeling for the future. Business owners who fail to provide a detailed plan showing a model for success will rarely find enough funding to get on their feet.

#2 Government Assistance is Available

The government, federal, state or local, does not hand out free money to just any business. However, there are several options for government grants and even guarantees on loans that can reduce the cost of financing a business. Grants tend to be harder to get because they have more specific requirements. Entrepreneurs can research grants in your area by contacting the local Chamber of Commerce to ask about small business grant programs.

The Small Business Administration does guarantee loans for young entrepreneurs. Those seeking these loan guarantees will have to meet basic credit requirements. They are then eligible for low, fixed interest rates on private loans thanks to the government's support of the program. Research SBA loans on the SBA website or by going to your local SBA office.

#3 Placing Personal Assets as Collateral is Risky

Some private lenders in particular will ask a borrower to place a personal asset, such as a home or automobile, on the line in order to secure a business loan. If the business goes bankrupt, that asset will be seized, rendering the business owner without equity in his or her own home. The results can be detrimental.

Separate personal and business assets to avoid systemic risk. A business owner can use a personal asset for a start up loan. Then, once a business shows signs of becoming profitable, the business owner should replace personal assets with business assets on secured loans. In the future, only business assets should be used when collateral is required. Once a business establishes its own credit, the business owner should no longer attach his or her name to loan applications and finance opportunities.

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