Startups are businesses that are less than five years old. They often require large amounts of capital to get off the ground. Startup business loans are designed to provide funding to startups at early stages of development. These loans are typically offered by banks or other financial institutions.
There are two main types of startup business loans: term loans and revolving lines of credit (RLC). Term loans are fixed-term loans that usually last between six months and three years. RLCs are variable-rate loans that allow borrowers to borrow funds over time.
The interest rates on startup business loans vary depending on the type of loan. For example, bank loans have higher interest rates compared to nonbank loans. However, there is a wide range in terms of interest rate. Some startup business lenders charge as low as 5% per year while others can be as high as 30%.
Startups may also qualify for certain tax benefits if they use startup business loans. This means that the money borrowed will not be taxed until it’s used for business purposes. The IRS allows entrepreneurs to deduct up to $5 million in start-up costs from their taxes.
If you’re considering taking out a startup business loan, here are some things to consider when choosing an institution to do so with.
1. Borrowing Amount
Banks offer different financing options based on how much money you need to borrow. Smaller companies can obtain small business loans ranging from $50,000 to $250,000. Larger companies can take out larger loans, such as those that exceed $10 million.
2. Repayment Terms
Bank loans tend to have longer repayment periods than nonbank loans. Most banks offer loans with repayment terms of 2 to 10 years. Nonbanks typically offer loans with shorter repayment terms.
3. Interest Rates
Bank loans generally carry higher interest rates than nonbank loans. On average, bank loans can cost anywhere from 6% to 12%, whereas nonbank loans can cost as little as 3% per year.
APRs are calculated using the annual percentage rate. It represents the total amount of interest paid during the life of the loan divided by the outstanding balance.
Fees associated with startup business loans include origination fees, application processing fees, and closing fees. Origination fees are charged upfront and are usually around 1% to 4% of the loan amount. Application processing fees are charged after the loan has been approved. Closing fees are charged at the end of the loan period.
6. Prepayment Penalties
Prepayments are common among startup business loans. Banks typically charge prepayment penalties of 0.25% to 2% per month. You should check with your lender before making any payments.
7. Other Considerations
Lenders look at several factors when deciding whether to approve a loan request. These include the company’s current financial situation, its future plans, and the risk involved in lending to the company.
8. Startup Business Loans vs. Bank Loans
A startup business loan is similar to a personal line of credit. Both provide access to capital for businesses. A startup business loan differs from a personal line of credit because it is tied to a specific project or investment.
9. When To Use Each Type Of Financing
A startup business loan is best suited for new companies that don’t yet have established credit histories. Personal lines of credit work well for existing companies that want to expand their operations.
10. How To Apply For A Startup Business Loan
Applying for a startup business loan requires filling out a form and submitting supporting documentation. Your lender will review the information provided and make a decision about whether or not to lend you money.