How much money do you need to get a loan for a business?

Business News Daily receives compensation from some of the companies listed on this page. Advertising Disclosure Starting a business can be an exciting process, but it costs money. When determining the startup costs of a business, it's important to be realistic. Things like office space, legal fees, payroll, business credit cards, and other organizational expenses can really add up.

If you're thinking about launching a new business, you might not know how to choose a loan provider. Chances are you have high expectations for your company. However, blind optimism can cause you to invest too much money too quickly. At first, it's smart to keep an open mind and prepare for problems that may arise later.

Cynthia McCahon, founder and CEO of business plan software company Enloop, said business owners should start with a bit of healthy skepticism. While each type of business has its own funding needs, experts have some tips to help you determine how much cash you'll need. Serial entrepreneur Drew Gerber, who has created a technology company, a financial planning company and a public relations firm Wasabi Publicity, estimates that an entrepreneur will need to have six months of fixed costs on hand when starting a company. When planning your costs, don't underestimate expenses and remember that they can increase as the company grows, Gerber said.

It's easy to overlook costs when thinking about the big picture, but you need to be more precise when planning your fixed expenses, he added. In fact, underestimating costs can decimate your company, McCahon said. The SBA states that there are several types of expenses to consider when starting your business. You must differentiate these costs to properly manage your company's cash flow in the short and long term, said Eyal Shinar, CEO of cash flow management company Fundbox.

Here are some types of costs that new business owners should consider. One-time expenses will be relevant mainly in the start-up process, such as the costs of setting up a company. If there's a month in which you only need to buy equipment once, the money you come out is likely to be more than the money that comes in, Shinar said. This means that your cash flow will be interrupted that month and you will have to compensate it the following month.

Ongoing costs, on the other hand, are paid on a regular basis and include expenses such as utilities. They usually don't fluctuate as much from month to month. Essential costs are expenses that are absolutely necessary for the growth and development of the company. Optional purchases should only be made if the budget allows it.

The following table estimates the very basic fixed costs for a hypothetical start-up company with five employees. Variable costs will depend on the situation of each company and are not included in this table. Another important aspect of a startup's financial planning is projecting the company's cash flow. Bill Brigham, director of the New York Small Business Development Center in Albany, advises startup owners to project their cash flows for at least the first three months of the company's life.

He said that we must add up not only the fixed costs, but also the estimated costs of the goods and the best and worst case revenues. This is an essential step in maintaining the financial health of your company. If you're not realistic about your cash flow and debt, you won't be able to get your business off the ground, especially as other costs start to grow. Did you know? Keep in mind that when it comes to small businesses, personal assets are also often at stake.

Find out if asset-based lending is right for your business. Gerber recommends starting a business without taking out any loans, if possible. Indebtedness puts a lot of pressure on any business and its owners, he said, as it leaves less room for error. Do your best to explore all your funding options.

If your only option is to take out a loan, work closely with your lender to ensure that your company can manage the commitment financially. Keep in mind that when it comes to small businesses, personal assets are also often at stake. Once you've determined your costs and projected your cash flow, you'll need to consider how to seek funding. How you get the funds will affect the future of your business for years to come.

Personal savings, loans from family and friends, government and bank loans, and government grants are just a few potential sources of funding. According to Herndon Davis, mortgage loan officer and real estate agent for Mortgage Real Estate Services, most startups are self-financing. One place to go for help is SCORE. Formerly known as the Retired Executive Services Corps, this volunteer organization partners with the SBA and offers training and workshops for small business owners and aspiring entrepreneurs.

Most importantly, SCORE offers advice from people who have been in the business you might want to be in and know the specific problems you're likely to encounter. There are many ways to finance your new business. You can borrow from a certified lender, raise funds through family and friends, fund capital through investors, or even access your retirement accounts, although the latter is not recommended. In addition to the type of loan you apply for, the amount you can borrow depends on the type of lender you choose.

Large domestic and foreign banks lend more on average than smaller regional banks. Alternative lenders tend to offer a smaller range of loan amounts. The average amount of a small business loan varies considerably depending on the type of loan you apply for and the lender you choose. Small business loans come in a variety of formats and features, including long-term business investments and payroll coverage when income is low.

Borrowers looking for large sums and longer repayment terms will likely prefer to apply for loans from the SBA and large banks, while borrowers looking to cover smaller expenses should consider applying for small banks or alternative loans. Medium-term and short-term loans are often offered by alternative online lenders and may be better suited to smaller, short-term needs. However, it's possible to get even more if you apply for a 504 loan from the SBA for equipment or real estate, that program technically has no limit. SBA loans connect you to banks looking to work specifically with small businesses, and the SBA covers up to 85 percent of any loss in the event of default.

These loans tend to be lower because your company has less time to repay them, usually between three and 18 months. Depending on a variety of factors, such as your credit and how quickly you need capital, you can apply for a bank loan, an SBA loan, or a short-term loan online for your company. The APRs for these loans can be prohibitively high, up to 99% in extreme cases, depending on your creditworthiness. Although there is no established structure for this type of business financing, debt capital often grants the lending institution the right to convert the loan into an equity interest in the company if the loan is not repaid on time or in full.

Small business lenders understand that every business is unique, which is why they offer so many loan options. Term loans, which are normally repaid over a period of between two and 10 years, are a reliable and common way to finance a business. In general, lenders give the highest loan amounts to the borrowers they consider most eligible, essentially borrowers who believe they will be able to repay these large debts in full and on time. To decide what's right for you, consider the average loan amounts available for each type of small business loan and lender.

Angel investors, on the other hand, are generally wealthy people who want to invest a smaller amount of money in a single product rather than creating a business. The most common types of SBA loans require at least a 10% down payment on the SBA, especially from startups and for company acquisitions. If you're looking for a smaller loan for short-term expenses, a short-term loan from a smaller bank or an alternative loan might be best for you. .

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