8 Ways to Finance Your Startup with Debt: Part 2

I mentioned this article to someone recently who was surprised at the limited number of debt options for startup companies.  I asked her to do some research and encouraged her to come on and comment on the story if she has some other suggestions.  It’s not that we’re discussing the “only” debt options for startups but, rather, we’re talking about the most common options or the solutions that can be employed by the majority.  The answers to all your prayers may not be here but it’s important to clearly understand your options and the beginning of empowerment is to know what can and can’t be done so that decisive action can be taken.

hone equity

So here we go with our next set of startup debt financing options:

SBA Loan – We’re all familiar with SBA loans and I know they have a bad name with some but, if you’re a startup, don’t discard this option.  Brock Blake is the CEO of Lendio, a free small business resource that should be utilized by any small business owner looking for capital.  According to Blake:

“SBA can be a great option for startups looking for capital.  One of the most important requirements is strong personal credit. With good credit, it’s likely that a startup could get approved for a loan up to $35,000 through the Community Express or Community Advantage loan programs. For larger loan sizes, the business owner will need a combination of strong credit, industry experience, collateral, and a thorough business plan.”

Home Equity Line of Credit or HELOC – I realize this isn’t 2007 so there are not nearly as many HELOC’s being handed out.  However, there are still people who either own their homes free and clear with no financing or they have a lot of equity.  People who have been downsized after several years in the workforce.  Others have inherited a property from parents or grandparents and now they have options to borrow against their new home.  So, despite the fact that approximately 30% of homeowners owe more than their homes are worth, there is still a large army out there with equity.  If you’re part of the silent “equity army” and you’re looking for a HELOC then you may be wise to look at the smaller banks and credit unions since the lending challenges and issues at the big banks are well documented.  Lastly, even though HELOC’s are not nearly as prevalent as they once were, they belong on the list of options.

Peer to Peer Loan aka P2P – I’m still amazed that, with all the requirements involved in being a lender and the burdensome requirements of the SEC, that we still have lenders who are willing to offer small loans like the P2P lenders.  So on one hand they are great.  But if you visit the websites for two of the largest P2P lenders, Prosper and Lending Club, you’ll quickly learn that these loans aren’t cheap.  With closing costs and high APY’s this is not your bank loan with minimal closing costs and a reasonable interest rate.

However, there are tens of millions of dollars of loans being issued through these networks and the default rates are rather minimal.  So they have created models that work.  The downside is that loan amounts are pretty low on average.  Lending limits are usually $25,000 to $35,000 and the average loan sizes that are being approved are much lower than those limits.  You’ll almost always get better terms on a credit card which allows you to use the funds over and over again instead of only once like a loan – and you may be able to get a larger credit limit as well.  P2P loans may not be cheap and they do have their downsides but these are a good fit for the right person.

Contract Financing – This is a relatively new financing option that allows business owners to capitalize on a contract that is either existing or in the beginning stages of negotiation.  Kris Roglieri is the founder of Commercial Capital Training Group and the President of a national commercial finance company who has used contract financing for many clients.  Roglieri explains it like this:

“By having a contact, some lenders can immediately monetize a portion of the fixed payment stream from the contract to fund the small business in order to perform on the contract. This method allows the business to grow effectively and is a far cheaper debt option compared to giving up equity to a lender or investor.” 

The credit of the borrower and financials of the new business are not a factor in determining whether or not a business can access capital from their contract.  Roglieri points out that:

“The underlining factor in a lenders decision to monetize a contract is solely done on the issuer of the contract and their credit worthiness.  Ideally, the business provides a unique technology or service to an investment grade company and has a fixed contract over a period of time.”

So the bottom line is to know and understand what your options are.  After all, how can you make the best decision if you don’t know what your options are and which one or which combination is best for you?  Be sure to check out Part 1 too.  I realize that not every option is here but we welcome your comments.  So to all my fellow business owners keep living the dream!

Home Equity Loan Photo via Shutterstock


Tom Gazaway Tom Gazaway is Founder and President of LenCred. His expertise is in helping small business owners who are in the first two years of business to properly obtain business financing that separates their personal and business credit while also protecting, preserving, and improving their credit profiles. Tom blogs on the LenCred blog, The Business Finance Lounge.

11 Reactions
  1. The “SBA can be a great option for startups looking for capital. One of the most important requirements is strong personal credit. With good credit, it’s likely that a startup could get approved for a loan up to $35,000 through the Community Express or Community Advantage loan programs. For larger loan sizes, the business owner will need a combination of strong credit, industry experience, collateral, and a thorough business plan.”

    Highly suspect comment. Recently, a friend who was a VP for Capital One, has excellant credit, had $250,000 liquid cash, VP with high financial industry experience, was a minority, was denied a loan. Reason, even tho O’bama has stated loans are being made available; regulators are not abiding by anything O’bama is doing. The banks walk into her business waiting for them to turn into a profit, which they are close to doing within their first five months of business. After they make their profit, the banks want to lend them the money they were requesting. Oh and they had collateral.

  2. Lesli,
    Sorry to hear about your friends experience. How much was the request? What was the loan for? Do you know which lender he/she applied with?

    This is actually another reason why companies like Lendio are such a good resource. Your story is not a surprise and it’s completely normal and common. Banks actually tend to approve less than 10% of the loan requests they receive from small business owners. One of the advantages with companies like Lendio is that they know which lenders are the best fit for each client. Quite frankly, if everyone could go to the bank – any bank – and get their funding then companies like Lendio wouldn’t be coming off their second year in a row on the Inc 500 list.

    I know it’s frustrating when situations like this occur but I see hundreds of these kinds of requests each month where small business owners come to us after striking out in their efforts with getting their funding on their own. I realize it’s still frustrating but this story is shockingly common. I suggest your friend not throw in the towel and that he/she work with someone experienced in small business lending and not go directly to a bank.

    My company doesn’t specialize in SBA loans but we’ve personally had several situations where we’ve taken clients back to the exact same bank that just denied them and got their loan requests approved…but, of course, it’s more common to take a borrower to a new bank/lender where they are a better match based on their location, industry, revenue, cash-flow, credit, etc.

    Thanks Lesli.

  3. Nice post. I recently started a real estate brokerage, and have been looking into ways to fund business expansion. Just submitted an application with lending club ,and got the following denial message:

    “Total revolving balance in relation to income greater than 100%.”

    Seems odd to me that would be a reason for denial. I figured regardless of my credit, my profile would still be shopped out to peers, so that they could make a decision after reading up on me. I have a very strong history in my industry and was recently named to the wall street journal top 250 list for my field.

  4. Hey Jared, thanks for your comments. I’m sorry to hear about your experience with your P2P app. Hopefully you can find another option or a better option for some of your financing. Check out part one of this blog too for some other options. All the best.

  5. Thanks for the info.I’ve recently started a couple of small business and i was looking for intelligent ways of financing them..This info was helpful.

  6. You’re welcome Andy. Thanks for your comments and all the best on your new ventures!

  7. Thanks for pointing out some financing options that I wasn’t very familiar with, though I get the impression that with the current state of the economy financing will be tough to get no matter what. Do you think the availability of bankruptcy makes it more risky for lenders and that is making them more reluctant?

  8. Hey Robert,
    I haven’t heard a lot of talk about availability of BK’s being a big driver that has caused lenders to pull back. It’s possible but I haven’t seen that be a factor. However, when a deal is borderline and a lender needs a reason to say “no” then they are most likely to paste the reason codes from the credit report into the denial letter sent to the applicant. I can’t say I’ve seen any denials for this reason but there may be some situations where that may play into the concerns held by the underwriter.

    Thanks again Robert!

  9. Great post and tips, Tom! Depending on the type of business, entrepreneurs may be looking at lending options through their local banks. But going from bank to bank and filling out form after form is not necessarily the best use anyone’s time. While other options are available, as you discussed, knowing which ones match your specific business needs is not always clear. Using resources to better manage this process can mean the difference between growing your business and becoming discouraged by the hurdles you might encounter.

    Jana Hocker, group product manager at Intuit
    Twitter: @sbloanfinder

  10. Great read. Thanks for pointing out all the different ways to finance. I am thinking of telling a friend to use option 1, the SBA loan.