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How to Get a Small Business Loan to Start a Business

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QUESTION ON Business Loan to Start a Business

I don’t have very good credit. What are my chances of getting a small business loan. particularly government loan, especially without collateral? Also, does the SBA provide loans under $250,000? Who is my second best choice?

– Jessica

Dear Jessica,

It is really unfortunate that many talented individuals with bright and workable business ideas are constrained in getting resources to finance their business due to “less than perfect credit.”

In our experience, any kind of “not so good, not very good” remark on your credit report is just plain “No Good” to any financial institution and any attempt to apply for any kind of loan would just be a futile attempt.

To help you assess your credit standing, you may want to get hold of your credit score. Previously kept secret by lending and credit institutions, credit bureaus and other organizations are now offering them to the public. Equifax is offering FICO scores to consumers for a fee. Annual Credit Report is offering this service free of charge. Plus, their free report comes with an analysis of your credit worthiness based on a number of factors, such as payment timeliness, number of accounts opened, etc. The report also comes with recommendations on how you can improve your credit score. Best of all, this resource is free.

One important thing to remember is that the Small Business Administration does not really give out loans; they only guarantee the loans. You will have to apply for a bank and ask for SBA guarantees. Read the article How to Get an SBA Loan to learn more about SBA loans.

When applying for a loan from a bank, there are a number of things you need to show and prove. Even if you have a very good credit, you will have to present a viable business plan when seeking out a business loan, whether from the bank or SBA. The business plan must show the feasibility of your proposed business to convince the “institution” to risk their money with you or your organization. For a guide in preparing business plans, you can visit our

Starting a Business section at

If you have equity in your home, you can also use a “Second Mortgage” financing and use the money for your new business. Normally, second mortgages are intended for home remodeling, etc for your home, but they usually don’t bother checking whether you really used the money for home-improvement. Their main concern is that you pay the money back. Understand though, that this may not be a good option, because second mortgage financing normally are high interest loans and the pay back amount is almost over 200% than the original loan. Imagine paying back $75,000 for a $25,000 loan in the span of thirty years.

We have articles in the website that may also give you some insights. I suggest you read the articles Thinking of Getting a Bank Loan? Do Your Homework First!. and Twelve Tips for Getting Your Bank Loan Approved to give you ideas on the preparations you need to do before applying for a loan.

Without good credit, your best option is to check out your family, relatives, friends to become incorporators or partners in your planned enterprise. Present your idea to them and show them how you foresee the business to operate. Show them your business plan. Perhaps, some of them will be willing to put up some kind of investment money for you. And if you have considered the initial amount you will need, ask them to invest specific pro-rated amounts. Of course, you have to make sure that your business will really work out successfully. Otherwise, you might run into lawsuits and ultimately lose your friends and maybe your relatives.

You can also use your credit cards to purchase your initial equipment, materials and supplies you need. Credit card financing is actually pretty common for startup entrepreneurs, especially those that can’t pass the rigid screening of banks and lending institutions. It is relatively easy to get. But watch out: it can be an expensive way to get capital.

Good luck!

Nach M Maravilla

Recommended Resources on Getting A Government Loan To Start a Small Business

Article originally published in November 2000. Updated March 11, 2012

Category: Credit

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