How to get a business loan as a teenager
Posted on 04. Jul, 2009 by Stuart in Loans
Teenagers of today are realizing that it pays to start thinking about their financial future sooner rather than later. Many have great ideas they would like to develop into a money-making business. While it’s possible for teenagers to start their own business, it’s a little more difficult for them to find the means.
There are ways to get a business loan as a teenager, but young entrepreneurs might have to jump through a few hoops first. It’s important to realize that by law, teenagers who are under the age of 18 are not old enough to take out a small loan. To obtain a loan, an individual must be considered a legal adult. The reason? If you sign a loan application as a minor, the loan company would be unable to enforce the contract if you defaulted and did not pay. Basically, as long as you are a minor, your signature is worthless!
But, this does not mean that teenagers cannot get a business loan. The teenager’s parents or guardians could loan the money, and an informal agreement could be worked up. The parents/guardians of the teen could give the money to the teenager, who in return would promise to pay the elders back each month.
If the teenager’s parents/guardians do not have cash on hand, they could get a small business loan in their names, and then pass the money over to the teen to launch the business. The same, informal agreement would need to be mocked up to ensure the teen understood the importance of giving the parents/guardians a payment each month.
As a teenager, borrowing from your family or friends is really the best bet if he or she is still of minor age. However, once the teen reaches the age of 18, there are additional options. If the teenager is aged 18 or over, there is a possibility that the young adult could be given a small business loan.
When thinking about obtaining a small business loan, it’s beneficial to know what the lender looks at to determine eligibility. The lender looks at a loan request in three parts, which are nicknamed “The Three C’s.” They include: credit history, capacity, and collateral.
An individual’s credit history details if he or she pays bills on time and includes a credit score. A person’s capacity tells if that individual can afford to pay back the loan, which is determined by a paycheck and the amount of debt that is listed in a credit report. A person’s collateral establishes what assets he or she has for the lender to take in the case the debt is not repaid.
Obviously, having a strong “Three C’s” score is difficult for many adults, let alone a teenager that does not have much credit, capacity or collateral. So, securing a loan might be a tough job for a teen.
There are numerous lenders out there who have loose criteria for loans, and would work with a young borrower. While some lenders and private organizations are willing to grant business loans to those people, including teens, who don’t have a lot of credit, it usually comes at a steep price: The lower “Three C’s” score a person has, the higher the interest rate will be. Also, low scores also result in having increased down payments.
If a teenager does not have a high enough “Three C’s” score to obtain a loan, he or she can always ask a responsible adult to co-sign. This would mean that the teenager’s name would be on the loan, but an additional signer would also be listed. Co-signers promise to pay the debt if the original signer fails to do so.
In the end, a teenager can access a business loan, but it might be hard work! But, if a teen is persistent and is dedicated to the business idea, it just might be the start of something great.
Photo source: clare m.
Now this is a really interesting topic and you’re very right that younger and younger people are making moves to securing their future.
As an alternative to traditional loans, which are hard to get for many business regardless of a person’s age, particularly today, a business can consider a business cash advance. It’s cash given up front to businesses when they need it. Depending on how much monthly revenue the business brings in, they don’t have to make monthly payments like with small business loans; instead small debits are automatically taken from batched credit card sales which makes repaying the money much easier.