Thinking About A Start Up Loan? Read This Blog
Start up loans, often known as startup capital, refer to the initial financial investment in the development of a new company or product. It provides a new business with the upfront capital needed to get it off the ground.
These startup loans are applied for anyone looking to start a new business and may be provided by venture capitalists, angel investors, or even traditional banks. Startup loan provides capital that is used to pay for all expenses that would be incurred in the course of creating a new business such as initial hires, office space, permits, licenses, product research and market testing, product manufacturing to mention a few.
Sources Of Startup Capital
Starting up a new business might be difficult, especially if you are an individual looking to start your own business. This is because you would need to invest funds into the business, and sometimes, you might not have such large amounts of cash at hand. However, startup loans provide you with the funds you need to invest in your business to get it started. There are various sources of startup capital for new businesses; they include:
- Personal Investment
Starting a new business is risky, especially as it may not, in the long run, be able to sustain itself, leading to its crash. As a result, it is much more advisable that you invest your savings into your new business if you do have enough money saved up. By using your funds, you are protected from external influence and would not be indebted to anyone should the business end up failing. You retain total control over your business, and if things go sideways, you are not indebted to anyone.
- Bank Loans Or Credit Card
You can also choose to finance your new business with a credit card or a bank loan. It is relatively easy and fast to get approval or your business credit card, and minimum payments are generally low, meaning you can afford the regular payments until your business entirely takes off. On the other hand, making minimum payments can cause your loan to spread for years with higher interest rates. Your loan can also be damaged by one missed payment.
As a startup business owner seeking bank loans, there are specific requirements you need to meet; you need a good credit rating, assets as well as a history of tax payments. These requirements make it harder for startup companies to apply for bank loans as even with all of this, your loan might still be declined. They take longer to process and require more documentation. When they are finally granted the interest charged on these bank loans are high.
- Love Money
Another source of startup loans is love money, which is money loaned by a spouse, parents, family, or friends to be invested in setting up a new business. These loans are considered to be patient capital, which would be repaid when the business takes off, and profits start to come in.
You must, however, note that when using love money as your business startup capital, you would only be getting limited amounts as friends and family rarely have that much capital. Also, they might want to have equity over your business, and you should not take business relationships with them lightly.
- Angel Investors
An angel investor is a private investor with high income who invests their funds in developing a company in exchange for a share of that company. These investors often invest in startups which are just emerging and are willing to take on the high risks associated with newly formed businesses.
These angel investors may act independently or on behalf of specific organizations that have created a fund or operate in a syndicate. Angel financing takes even less time when compared to other traditional ventures.
- Government Grants And Subsidies
The government sometimes makes grants and subsidies targeted at financing both startup and small scale business owners. These grants provide you with the funding required to finance startup businesses. The process of getting these grants are, however stringent and require a lot more documentation. You must first have your business proposal which contains vital information of the project; work costs as well as long term returns before you even think about applying for these grants.
Advantages Of Startup Loans
There are several reasons why startup loans are considered a capital raising option and used by many. These reasons are not unrelated to the benefits these loans hold for startup businesses. These benefits include:
- Startup Business Loans Provides Capital For Businesses
Starting a business requires working capital that would be used in paying fo all initial expenses and costs that would be necessary for running a business. Depending on the industry, your savings or love money may be able to finance your business. However, if your business requires substantial capital for the purchase of heavy machinery, then startup loans are no doubt the way to go.
- You Retain Ownership
For most startup loans, you maintain your place as the business owner and provides an alternative to seeking out investors who might ask for a share of the company’s equity. You also have more options to choose from, and if you indeed decide on investors, you want them based on strategy rather than monetary value, giving you more leeway in considering potential partners.
- Startup Loans Allow You Build Business Credit
In the long run, your Business Proposal might need an even more substantial cash infusion to keep growing. Startup loans help with building the excellent credit history you might need. By taking out and paying back these loans, your chances of being considered for more substantial loans at lower interest rates are also increased.
Disadvantages of Startup Loans
Like other forms of loans, there are also disadvantages with taking out startup loans which have to be considered before they are decided on as a capital source. These disadvantages include:
- Startup loans are a risky venture for investors, and as a result, they are particularly difficult to qualify for.
- These loans restrict cash flow into the business as they have to be paid off monthly. A missed loan payment can cause irreparable damage to business and personal credit, hence as these loans are being paid off, very little is left to be invested into the business.
- While limited capital may be a motivator for bootstrapping, there might be misspending when businesses are provided with large amounts of funds as capital at a go.
Startup loans are excellent sources of working capital for newly or about to be established businesses. These businesses require capital to allow for the functional operation of the business. However, there are various sources of this required startup capital, and they all have to be considered, including their pros and cons before they are eventually given out.