Startup business loans are loans available to companies that are beginning operations. These loans aren’t for established businesses, but rather for ones in the early stages of operation.
A loan can be essential for a startup, as it’s often hard for a business to stay afloat without assistance at the start. You’ll require funds to cover your early business expenses, including payroll, equipment, real estate, and other assets.
The funding process works like it would for many other entities, although you’d require plenty of documentation to get your loan. The repayment process is also consistent, but the timing might be faster than you expect.
You’ll find many positives surrounding business loans for startups, but there are a few concerns to note as well. Here’s a closer look at the pros and cons of startup business loans.
The Pros of Business Loans For Startups
- You can build business credit with a loan.
A startup might require a more massive loan later, so it will need to find ways to boost its credit before then. You can improve your company’s business credit rating by getting a startup loan and paying it off as your team grows.
Paying off your startup loan as planned will help lenders see that you’re responsible with your money and that you are reliable. A lender will consider you a low-risk borrower, thus giving you access to a loan. The terms for that loan might also be better, as you could get a lower interest rate that entails fewer interest charges.
- You can use the funds in your loan for many purposes.
You can choose how to use the funds in your startup business loan. You could use those funds to cover equipment costs, hire new workers, or acquire a real estate property. Anything that can help your business grow can work.
Some lenders might require you to specify your plans for your loan. You can provide a thorough listing in your application showing how you will spend the money and how your business will grow through the assets you provide.
- You don’t have to give any equity in your business.
While finding investors to help support your business sounds helpful, you’d have to provide equity to those investors. Since you’re giving out equity to various parties, you are losing control of your business. You’d have to meet whatever demands those investors hold, making it harder for you to manage your business the way you want.
Since you’re not giving out any equity in your business, you can keep full control over your company when you have a startup loan. You’ll keep more of your profits, which can make a real difference after you finish paying off your startup loan.
There’s also the related benefit of getting your money sooner. There’s no need to search for parties looking for equity in your business, so you will get your funds faster and without having to manage obligations to anyone other than the lender.
The Cons of Startup Business Loans
- You might have to provide collateral for your loan.
Some lenders will require you to submit collateral before you can get a startup loan. Collateral is an asset you can use to back the loan with, meaning the lender could collect that collateral as payment if you are unable to pay off the loan.
While having collateral can help reduce the lender’s risk, you’re incurring more of a risk yourself. You’d have to review the specific collateral you would use and determine what you can do if you have to surrender that asset.
Startups are more likely to require collateral than other businesses because of a lack of information on what the business provides.
- The qualifications for some business loans for startups might be too tough to manage.
Some of the qualifications you’d have to manage for a startup loan can include earning enough revenue, having proper financial records, and having a prior credit history. While not all loan providers will have these requirements, some might still have them to reduce the risk the borrower will incur on your loan.
Be sure when finding a lender that you look for one who can explain the qualifications for your loan. Since your business is new, you might have to meet certain standards that a lender establishes, but that team should help you see what to expect.
- Many startup loans are short-term ones that require you to pay it off fast.
While many term loans can last for years, a startup loan may be a short-term loan that you’d have to pay off in one or two years. The shorter timeframe comes from how your loan likely won’t be worth as much money.
Since there are fewer payments necessary, you’ll likely spend more money each month on those charges. The total might interfere with your cash flow, making it harder for you to do more things within your business unless you find other ways to earn more funds.
How Business Loans Can Help Your Startup
While there are many challenging things surrounding startup business loans, you’ll find it easy for you to get more from a business loan when you pay it off well. There are many ways how your business loan can help you with your loan:
- You can use your loan to help you with some of your operational activities, including getting a physical work location ready, working on developing a product, or promoting your business to others.
- You can also cover operating costs like payroll charges and real estate payments.
- Equipment financing is complex, but a startup loan can help you cover the cost of the equipment you acquire. You can even use the equipment as collateral if necessary.
- You will also improve your business credit rating as you pay off your loan, although this point depends on how well you can complete those payments.
You can contact a lender to learn more about how a business loan can help you. Make sure when finding a lender that you’ll find someone who will help you.
How to Get Business Loans For Startups
The process of how to get a startup business loan is simple, as you can use these steps:
- Review how much money you’ll require in your loan. Be sure you choose the right amount of money in your loan, and avoid borrowing more than necessary to keep from spending more on interest charges.
- Review lenders to find their eligibility requirements. Some lenders require you to have a high enough personal credit score, plus you might have to provide a guarantee on the loan.
- After finding a lender to support you, gather the necessary documents for your loan. You’ll require a business plan and description of your company, including details on future operations and how you plan on growing your business.
- Allow your lender to review your business details. It can take a few days or weeks for a lender to review your application.
- Your lender will provide terms for your loan if you are approved. Check these terms to see what fees are necessary, what the interest rate is, and your schedule for paying off the loan. You can also see if you can add extra payments and if you can complete your payments early without incurring an early repayment fee.
- After you receive your confirmation, you can get the funds for your loan out to your bank account.
You can then check on your business loan through your lender as necessary. Your lender should provide details on how to review your account online. An online portal can also help you see what you owe and even let you adjust how much you’ll pay as necessary.
How Business Loans Can Hurt Your Startup
While business loans for startups are helpful, you must watch how your business could be at risk of harm. You’ll spend more money on your loan due to it having a higher interest rate than other loans. Since your startup likely won’t be as experienced, you won’t have much of a credit history to work with. You’d end up spending more on interest charges because of this point.
Sometimes the fees for a loan can also hurt your finances. The charges can total up to 10 percent of your loan’s value, although some charges might be set values. Some of the expenses you’ll find in a business loan include an origination fee, underwriting charges, and maintenance fees. There are also late payment charges involved when you don’t pay on time.
Your business cash flow may also be restricted after you take out the loan. Since you’re making monthly payments on your loan, your beginning cash flow will experience a substantial reduction due to the added obligation. This point might hurt your ability to get the funds you require.
The Advantages and Disadvantages of Business Loans
Pros
- It’s easier to get funds from a business loan than if you tried looking for venture investors or other parties.
- You can improve your business credit score after you pay off your startup loan.
- The interest rate for a startup loan will often be less than the rate on a credit card.
- Since you’re not giving up equity, you’ll have more control over your business without having to report to outside investors.
- You will get access to money in less time through a business loan than if you waited for investors to come in to help.
- The money you use for your business loan will be separate from your personal finances, so you don’t have to put up your personal money to acquire a loan.
- You can also review details on your loan online. Many lenders will help you check on your loan through an online platform where you can log in and check on what’s happening with your investment.
Cons
- The qualifications for a business loan will vary by lender. Some loans require you to have a long enough credit history or enough financial records.
- Your cash flow will be minimal due to how you spend extra on payments each month.
- While you might get more money for your business, you might not know what to spend that money on unless you establish a suitable plan.
- The interest rate might be higher than what a more established business can receive.
- You might have to provide collateral or a personal guarantee on your loan to reduce the risk the lender incurs.
- Although it’s easier to get money from a loan than other measures, the timeframe for getting your funds will still vary. You could wait weeks or months to get approved.
- The process of paying off a loan can become repetitive after a while.
- The amount of money you can borrow in a startup loan will be less than what you’d get out of a more traditional loan for a more established group.
What Do I Need For a Startup Business Loan?
Since your startup will be relatively new, you’ll have to provide multiple details about your business to get the help you need. Here are some of the items you’ll require when applying for a startup business loan:
- Information about yourself, including personal tax returns and bank statements
- Details on your business, including any available tax returns, profit and loss statements, licenses and permits, and any articles of incorporation
- A business plan that includes an executive summary, a description of your company, the product or service you offer, your marketing plan, and a general request for funding
- Collateral or guarantee information, if applicable
You’ll need to complete the application as well as possible. You might be rejected if you don’t complete it all the way or if you can’t find enough data.
How Can You Get the Best Deal On a Startup Business Loan?
Business loans don’t have to be as expensive as you might assume. You can get a better deal on one of these loans by doing a few things:
- Work on your personal credit score. Since you might not have enough business info, a lender might use your credit score as a deciding factor for your loan. You could get a better interest rate if you have a more valuable personal credit score.
- Review the debt-to-income ratio for your business. You should be getting more income into your business than the debt coming out of it. A decent rate should show your ability to pay off a loan and manage expenses.
- Provide collateral if necessary to reduce your rate and increase your chance of being approved. But make sure the collateral is of a value relevant to your loan, and figure out an alternative plan for any case where you might lose your collateral.
- List your business cash flow in your application to show how money comes into your business. Look for long-term reports if you have them, as a business with a consistent cash flow that doesn’t shift too much will be desirable to lenders.
Alternatives to Business Loans For Startups
While business loans are helpful for startups to consider, they aren’t always going to be suitable for everyone. There are many other options you can explore when finding an alternative to a business loan:
- You can provide equity to prospective investors if necessary. But remember that those investors will have a share in your company, and you’d have to report to those parties.
- Various industry incubators or accelerator programs can help startups, especially tech-based ones. You can establish partnerships with people through a program, although some groups might request equity.
- Crowdfunding campaigns can work if you have a product that might be of interest to various people. But you will likely have to provide rewards or other offers for people who give you funds.
- Some small business grants may also be available to help you cover the cost of some operations. But not all businesses can qualify for grants, and some grants will have rules for how you can use the funds you receive. Various governmental groups offer grants, so make sure you look out for what these parties provide you.
A Final Note on Startup Business Loans
Startup business loans can help you get your business off the ground, as you’ll receive the funding necessary to manage various operations. But the terms for these loans can vary, and not all will work out for people. Make sure when finding business loans for startups that you know what to expect. You can also contact us at the Wheeler Group for further details on what might work for you when finding funds for your startup.