Any business venture requires upfront funds to get anywhere. Entrepreneurs can’t start a company without some upfront capital. Fortunately, there are many options that entrepreneurs can explore when they’re searching for the source of funds for business they need. The important thing is to do research and fully understand what the motives are behind getting a startup loan. It’s also essential to understand how you can use such a loan best to lead a company to success.
Another important thing that you need to consider is the type of loan that you as an entrepreneur are going to pursue. It’s important to understand the many options out there and you can actually use many types of loans to finance startup ventures.
The following are some important information to keep in mind if you’re an entrepreneur considering a startup loan.
Startup Loans – What You Need to Know
An entrepreneur needs to have good reasons to pursue a startup loan. Entrepreneurs must remember that taking out a loan means that their fledgling company will have a new expense to cover each and every month. This puts an added budget on the company budget. It’s therefore essential that borrowing is justified for the company.
The justification for a loan should include a detailed explanation of what you will spend the loan funds on. This is important not only for the company itself to make the right financial decisions, but also for securing the loan. A lot of financial institutions have strict requirements regarding business plans for use of the loan that must be met before a company will be approved to borrow.
Business owners should be very detailed in their planning measures. The exact expenses that the loan will be used for should be determined. Also, business owners should develop financial projections explaining how loan payments will be worked into the company’s budget into the future. Before even looking for a loan, business owners should determine how much they need to borrow, how long they want to have to repay the loan, and how much they will pay in interest throughout the loan life.
Possible Reasons for a Startup Loan
There are numerous reasons why entrepreneurs want or need to borrow when they’re just starting out with their business ventures. The following are a few of the most common reasons why loan funds are necessary for startup ventures.
Paying Living Expenses before Profits Start
One of the biggest expenses a lot of entrepreneurs need to deal with when they’re startup up a new company is their living expenses. Profits aren’t going to come in for a new company right away. In fact, it can take weeks or months before profits start coming in for a lot of different business venture types out there.
Loan funds can make it possible for entrepreneurs to devote their full efforts to their new company. Instead of juggling a job and a startup, they focus only on their startup. This increases their chances of startup success. It also increases the speed with which their startup venture becomes profitable.
Acquiring Needed Equipment
Every startup venture requires some type of equipment. For example, a construction business requires tools and vehicles for transportation. An advertising startup requires computer and printing equipment. The equipment a startup requires to get started can be one of the most significant expenses.
Startup loans are a good option for making large equipment purchases. Entrepreneurs might not have enough money to purchase these items. At the same time, the profits won’t come in and the business won’t grow until equipment is required.
While renting equipment is an option for many equipment types, even rental equipment costs add up over time. Equipment loans for startup ventures help manage these expenses.
Many startup ventures require staff. Entrepreneurs might not be able to take on the jobs and assignments they need to alone. They need to hire laborers to assist them. Wages for laborers are expensive. Also, there are expenses in addition to wages that go along with hiring help. Entrepreneurs are often required to cover additional expenses like unemployment insurance costs if they hire employees. Loan funds for startups are often used to pay for expenses like these.
Types of Startup Loan Available from Business Loan Companies
After you decide to borrow, your job is far from over when it comes to acquiring a loan. The next step is to evaluate all the loans available to you. You need to look carefully into various business loan companies. There are numerous types of loans one can use for startup funding. You’ll make the best choice on which loan to borrow by researching. It’s important to know what all the options are to make the best possible decision.
Here are some of the most common loan types that you can use for your startup.
Basic Startup Loan
Some financial institutions out there might offer loans that are specifically designated as startup loans. New companies are the ones who should look into these loans. They might be specifically designed for companies that don’t have a great deal of credit history. For these reasons, they may have higher interest rates.
The approval decision for these loans could be based mostly on persuading the lender that the venture is profitable. However, lenders might also offer these loans on the basis of collateral. This would make them secured loans rather than unsecured loans.
Convincing a lender to provide a startup loan typically requires a lot of work and documentation. The lender will want to see a detailed business plan. They will want a thorough analysis of the market. They will want to know why customers will prefer you over the competition. You need to be prepared when you apply for a startup loan. The lender’s approval decision will be based on how prepared and convincing you are.
Term loans are generally unsecured loans. A term loan refers to any loan type that is designed so that repayment is made at regular intervals. When an individual takes out a term loan, they get the entire loan amount upfront. Then, they begin making payments. They repay the loan until it is paid off in full.
The approval decision for term loans is generally made according to the business and credit of the startup. For a new company, it’s basically always necessary to use one’s personal credit history to be approved. This means that entrepreneurs usually need good personal credit histories to be approved for term loans.
Small Business Administration Loans
Small business administration (SBA) loans are loans that you can get through the government. These loans are one of the government’s efforts to encourage entrepreneurship. They have the advantage of lower interest rates and somewhat easier approval for fledgling businesses.
Any entrepreneur should definitely at least look into the possibility of taking out an SBA loan. SBA loans are backed by the government. Lenders are more likely to approve borrowers for SBA-backed loans because they involve less risk for the lender.
Nevertheless, there are numerous requirements entrepreneurs must meet to get the loan. SBA loans are good for entrepreneurs who can meet the requirements and face higher interest rates with private loans.
Secured loans are often the only option for entrepreneurs who don’t have strong credit. Taking out a secured loan involves offering collateral to the lender. The lender takes ownership of the collateral if the entrepreneur is unable to pay back the loan.
Entrepreneurs can use just about any valuable possession as collateral for these loans. One common piece of collateral is a vehicle. Entrepreneurs can put up their vehicle as collateral through what’s known as a title loan. The entrepreneur gets continued usage of the vehicle unless he or she defaults. At the same time, the entrepreneur is able to use loan funds for their business. People also frequently use real estate properties as loan collateral.
Another type of secured business loan is a vehicle or equipment loan. An entrepreneur can borrow money to purchase a vehicle or equipment. Then, the entrepreneur uses that vehicle or equipment as collateral while paying back the loan. These are great options for acquiring equipment without strong business credit.
A credit line or revolving credit is a great option as a startup loan for entrepreneurs. Credit lines are convenient because they make funds available to entrepreneurs. At the same time, entrepreneurs don’t necessarily have to spend these funds. For this reason, business lines of credit serve as a good emergency fund. Entrepreneurs can use their credit account if they’re dealing with an unexpected decrease in cash flow.
Most entrepreneurs will eventually open up a line of credit for their business. In fact, statistics show that 41 percent of small businesses have a line of credit open. Most major financial institutions offer business credit cards. They not only create more funds for companies, but also make purchasing supplies more convenient.
If you’re in need of equipment, you should look into lines of credit available from suppliers. A lot of equipment suppliers offer lines of credit to business owners. It’s often easier to get approved for a business line of credit from a supplier than from a financial institution.
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Personal loans are important for funding a lot of entrepreneurial ventures. Entrepreneurs building startups don’t yet have strong business credit. They, therefore, must rely on their personal credit to borrow. As an entrepreneur, you’re at a huge advantage if you have strong personal credit. However, entrepreneurs can use both their personal credit and their business plan to achieve approval from lenders.
One does not necessarily use personal loans as business loans. However, a personal loan generally consists of funds the borrower can use on anything. So you can actually use them for business expenses if that is what you need.
Sole Proprietorships Businesses
Personal loans used for business purposes are especially common with sole proprietorships. Entrepreneurs running sole proprietorships aren’t really separate entities from their businesses. Their credit is their company’s credit and vice versa.
The only real drawback to using a personal loan for business purposes is the potential negative consequences. If anything goes wrong, it can ruin an entrepreneur’s strong personal credit. This makes it especially important to make all payments on time and pay a personal loan off in full. Even missing a single payment could cause a ding in an entrepreneur’s personal credit.
If you’re an entrepreneur looking for financing, analyze your credit report to determine if a personal loan is your best chance for funding your business venture.
Signs You Should Borrow a Startup Loan
While loans are obviously important for startups, it’s important that an entrepreneur takes care before borrowing. One of the challenges in the early days for a startup is having enough cash flow to cover expenses. Borrowing money for a startup provides necessary initial funds. However, it also creates an added expense each month during the repayment period. Borrowing costs money in interest.
Entrepreneurs should evaluate the situation carefully and crunch the numbers before borrowing. They should avoid borrowing if they have no clear idea of what they’re going to spend funds on. And they should avoid borrowing if they’re only eligible for loans with high interest rates. They should also avoid borrowing if they’re not sure when their business will start to bring in money.
As an entrepreneur, you should avoid borrowing in many scenarios unless the following situations are present.
You Can’t Proceed without Capital
Entrepreneurs should limit startup loan borrowing to situations when it’s absolutely necessary. There should be an opportunity they want to pursue that they can’t pursue without loan funds. Managing funds is an essential skill for a successful entrepreneur. Entrepreneurs need to know how to best direct their liquid assets. They also need to know how to weigh the costs of borrowing versus the added profits borrowing can bring.
As an entrepreneur, you should be aware of alternatives to borrowing if there are any. You should calculate the added profits you can enjoy by borrowing. Then, you should compare this to the costs of borrowing. Only borrow if the venture will be profitable and won’t leave you in the red.
You’re Ahead with All Your Current Expenses
Entrepreneurs definitely shouldn’t borrow when they’re already struggling to keep up with their company’s expenses. As previously mentioned, borrowing leads to an added cost for a company. If your startup’s finances are already stressed, borrowing will make the situation worse.
Falling behind on loan repayment downgrades a company’s credit rating. If an entrepreneur backs their startup loan with their personal credit, then their personal credit will also be downgraded. Entrepreneurs must tread carefully and analyze their startup finances in detail before committing to a loan.
But if you are managing to pay your current expenses and you’re not already in debt, then you can consider a startup loan if there is a need for additional funds.
You Have a Guaranteed Opportunity to Profit
As an entrepreneur, you might argue that nothing is guaranteed in the world of business. It’s true that you can’t be 100 percent certain of profiting from a venture. However, some ventures clearly show more potential than others. It’s best to avoid borrowing unless you see an opportunity showing a lot of potential.
The venture you invest your loan funds in may turn out to be a flop. Even so, you’ll still be on the hook for paying back the loan. Do your due diligence and limit borrowing to ventures you have a great deal of confidence in.
The inability to acquire a funding loan is frequently the biggest obstacle to success as an entrepreneur. The more you know about resources for getting a startup loan, the faster you’ll be able to start. Calculate all the expenses you need to cover to realize your business vision. This will tell you how much you need to borrow. Of course, it’s good to minimize your startup expenses. You’ll want to have as little debt as possible to maximize your chances of business success. Bring down startup expenses through innovation and creativity. Buy used equipment or run your business out of home rather than a commercial facility, for example. There are always ways to bring down costs if you do your research.
The Internet is a great resource for entrepreneurs looking for a startup loan. Most financial institutions offer information about business loan products on their websites. Using the Internet, you have information on many loan opportunities at your fingertips. Also, many lenders offer great tools on their websites like loan calculators. With resources on the web, you start today. Use the resources at your disposal and you may be surprised at how easy it is to finance your entrepreneurial dreams.
Katherine Davis is a freelance writer specializing in the subjects of finance, banking, and investment. Based in New York City, Katherine’s experiences combating the Big Apple’s outrageous real estate costs and living expenses have provided her with some great budgeting insights on stretching a dollar. A graduate of Penn State University, Katherine advises millennials to be disciplined when it comes to their finances and to start investing as soon as possible.