In order to launch a successful business, you need capital. There are many ways to source capital, but not everyone has access to large amounts of savings or friends and family that can lend money for a new business. Sometimes a startup business loan is what you need to make your successful business idea into reality.
However, there are benefits and drawbacks to getting a startup business loan, as there is with any business venture. On one hand, it can be the difference between launching a successful business or an unsuccessful business, and on the other hand, it is a real risk to your personal finances. Let’s explore the benefits and drawbacks of getting a startup business loan.
Benefits of a Small Business Loan
Sometimes you just need to take a chance to succeed, and while many new small businesses fail, a sharp business owner with the right ideas and a dedicated work ethic can make it work. Getting a small business loan is a risk, but it comes with its own benefits if used effectively.
Focus on Success
One of the main benefits of a startup business loan is being able to focus on launching and running your business successfully, instead of pitching ideas to potential investors and securing the capital you need to even get started in the first place. In this case, you can start setting up your business immediately without chasing funding.
Bring in Good Talent From the Start
Good talent is essential to launching a successful business, and it can take years to establish profitability and a reputable brand name for recruiting new talent. With a startup business loan, you immediately have the capital to recruit talented workers with alluring salaries.
Build Credit With Lenders
In the long term, being on good terms with lenders can only help your new startup business. If you need to borrow more in the future in order to cover expensive costs like relocation, marketing campaigns, and expansion, a responsibly paid startup business loan will instill confidence and favorable terms from lenders.
Avoid Selling Ownership for Funding
Startups will offer partial ownership to workers and investors in order to attract capital and talent. If the business turns out to be hugely successful, then very large chunks of your company will be in the hands of investors who may or may not share a similar vision for your company.
Raise Capital Without Playing the VC Game
The venture capital song and dance has been broken down into a science, but not everyone is seeking billions of dollars for a high-risk “unicorn” startup. Forget the VC pitch decks and politics of venture capital and focus on running a successful business with a startup business loan.
Drawbacks of a Startup Business Loan
While a startup business loan does have many benefits, it’s not always the best idea for your business. Before taking on a startup business loan or any sort of debt, it’s important to plan carefully and assess whether or not you really need a loan for your startup to succeed.
Hard to Qualify
Qualifying for a startup business loan is no simple task. You have to prove the value of your business and your ability to repay the loan to a loan officer. If they find your credit history trustworthy and your startup business to be practical and reliable for making steady payments, then you may be able to secure a startup business loan.
May Not Be Necessary
You don’t need to take a loan to start a successful business. Being able to be resourceful and make the most of what you have is equally as important. If you can get your business up and running on your personal capital and/or a shoestring budget, then you have a solid business model and can grow naturally without taking on debt.
Loans Curb Your Balance Sheet
When your startup is first generating revenue, loan payments can reduce or even eliminate your positive cash flow. Managing expenses is just as important as generating revenue, and a startup business loan can actually hinder your cash flow as another fixed expense. It’s crucial to plan carefully and ensure that your company’s revenue can cover the cost of loan payments.
Personal Finances Can Take a Hit
Many new businesses fail, and your chances go down as the years pile on. It takes good ideas, adaptability, and a lot of hard work to start and sustain a successful business. If you are working with your personal capital or a minimal budget, then failing is not as bad, you still have your credit and the lessons learned. However, if you fail with a loan, lenders can seize your assets, and you may be personally on the hook for a large amount of debt without the ability to take on more.
Hard to Use Efficiently in Formation Stage
When you are launching a new startup, the best way to allocate your capital may not be immediately obvious. You may still be trying new ideas, seeing what works, seeing what doesn’t. If you use a startup business loan to experiment with unproven ideas, you may waste your capital and leave yourself on the hook for a large amount of money.
Getting a Startup Business Loan
Startup business loans can be acquired through private lenders, government small business lending programs like the SBA, business credit cards, cash advances, and more. Typically, a loan like this is acquired through a loan officer at a private bank or public institution.
Business financing is what you make of it, and there is no one-size-fits-all solution. If your startup is based on proven ideas with real results, a startup business loan could be just what you need to get your company off the ground. If you are still testing new ideas and don’t yet have a solid foundation to build on, then it’s probably best to avoid taking on debt.
No doc business startup loans are available to budding entrepreneurs, and concessional loans for small businesses are also available through government programs such as the SBA. These loans are more favorable than private loans as they are subsidized by tax dollars to encourage economic development. These SBA loans are non-recourse small business loans, meaning that the lender can seize your upfront collateral in case of nonpayment, but they cannot pursue further compensation or recourse. Typically, this collateral is property.
Make sure to consider all the factors that are relevant to your project before getting a startup business loan and always weigh the pros and cons before making such an important financial decision.
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