You have a great business concept, but you lack the resources to implement it. For most entrepreneurs, obtaining funding is a difficult task. Recruiting an investor is never easy, and most entrepreneurs experience anxiety in their early days due to a lack of funds. That’s when they consider startup loans as viable finance options.
“Many small businesses and startups seeking to grow have something in common: they need more capital to get started or grow their business. Obtaining start up business loans isn’t a choice to be made carelessly. Understanding the pros and cons is the best way to start,” says startup investing firm spokesperson Shane Perry of Max Funding.
In most cases, startup business loans are beneficial, but there are some drawbacks as well. Here’s a closer look at the pros and cons of receiving startup business loans so you can make an informed decision about whether or not they are best for business.
Pros Of Receiving A Startup Loan
- Banks and loan providers will assess your business plan, which will outline how you intend to spend the cash you’re seeking, but they’ll have zero influence in the day-to-day functioning of your business or about how you handle your finances.
- Lenders do not have any claim to your revenues. Their main concern is repaying the loan.
- Startup business loans often have a lower interest rate than many other forms of financing (such as credit cards and merchant banks), albeit the repayment period of startup business loans varies depending on the provider.
- Startup business loans can provide substantial quantities of money specific to the needs of your business.
- Startup business loans can provide substantial quantities of money specific to the needs of your business.
- The funding is immediately usable, which in turn helps you develop a positive credit rating (which helps secure future loans) and establishes a favourable financial profile for your business from the outset.
Cons Of Receiving A Startup Loan
- For startup business loans, many commercial banks and lenders implement stringent standards. They consequently want additional information – a complete understanding of your business’s future structure and fundamental business systems, information about other interested parties, and cost and profit estimates – and a rigorous assessment procedure. Lenders also want to know that you have a decent credit score and are credible since this increases your chances of repaying the loan.
- Commercial lenders’ interest rates are influenced by national policy and the fluctuations of the market. Mainly in the early stages, rates may vary, and profits may be unable to keep pace. Keep in mind that interest rates for startup business loans are often hefty to begin with.
- A personal asset (like a stock portfolio and properties) is usually required as collateral by financial institutions for them to feel confident lending you money. However, if your business fails and cannot pay off your loan, lenders may collect its obligation by liquidating the collateral you provided.
- A loan from a bank is the bank’s property. As a result, a startup business loan obtained from banks shows on the balance sheet’s liabilities side. Therefore, it has an impact on the value of your business.
The Bottomline: Look Into Every Detail Of A Startup Business Loans Before Applying
Whatever source of financing you choose, keep in mind that each has advantages and disadvantages. Make an informed decision based on your financial situation, your business needs, and objectives.
