What factors should one consider before seeking startup business loans? A look at the difference between startup loans and other business loans will help understand the issue better.
Startup Vs Other Loans
- Startups consume a lot of money in the initial phase before high returns start flowing in. The advantage of investing in startup is that a business that catches the fancy of its customers can provide very high profits in a very short period of time. Other loans provided to establish businesses focus on a specific rate of return and investors generally eschew the high risk high return model.
- Existing business may collapse due to mismanagement. However, startups may collapse due to systemic flaws or fundamental shift in expectations of the client and the industry. Even the best laid plans can go waste and this renders startup business loans a very risky venture.
- Startup loans are riskier because inexperienced entrepreneurs may make basic mistakes that may affect the business negatively. Over emphasis on hype and lack of regard for the requirements and expectations of customers may cause the business model to collapse.
Factors Affecting Startup Business Loans
- Nature of Business: This is one common factors considered by lenders for new as well as established businesses. Seeking startup business loans for setting up a typewriter manufacturing unit will not generate any interest in lenders now that touch screen keyboards are becoming popular.
- Future Potential in Business: An individual seeking startup business loans for a mobile app development company will easily secure funding at good terms. The mobile app industry is all set to explode and is considered the next big thing in the world of technology. Most startup business loans are offered on the basis of this factor. Convincing lenders of future potential can help the entrepreneur secure loans without any collateral or other such formalities.
- Gestation Period: A business that starts yielding returns quickly is always preferred to one that has a longer lock in period. Risk involved in startup business loans rises significantly if the gestation period for the business is very high.
- Terms of Credit and Collateral Requirements: One cannot negotiate with startup business loans providers like normal lenders. Offering higher collateral or a higher rate of return need not necessarily make it easier to finalize the deal. However, having sufficient collateral in hand will help check out traditional forms of loans along with unconventional startup business loans.