Startup Business Loans

You may have hit upon a brilliant business idea which you are sure will be a success if implemented.  However, for that to happen you have to draw a good business plan – a plan which indicates how you would establish the business and the steps you would take to make it a success. Your financier’s decision to provide funds to your business may be dependent on this plan.

Financing a startup business is a big challenge for most entrepreneurs.  For one, the business has no past record of success and second, the creditworthiness of a new business cannot be proved.

Financing Startup Businesses

An entrepreneur planning a new venture can opt for equity financing or take startup Startup Business Loans .  In case of equity financing, the person starting the business will receive money from the financier and in exchange he would give him a stake in the new business.  The business owner can also take a startup business loan that is he can borrow money which needs to be repaid along with interest.

Advantages of Startup Business Loans over Equity Financing

Unless you have drawn an elaborate plan for equity financing, borrowing Business Loans would be more practical for business owners. If you opt for equity financing, they may be complicated issues and legal problems that may surface. As the owner of your business, you may not want to dilute your share in the business.  Equity financing may force you to share ownership with others. Not only that, you will also have to share the profits of the business.  Moreover, you may not remain the sole decision-making authority as management control is distributed, creating scope for conflicts.  If you take startup Business Loans instead, you could avoid all these problems.

Business Loans from banks

It is very difficult to obtain Business Loans from banks. 
Bank loans may be secured are unsecured.

  • Secured Loan: When you are taking a secured loan, you’re giving the creditor an interest in an asset belonging to your business.  The asset may be a building, land, inventory or receivables.  In the event of you defaulting on the loan, the lender would recover his money from this asset, also called as collateral.
  • Unsecured loan: Unsecured loans are generally granted to businesses which have a good credit history or have established cash flows.  But startup businesses do not have either and the chances of getting unsecured startup Business Loans are very slim.

Banks generally grant secured loans to startup businesses, also taking a personal guarantee from the owner.  This means that in addition to the business assets, the owner’s personal assets are also at risk.
The owner’s borrowing decision will depend on the term of the loan, the interest rate charged and the fee charged by the banks.

  • Term of the loan: You need reasonable time to pay back the loan.  Business Loans are generally granted for a period of 1 to 3 years.
  • Rate of interest: Before taking Business Loans, you should ensure that you can comfortably pay interest at the rate charged by the bank.  Longer the term of the loan, the higher will be the interest rate.  Interest rates may be fixed or variable.
  • Loan fees: The bank would charge you for the loan application, for reviewing the submitted documents, conducting credit check and so on.  You also need to enquire about the fee the bank would charge for loan prepayment.

Other sources of Startup Business Loans

  • Startup Business Loans can also be got from financial institutions which are specially formed by the government to help small businesses.  In addition to finance, these organizations also provide guidance.
  • Loans can be borrowed from family and friends who may agree to help you out.  It would be advisable for you to prepare a promissory note mentioning the terms of the loan.

Funds, though difficult to get, are crucial for startup businesses.  Entrepreneurs starting new ventures may have to take great pains to arrange for startup Business Loans as these businesses, being new, cannot prove their credentials.