Having an excellent business idea and working hard towards actuating it is significant for any startup. Perhaps you’ve already compiled a detailed business plan, chosen a legal structure, registered a trademark, and identified an appropriate location, among other startup essentials.
The next vital step is acquiring funds to make the dream a reality. Without enough cash, your operations may stagnate just a few months after you launch your startup. Study shows 20% of small businesses don’t survive past their first year, 30% fail in their second year, 50% in their fifth, or 70% in their tenth.
That’s where startup business loans come in. This compact but comprehensive guide fills you in on all you need to know about these loans. Jump right in!
Challenges In Getting A Loan For A Startup
Most startups have no business history, and thus it’s difficult for financial lenders to assess their credibility. Remember, banks and other lending institutions are in business and would want to limit their risks. Therefore, an extensive background check is necessary to ensure you can repay the cash they give you. But since you’re just starting a business, they have nothing substantial to assess your ability to pay. For this reason, they use alternative qualification criteria.
Loan lenders consider several factors before approving your loan request.
Personal Credit Score: Many banks use your personal credit score to assess your history of settling debts and how likely you are to meet your financial obligations.
A score of 680 and above is ideal, and they can approve your loan request quickly. Any score below this may subject you further scrutiny and possibly higher interest rates because of the risks involved.
Collateral: Another vital requirement is collateral. You might wonder, ‘Is a small business loan secured or unsecured?’ To set the record straight, not all startup business loans require collateral. Thus, you may want to work with banks or lenders that offer unsecured loans. Those offering secured loans may require you to list security assets like vehicles, business equipment, house, land, stock options, or insurance policies. These assets could be taken into possession if you default on paying your loan.
Business Plan: Your idea’s feasibility may convince the lender to grant you the desired loan. So, write a comprehensive business plan with all the essential elements like competitor analysis, marketing strategies, operating plan, financial analysis, management team, and product description. Ensure every detail makes sense by conducting extensive research. Notably, banks receive dozens of loan requests daily, and your application must be outstanding to get approved.
It’s essential to research before you apply for a loan. Furthermore, you can review the different kinds of loans, rates, payment terms and conditions, and benefits to find the best type of loan that suits your business needs.
CStartup Business Loan Options
It’s good to note that banks aren’t the only source of startup business loans. You have several other options to consider if you don’t qualify for a bank loan. These are as follows:
Business Credit Cards: Business credit cards are intended for use by an entrepreneurial firm instead of personal use. They’re easier to apply for than typical mainstream loans. For one, the process is automated and lacks the extensive background checks typical for loans.
However, they carry slightly higher interest rates than conventional loans because of the inherent risks, given they’re offered without collateral and credit score checks. An advantage is they come with special perks like sign-up bonuses, 0% introductory interest rate, discounts at select hotels and airlines, flexible repayment terms, and cashback.
Equipment Financing: If your business needs costly machines like refrigerated trucks, excavators, or automobile lifts, you can buy or lease them through equipment financing. Basically, you’re given enough cash to purchase the desired equipment, with the agreement that you’ll pay back the amount in regular installments, plus some interest.
Government Grants: Time and again, governments roll out schemes to give loans to up-and-coming entrepreneurs. You may want to be on the watch out for such programs and apply as soon as they kick off because of the potentially stiff competition from fellow citizens.
Angel Investors: Angel investors are people who may want to invest in your business, hoping to reap financial rewards in the future. They can lend you money, offer valuable advice, and hook you up with relevant stakeholders to propel your business into profitability. There are several angel investor networks you can enroll in to connect with potential financiers.
Besides these options, you can consider crowdfunding or personal savings, among others.
Acquiring a startup business loan requires a thorough analysis of the available options and eligibility requirements. Typically, no one will lend you money unless you prove beyond reasonable doubt that you have what it takes to repay the cash. So, build your credibility by improving your credit score, mending your character, and conducting in-depth research to prove your business idea’s feasibility. With these elements in check, lenders will extend a helping hand and give you the cash you need to buy equipment, stock your store, pay workers, and rent the business premises.
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