Taking a loan to start a business might sound scary to many. Naturally, people don’t like owing money to anyone, especially banks. It doesn’t seem too appealing to let yourself get into debt before your business has even started operating.
However, not many businesses are opened and started with the money of their owners alone. Actually, as much as 64 percent of new companies use some sort of a loan to cover their initial expenses and get themselves up and running. It’s not at all that uncommon for fresh entrepreneurs to borrow money when setting up their businesses. Especially if they don’t have the personal resources that would enable them to do that.
So, if you don’t have the money yourself, you are probably asking yourself whether taking loans is the only option. Of course not, but most other ways of getting the seed money come with problems of their own.
So, I Can Avoid Loans?
Certainly. One of the ways to do this is by finding someone who will invest in your business without demanding that you repay them. This means pursuing some venture capital funds or an angel investor. They will be happy to give you the cash you need if they find your business ideas interesting and if they think it has the potential to grow and develop in the right direction. However, this doesn’t mean they want nothing in return.
Normally, a venture capitalist or an angel investor will help you with initial financing, but they will want their cut once your business develops and starts making a profit. They’re interested in becoming stakeholders and owners of a certain percentage of the company’s shares. Also, they will usually want to be involved in making big decisions, so you will essentially have to give up your independence if you decide to go this way.
Another option is to present your project to the wider audience and try to get those who like your idea to help you financially. This is called crowdfunding and there’s a number of online platforms you can use for this purpose. A big advantage of this process is that you can see right away what people think about your product or service and whether they would be really into using it. It’s a kind of a test that will show whether people consider your business worth starting or not. However, it’s very difficult to get all the required finances this way and it rarely works out, especially if you need large sums of money.
Why and When Should I Take on a Loan?
Choosing to take a loan instead of teaming up with an angel investor or taking venture capital means retaining independence and full control of your firm. You do have to pay the money back, with a certain percentage of interest, but you’ll have to choose between that and giving up on a certain part of the shares for good. If you decide to go with the former, here are a few things to have in mind.
Don’t Take on Loans if You Can’t Repay
It’s quite obvious that you shouldn’t take loans that you definitely can’t handle and repay. This means you need to have a sound financial plan before you even start your business. The plan doesn’t just come down to your long-term projection that in 2 or 3 years you’ll be able to return the invested money.
It’s also crucial to maintain a constant cash flow, required to regularly pay off chunks of your debt. You need to think short-term as well since lenders tend not to have too much patience when it comes to their debtors.
Have a Strong Application
You should consider applying for a loan only if there’s a good chance you’ll get it. If your application is dismissed by a bank or a private lender, it may hurt your chances of getting a loan in the future as well. Once you’re turned down, the next potential lender can see that as an indication of a high risk.
Have a Plan for Where the Money is Going to Go
Have in mind that it’s very important to know what exactly you intend to do with the borrowed money. Think about every dime and try to invest it in a way that it actually generates returns – don’t just take loans to repay your previous debts or get carried away and buy fancy stuff you don’t really need at the initial stage. Use the money sensibly and functionally. It’s always good to leave some of that money on the side, sitting and waiting for the right opportunity to be wisely invested. Entrepreneurship is about thorough planning and detailed strategies, but at the same time, it’s about improvisation and making decisions and investments along the way as well. Therefore, having some cash on your hands at all times may be vital.
Which Loan Should I take?
The two basic dilemmas you’ll have are whether to take a business loan or a personal loan, as well as whether to go to the bank or contact private lending companies. If you choose the bank, have in mind that you’re expected to have a flawless financial record and credit score, for both personal and a business loan.
Business loans might be even more difficult to get, especially for new businesses – banks don’t tend to take too many risks in this respect. Getting a personal loan to start a business is normally a bit easier, especially if you have something to offer as collateral, but intermingling your personal and your business funds and issues is usually not the best idea and you should think twice about this.
On the other hand, turning to private companies that will lend you money has its advantages. First of all, in order to get start up business loans, you’ll need less paperwork and you won’t have to have a perfect credit score. In general, securing these loans is less time-consuming, the requirements for eligibility are more reasonable and the approval process is quick. Nevertheless, the interest rates are often higher than those offered by the banks, so pay attention to this little detail.
Deciding to Take on a Loan for Your Small Business
All in all, getting a loan to start your business is not something to be afraid of or avoided at all costs. Consider all your options, analyze carefully how much money you need and which type of loan suits you best. If you’re confident and believe your financial plan is sound and thorough enough to repay the debt, you should definitely think about going for it.
Are you in the beginning stages of starting your business? Let us know your questions below!