Startup Business Loans

What is a Startup Business Loan?

A startup business loan is a type of loan that provides a new business or company with enough upfront capital to get up and running. Startups require an adequate amount of money to pay for expansions or finance startup expenses. Startup businesses usually incur costs that they are unable to pay for themselves. As such, they take out business loans to gain the financial assistance they need. Most times, the borrowed funds are put toward inventory, marketing, office supplies, physical facilities, or other business projects.

Factors to Consider When Seeking Startup Business Loans

It is essential to put certain things into consideration when exploring your funding options. These include:

  • Your business needs. Do you intend to use the funds finance short-term or long-term business needs? What plans are you making to pay the loan back as quickly as possible? You have to plan out your debt financing such that the interest owed does not accumulate into an exorbitant amount.
  • Will the money be used to finance operating expenses or capital expenditures? Capital expenditure such as equipment and real estate will become an asset, which serves as a plus to your business.
  • Loan structure. You have to consider if you want all the money now or in smaller portions over several months.
  • Risk factor. Decide if you are willing to assume all the risk if your business fails, or you prefer to share such risk with someone.

Types of Business Loans Available to Startups

New ventures can raise finances through the following channels:

  • Debt Financing. Debt financing allows business owners to borrow funds with the intention of paying it all back at a particular time frame and an agreed interest rate. This makes you indebted to the creditor regardless of whether the business venture succeeds or fails. An example of this type of financing is bank loans, which are offered in all shapes and sizes. Startups can seek to obtain microloans of not more than a few hundred dollars from community banks or contact commercial banks for massive loans. Debt financing is easier to get when backed by collateral.
  • Equity Financing. With equity financing, startups sell partial ownership of their company to members of the public (investors) in exchange for cash. Here, the investors assume most (or all) of the risk if the business fails. However, the amount they could lose is limited to the sum of money invested in the firm. But if the business succeeds, investors stand to make a much greater return on their investment in the company. The essence of equity financing is to make a business far less expensive for the owner if it fails. In any case, it is advisable that owners do not give up too much control of their companies, as there may be a clash of interest if investors’ motivation is short-term.
  • Business owners who need big items such as vehicles, equipment, or computers can get them on a lease agreement in return for specified periodic lease payments.
  • Angel Investor. Angel investing helps startup businesses to raise funds through the aid of angel investors who provide capital for new ventures.
  • Friends and family. Startups can obtain both loans and equity deals from friends and family sources. The advantage of this type of business loan is that it comes with a less stringent conditionality.