Is It Okay To Take Out Business Loans For Startups? Know The Pros And Cons Of Startup Business Loans
Yes, it is okay to take out business loans for startups! As morning shows the day, a strong beginning always enhances the chance of your business’s success.
The numbers furnished by the U.S. Chamber of Commerce have projected a positive scenario for startup businesses. Despite 50% of startup businesses having an average shelf life of five years, there is a major surge in the number of new business applicants across states.
| “Application numbers doubled in 2020 compared to recent years, and 2021 and 2022 saw over 5 million applications filed, according to the U.S. Census Bureau. The trend only accelerated in 2023, with a record-breaking 5.5 million new business applications filed.” – U.S. Chamber of Commerce. |
However, as you kickstart your business, you will need a steady cash flow to support expenses like supplies, employee payroll, buying or renting commercial premises, and employee costs.
Business loans for startups can end all these financial worries, provided you qualify for one and have a good FICO score. Further, like any financial loan, startup business loans come with various risks.
So, let’s have a comprehensive discussion about the benefits and disadvantages of taking out a business loan for a startup business.
Is It Okay To Take Out Business Loans For Startups?
Business loans for startups or startup business loans are meant to meet the capital requirements of a business. Banks and other financial organizations offer funding to a business owner to invest in various aspects.
Usually, a startup business loan is used to meet the following expenses.
- Working capital
- Buying equipment
- Marketing and publicity
- Business expansion
Similar to usual business loans, for a startup business loan, the lender will assess your creditworthiness. It will assess your credit history and the finances of the company to grant or refuse the amount you have asked for.
Further, the U.S. Small Business Administration (SBA) has set strict guidelines for business loans to minimize “lender risks.” So, when you take a business loan backed by SBA, you get easy funding, and that too on fair terms.
Having said that, let’s know more about the benefits of taking business loans for startups.
Pros Of Taking Business Loans For Startups
Building credit, retaining ownership, and quick access to capital are major benefits of taking business loans for startups. You will also have to pay lesser interest rates and nominal processing fees to get business loans for startups.
1. Quick Access To Capital
As I have mentioned earlier, you will need solid financial backing to support all the expenses of your startup business. The business loan will help you cover your day-to-day costs and more specific requirements like product development.
Further, you can take requirement-specific business startup loans like semi-truck financing or equipment loans.
2. Retaining Business Ownership
You don’t have to sell the equities or find investors if you have business loans for startups. Without the presence of investors and you not being answerable to them, you have absolute control over your startup business.
Startup business loans are even better than venture capital or VCs. You have to offer stakes to VCs in the company, inviting interference. With business loans taking care of your funds, you don’t have to reach out to VCs and sell your stakes.
3. Building Credit
Now, think of a scenario.
- You borrow business loans for startups.
- Then, you make timely payments.
- You also keep your debt low.
- Your lender sends reports to credit bureaus when you make payments.
Thus, you build a good credit score. It is crucial to qualify for the best offers and flexible rates of interest. So, whenever you take up a business loan for your startup, make sure that your lender is associated with credit bureaus.
| Did You Know? Bank of America has its dedicated program to help you build a secure credit score. Further, with time, you can proceed to the unsecured line of credit. |
4. Getting Nominal Interest Rates
Business loans meant for startups have lower-than-usual interest rates. Further, the terms are more flexible to keep the landscape for startups promising in the USA.
| “Loans guaranteed by SBA range from small to large and can be used for most business purposes, including long-term fixed assets and operating capital. Some loan programs set restrictions on how you can use the funds, so check with an SBA-approved lender when requesting a loan. Your lender can match you with the right loan for your business needs.” U.S. Small Business Administration |
So, with flexibility and a nominal interest rate, you will have fewer financial burdens on your shoulders while repaying the amount.
5. Personal Wealth Protection
When you take a business loan for your startup, you don’t need to invest your personal funds. You will also get a business loan without collateral.
Investing your personal wealth in a startup business can be risky. However, with a business loan, you don’t need to drain your own money for current expenses and expansion.
Cons Of Taking Business Loans For Startups
Eligibility criteria and fees and interest rates can be the biggest challenges if you want to take business loans for startups.
Fulfilling Eligibility Criteria
For a startup owner, meeting the eligibility criteria and getting a business loan can be a challenge. To begin with, you will need a credit score of 600 or more. You will also need to meet the following criteria to qualify for a business loan for your startup.
- Minimum business turnover
- Nature of business
- Business activities
- Business existence, etc.
Even if there are lenient lenders offering business loans for startups, in such cases, you may have to pay higher interest rates.
Fees, Interests, And EMI Burdens
When you take a business loan for a startup, you have to repay the principal and interest through EMIs. This is a recurring financial burden, restricting your cash flow.
Further, in many cases, the processing fees and interest rates are higher. So, you burn cash easily. That is why, you need to avail yourself of loans backed by SBA.
Is There Any Alternative To Business Loans For Startups?
Yes, there are many alternatives to business loans for startups. In recent times, the most popular ways to arrange funding for your business (in case you don’t want a business loan) are:
- Business grants
- Business credit cards
- Crowd Funding
- Bootstrapping
Let’s have a brief idea about these alternatives.
1. Business Grants
You can consider business grants offered by government agencies, NGOs, and private organizations. You don’t need to pay business grants. So, it is most viable if you are starting small with simple operations and services.
However, the competition is high for acquiring these grants.
2. Business Credit Cards
If you need short-term financial assistance, business credit cards will be the best choice. You can pay off the balance monthly to avoid interest rates.
Further, as you pay off the balances, you will be able to build good credit scores, establishing you on a strong financial ground.
Some other benefits of using business credit cards for your startup are:
- Annual Percentage Rate (APR)
- Welcome Bonus
- Discounts on Chosen Purchases
- Rewards
So, these are similar to business loans but better.
3. Crowd Funding
There are companies like Popsocket and Allbirds that became million-dollar businesses after a start by crowdfunding.
If you are struggling to secure a bank loan, run a fundraiser campaign on social media and kickstart your venture. However, managing a small amount of money from various sources is a challenge.
4. Bootstrapping
Are you running a business in your house? You can try bootstrapping by investing your personal funds and operating revenue to run and expand your startup.
However, remember that your business overhead really needs to be low if you want to try bootstrapping.
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