It is a tough world out there for small business owners, and perhaps you’re working on a startup company right now. There are many important things you’ll need to factor into your initial plan.
One of the key areas you’ll need to cover is finance, and it can make or break any fledgling enterprise. You may be wondering what your options are, and what are the pros and cons of each. This article will give you some of the proven ways you can access the money you need in order to finance your startup business.
Unsecured Business Loans
These types of loans are typically issued by banks or lending institutions to small businesses that may not have the credit history required for an unsecured personal loan. They can be used to finance almost any business expense, with the exception of things like mortgages. Whilst the loan does not have to be repaid immediately, you would incur interest charges on a daily basis until it is paid off.
This type of loan is generally more expensive than secured lending. This is because the lenders risk losing their investment if you default on your obligation. These loans offer greater flexibility than secured loans, and they are suitable for companies possessing proof of income but that lack the required credit history. They are also beneficial for startups that have not yet established a permanent place to do business.
You can do much of the research you need for this type of loan by visiting specialist sites on the internet. People taking out unsecured business loans are typical of those wanting quick applications and inhouse checks, with decisions made and money received within two days. Today more specialist sites offer ethical and Sharia-compliant unsecured business finance, further enabling entrepreneurs to improve their cash flow, invest in marketing, purchase stock and hire new staff.
Secured Business Loans
If you are only on the starting rung with your business, this option may not be applicable to you. Having said that, it’s important to know what these loans are and how they are different from unsecured business loans. They are basically cash infusions provided by financial institutions to enable established companies to expand their operations or to help cover their operating expenses.
These loans are typically for people who have already been in business for some time. This would mean they usually have good credit scores as well as collateral such as real estate or equipment. The interest rates would be typically lower than for unsecured business loans. This is because if the borrower defaulted on its repayments, the lender could take ownership of the real estate or equipment to recoup its losses.
Bank Loans For Businesses
The type of loan provided is usually determined by how the business will use the money. For example, a retail store may apply for a working capital loan to buy inventory, while an IT company could request financing for office equipment or real estate. The bank may require collateral such as real estate or the equipment used in your company’s day-to-day operations.
These loans can come with high interest rates, and some banks charge penalties for early repayment. Many small businesses do not meet the lending requirements since they have no established track record or financial history to prove their creditworthiness.
Friends Or Family
If you have a good relationship with your family or an individual, you could consider asking them for some money to finance your business venture. The huge advantage would be that you wouldn’t need to be paying interest on your loan. You’d both need to be absolutely clear on the amount to be lent and the repayment amounts and terms. If you aren’t able to fulfill your side of the bargain, it could cost you the friendship!
If you have friends who are involved in banking or other financial industries, they might know of investors looking for opportunities like the one you have to offer.
This involves borrowing money from a group of lenders, where each individual lends you the amount they can afford and then receives it back with interest once your business starts turning a profit. The benefit here is that there’s no collateral involved, so if things don’t work out you won’t lose any personal assets.
There are disadvantages though: loans through these platforms tend not to start off as high-value amounts ($20k+) so they may not cover all your initial needs. Also, the interest rates are generally higher than traditional forms of finance due to the lack of collateral.
This is a process in which individuals pool their money together to support the efforts initiated by other people or organizations. Two examples of crowdfunding sites are Kickstarter and Indiegogo. Crowdfunding is one of the newest options for entrepreneurs to get finance when traditional sources are not an option. There are many different types of crowdfunding, but they all have two things in common:
- They help raise funds through small contributions from a large number of backers
- The project creator usually offers rewards or incentives to donors/backers as a way of showing gratitude for their support.
There is a high failure rate with projects on Kickstarter. The hurdle of making your project stand out from the rest can also be difficult. Crowdfunding platforms often have their own rules and regulations that you must follow in order to run a successful campaign. The fees for using these sites are also significant, which means less money going into your business budget.
It’s also worth researching angel investors or considering an evening job to raise extra cash. Perhaps you can sell a car if you own two, or can sacrifice your holiday. Alternatively, keep your full-time job for now or go part-time.
Once you have the funds that you need, you will be in a good position to establish and grow your business. In a year from now, you may be reaping the benefits of all your hard work and feel optimistic about the future.