Sitting on a brilliant business idea with no money to back it up? Funding is a tricky issue for most startups. Finding an investor is always difficult, and the lack of money gives most entrepreneurs jitters in the initial days. That is when they look at startup loans or guaranteed payday loans – two interesting funding sources you too must have heard of.
While business loans are helpful in most situations, they have some disadvantages too. Let’s have a look at both the pros and cons of startup business loans so that you can decide if they’re the way for your startup.
Advantages
Disadvantages
Conclusion
FAQ
Casestudy on startups fail due to loan
Advantages
Keep control of your business
Everybody wants to upscale and keep all their business’ shares with themselves. This pleasant situation is made possible by business loans. The owners keep their company’s hold and also enjoy the luxury of upscaling their startup.
With investors comes the hassle of managing the board with their preferences. Having distributed stocks reduces your profits with time. Lenders usually have no interest in your management. They care only about money and give out loans without asking for extra perks.
Temporary in nature
Business loans are for a limited time. After the whole loan is repaid, the lending institution won’t bother you. On the other hand, attracting investors comes with an obligation to pay dividends to the shareholders regularly, which may last as long as the company.
With time, the dividend sum increase with the increase in the company’s worth. Startup business loans, on the contrary, reduce steeply as you keep repaying. This temporary nature of loans makes them worth a try for those looking to stay financially freer.
Build business credit
As the company grows, production increases rapidly, and so does the need for money. Even if you did not start your company with a loan, you might need to expand or design a new product or service.
A credit score is important for lenders to consider your loan application. Taking a startup loan and repaying it on time can get your company a good credit score, opening the gates for future loans. Without a credit record to build on, some lenders might not give you a loan later if you need one to expand.
Personal Wealth Can Be Safeguarded
A starting business loan might assist you to separate your personal money from the finances of your company. Every new business initiative carries a risk; even the most well-planned venture may confront challenges beyond your control as the owner.
Disadvantages
Not easy to get
Getting startup business loans approved is a tough cookie. Unless you already have an established business or some collateral to pledge, there’s very little chance that a lender will trust you.
With the recent financial crunch they have found themselves in, banks and NBFCs have a strict policy concerning lending. Only businesses which they believe can repay the loan can get the loans. With such high scrutiny, it becomes infinitely difficult for a new and fresh startup to get loans. The difficulties in availing of loans are decreasing with time, but the hassle is significant even today.
A high rate of interest
Lenders’ most significant way to earn money is through interests. These interests can break the backbone of any small business. As a small business owner, it gets challenging to manage the competition and interest rates all at once.
As time passes by, every business faces a low-revenue phase. High-interest rates during those low phases can hurt you even more and potentially result in bankruptcy. Interest accrues as you delay payments, and you might soon find yourself into a black hole of financial trouble. To avoid this, however, you can plan repayments efficiently and opt for lower-interest loans.
Less Money to Invest in Business
Startup loans naturally come with a repayment obligation. As you repay heftily to the bank every month, you will be left with little cash to reinvest in your business’ growth. You might even have to compromise on buying equipment or hiring new employees.
These restrictions can hamper the speed at which you had envisioned your business growing. However, better cash flow management can save you from this trouble as well.
Shubham Kumar
It’s Possible That Your Credit Will Be Ruined
Your personal money will not be safeguarded by a small business loan. Because lending to small businesses has a higher risk, many financial institutions want a personal guarantee, which means the bank can pursue you for repayment if the business fails. As a result, your credit score and assets may be affected.
If you’re concerned about the impact on your personal credit, we recommend waiting a few months until your company is more established. That way, you’ll be able to pay back your loan on schedule while maintaining your good credit.
Devashish Shrivastava
Casestudy on startups fail due to loan
Katerra
Katerra, a modular construction company, filed for Chapter 11 bankruptcy protection in early June 2021. In 2018, the SoftBank-backed unicorn was valued at $3 billion and had raised over $1.5 billion in total capital from Khosla Ventures and Greenoaks Capital Management, among others.
Although mismanagement was regarded as the cause of the company’s demise, the failure of lender Greensill Capital just three months prior also played a factor.
While SoftBank was funding Katerra directly, Greensill, a SoftBank Vision Fund recipient ($1.5B), was also funding Katerra, demonstrating SoftBank’s portfolio’s interconnectedness. This downward spiral has caused some to question SoftBank’s Vision Fund’s viability, especially in light of the 2019 collapse of co-working unicorn WeWork, in which SoftBank was the principal investor.
Souvik Dey
Madefire
At the beginning of April 2021, Madefire, a digital comics firm, went for an assignment of benefit for creditors (ABC), an alternative to official bankruptcy. For many Madefire users, this was a surprise announcement, as they had been given until the end of the month to download their purchases.
Several digital comics applications, including Archie Unlimited and IDW, were also taken down as a result of the Madefire app. Despite having a diverse roster of musicians and investors, including Dave Gibbons and Drake, the organisation died in the face of competition.
Paridhi Mehrotra
Conclusion
As you think and analyze the advantages and disadvantages of bank loans, understand that opting for a small amount to start your startup is not a bad option if you are a good planner. You may look at guaranteed payday loans in the beginning and think about other options later.
Qualifying for a small business starting loan, on the other hand, could mean having money to start a firm without having to repay loved ones or investors who demand ownership in exchange for their money. Before deciding to pursue this lending option, small business owners should analyse all factors.
Let us know what you think about taking a business loan for your budding startup in the comments below.
Mahenoor Mansuri
FAQ
How do Business loans Build Business credit?
As the company grows, production increases rapidly, and so does the need for money. Even if you did not start your company with a loan, you might need to expand or design a new product or service.
A credit score is important for lenders to consider your loan application. Taking a startup loan and repaying it on time can get your company a good credit score, opening the gates for future loans. Without a credit record to build on, some lenders might not give you a loan later if you need one to expand.
Is Business loans are easy to get?
Getting startup business loans approved is a tough cookie. Unless you already have an established business or some collateral to pledge, there’s very little chance that a lender will trust you.
With the recent financial crunch they have found themselves in, banks and NBFCs have a strict policy concerning lending. Only businesses which they believe can repay the loan can get the loans. With such high scrutiny, it becomes infinitely difficult for a new and fresh startup to get loans. The difficulties in availing of loans are decreasing with time, but the hassle is significant even today.
It’s Possible That Your Credit Will Be Ruined?
Your personal money will not be safeguarded by a small business loan. Because lending to small businesses has a higher risk, many financial institutions want a personal guarantee, which means the bank can pursue you for repayment if the business fails. As a result, your credit score and assets may be affected.
If you’re concerned about the impact on your personal credit, we recommend waiting a few months until your company is more established. That way, you’ll be able to pay back your loan on schedule while maintaining your good credit.
