start up loans

Start Up Business Loans: Pros and Cons

Do you want to be your own boss and enter the world of entrepreneurs, but not sure where to start? Is a small business start-up loan right for you? Who may or may not qualify? Is it the right source of funding for you and your business?

What is it?

A start up business loan is money you borrow from a lender to help put your dream into motion. Startup loans allow business owners to work with traditional lenders.

Funding options for a small business can be tough to come by which can sometimes cause people to borrow money based on their “personal” credit and accumulate debt that can be riskier than debt assumed and guaranteed by the business. In certain circumstances, however, it may be necessary to acquire credit or loans based on your personal repayment history prior to being approved for loans or other funding backed solely by your business. There may even be cases where your personal credit does not meet the requirements of the lender. In such cases, you will most likely need to be a little more creative when it comes to financing your start up.

Who can get them?

Many lenders will be hesitant to lend money to people with no history of business performance and will rely on your personal credit history to determine your ability to repay. If you are looking for a startup loan, be prepared with the following:

Make sure you have a well thought out business plan and to be as specific as possible with details. (Ex:  who, what, when). Lenders want to know what will make your product or service stand out and make an impact.

Pros:

  • Low interest rates – Check local banks or credit unions for the best rates available. Interest you are paying on the loan is also potentially tax deductible and it can also help build credit for your business.
  • You are not as emotionally tied to a loan from the bank as you might be if you borrow startup funds from family or friends and the lender will have no daily opinions or input regarding how you are managing your funds.
  • You immediately begin to develop a relationship with your lender that could be a benefit for future business and personal transactions. Similarly, if you already have an extensive personal relationship with the lender, acquiring a loan for your business (especially with a smaller local bank) could alleviate some of the assumed risk factors when it comes to repayment in the eyes of the bank.
  • The lending institution is only concerned about your loan repayment and will not be concerned about “cuts” from any future profit.

Cons:

  • Most lenders will require a very detailed business plan, and sometimes proof that the business has been profitable. This tends to defeat the purpose of a startup loan.
  • In some cases, a commercial lender may require collateral and since the business is a “startup”, it might be necessary to tie personal assets to the loan. (home, savings, personal portfolios, etc.)
  • Loans must be paid back regardless of business success or lack thereof.

Alternative options?

Here are some other funding sources you may consider:

  • Angels investors – Wealthy individuals who offer financing in exchange for shares of the company
  • Venture Funding – Like Angels, except they only receive money if/when the business is either acquired by another Company or goes public.
  • Family and friends – Willing to lend you money to get started
  • Government grantshttp://www.grants.gov/ database of grants provided by various government agencies
  • SBA loans – Federally backed loans

No matter which route you choose when starting up your business, a lot of research and planning is needed to successfully launch and run a business. Carefully consider all options as no two businesses are ever alike.

About the Author: Lynette Rieke is a certified credit counselor for the Consumer Credit Counseling Service of Rochester (CCCS of Rochester). CCCS of Rochester is a member agency of the NFCC.

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