Do you have a brilliant business idea with no money to implement it or scale it? If yes, you aren’t alone. For many entrepreneurs, getting funding is a significant challenge. If you’re struggling to get financing for your startup, a startup business loan can come in handy.
But what exactly is a startup business loan, and is it suitable for you? In this post, we’ll explore the pros and cons of startup business loans so that you can determine whether they’re right for your business.
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What Is a Startup Business Loan?
A startup business loan is a business loan that can help you launch your business. It can help you finance the initial costs to start your business and go towards things like equipment, inventory, supplies, working capital, and office space.
Pros and Cons of Startup Business Loans
While a startup business loan can help you get your business off the ground, it may not be viable for you. Here are some pros and cons to bear in mind when considering whether to get a startup business loan.
Pros
You’ll Acquire Funds to Launch Your Business
Starting a startup often comes at a hefty cost. A startup business loan can provide you with the working capital required to launch your business. It can prove particularly useful if your business needs a huge initial investment to purchase specialized equipment or develop a unique product that’s capital intensive.
You’ll Maintain Control Over Your Business
If you’ve been thinking about approaching investors to obtain funding, applying for a startup loan may be a better alternative. When you launch your business using a startup business loan, you won’t have to give up any equity in your company. That means you’ll retain complete business ownership. If you’re not ready to cede power or equity to investors, a startup business loan may be right for you.
You Can Build Business Credit
As your business expands, you’ll need an influx of cash to expand your operations, hire more employees, purchase more inventory, and more. When you use a startup loan to fund these activities and settle the loan on time, you can improve your business credit score.
A good credit score is integral to the growth of your business. With a good credit history, you’ll be more likely to get approved for higher loans with favorable terms.
Cons
Obtaining Funding Can Prove Difficult
Getting a startup business loan isn’t easy. Many lenders may be reluctant to provide you with funding unless you have an excellent personal credit score and an established business.
You’ll Have Less Cash to Plough Back
You’ll eventually need to settle the startup loan. As you repay the loan, you’ll be left with little cash to reinvest back into the business. This can hamper your startup’s growth, especially in its early days.
Your Personal Credit Score Could Be Affected
A startup loan won’t protect your personal funds. In case you default on the loan, the lender can come after your personal finances. This can ruin your credit score.
A startup loan can be an excellent way to get your business off the ground and take it to the next level. If you’ve weighed the pros and cons and decided that a startup loan is suitable for you, according to Lantern by SoFi, here are the documents you’ll require when applying for the loan:
- Bank statements
- Tax returns
- Revenue statements
- Business legal documents
- Personal identification documents
- Business plan
- Accounts receivable and payable
While the procedure on how to apply for a business loan varies from lender to lender, these are the documents most lenders will require. According to the experts at Lantern by SoFi, “Once you’ve done it, expect to wait between 24 hours and six months. It all depends on the loan type you chose. While the long wait for an SBA loan may seem like a deterrent, some feel that the generous terms and low-interest rates for small business owners with a good credit history make this one worth the wait.”
