What are the top pros and cons of start-up business loans

Corporate Finance

You have had this amazing business idea for a long time. You have researched and planned everything, and all you need right now is funding to start the business. In this regard, you might be thinking of taking a start-up loan. Now, taking a loan has its pros and cons, and you need to know both sides to make a decision. So, here you go!

The pros of start-up business loans

Taking a business loan for a new business comes with a host of advantages, such as:

Securing the money to start the business

Building your start-up from the ground up is no small feat. You need sufficient working capital to deal with the initial expenditure, such as technology, equipment, inventory, marketing, and so on. The money you pool from your savings, borrowing from family, and credit cards might not be enough to meet all these expenses.

So, when your business needs a major initial investment to start running, a start-up business loan is a great idea. At least, you will be able to start your venture without compromising on technology, raw material, or any such necessities.

Keeping the reins of your business

Investor financing is the chosen path for a majority of start-ups. However, having investors on board means that you will have to take their preferences into account. Also, distributing the stocks means that your share in the profits is reduced.

This is where a business loan comes into the picture because it lets you scale your business without the need to bring too many investors along. You handle the reins of the company and make the important decisions. After all, the lenders have no interest in how your business is managed. They only want their money back on time.

If you still want to get investors on board, having financial support from the loan means you have more liberty to select investors based on their experience and strategy. You don’t have to go by solely their monetary value.

Building business line of credit for future

You might not need small business loans when you start your venture. However, you might need the money further down the line. Maybe you are planning to expand your operations, launch a new product or service, or try new marketing strategies.

Now, a good credit score is as important for personal loans as it is for start-up loans. When you take a loan and repay it on time, you build a good credit score for your company. Lenders will consider this score when giving you future loans. If your company does not have any credit score, lenders have no reference point to judge your trustworthiness. In that case, they might refuse to give you a loan altogether.

Protecting personal wealth from business expenses

One of the most important pieces of advice you will get as a start-up owner is to keep your business expenses separate from personal finances. However, there are risks and obstacles involved in the journey of a start-up. Thus, it might feel too hard not to pledge your wealth, such as retirement savings, home equity, etc., just to tide over a difficult spot in the business.

This makes it all the more important to get a start-up loan because it stops you from risking your finances.

The cons of start-up business loans

It would be wrong to assume that all are good when it comes to a business loan. The following disadvantages also have to be kept in mind:

Difficult to secure the loan

Getting a start-up loan is pretty difficult because lenders see start-ups as risky ventures. Business lenders give the most weightage to the following four factors when handing out a loan:

  • financial records
  • revenue
  • proof of longevity
  • credit history

Start-ups are found to be lacking on all these four counts. In short, if you do not have an established business or any collateral to offer, it is hard to get a lender to trust you.

Need to pay a higher interest rate

The business loan interest rate is the foremost way for lenders to earn their money. Now, it can be hard for a small business to bear the burden of high-interest rates, along with remaining competitive in the market.

A time might come when the start-up is going through a phase of low revenue. Managing the interest rates, while trying to stay afloat, is not easy for the start-up. It might lead to more financial troubles than what you set out to solve with a start-up loan.

The bottom line

Taking a loan is a good idea in more ways than one, but it also has its cons. So, it is important to evaluate both aspects before deciding to take a loan. Also, if you decide to apply for a loan, make sure you only rely on a well-reputed and reliable lender.