The Advantages and Disadvantages of Startup Loans
Are startup loans a good idea for getting your business off the ground? Every business needs cash during startup. If you’re in the process of making your venture idea a reality, then you’ll need to solve the problem of funding. Here are several pros and cons of taking out startup loans to get your new business on the right path to success.
Most People Startup With Banks
When thinking about taking out a loan to purchase a car or buy a home, most people start with their bank. While your bank might be eager to take an application for a car loan or a mortgage loan, you might find them less than enthusiastic about your business startup loan.
Getting a startup loan approved from your bank can be an extremely difficult task and for every loan the bank actually approves there could be dozens, even hundreds that are denied.
Fortunately for you, bank loans are just one avenue for getting the cash you need. The task now becomes evaluating the different sources of startup loans and choosing the one best suited for your business.
Advantages of Startup Loans From Banks
First and foremost, bank loans are convenient and accessible for taking loan applications. Most people are familiar with their banks after doing business with them for a number of years making the application process somewhat easy.
Larger banks typically have a number of loan options geared towards small business. Unlike venture capital and angel investors, banks don’t take a share of your business. The bank is only concerned with collecting the interest in addition to the loan principal, they won’t take part of your business in exchange for the funding.
Another advantage of bank startup loans are lower interest rates. Credit cards and private equity lenders charge much higher rates by comparison. You’ll also enjoy tax benefits from the interest paid on your loan.
Disadvantages of Bank Startup Loans
The main downside of getting a bank loan to start your business is the difficulty in getting approved. Your bank’s application process could be lengthy as banks want to verify ever detail and credential of your business before approving the loan.
Providing the necessary documents and details often makes the process frustrating and cumbersome. Especially when the information the bank is seeking seems insignificant.
Another problem with approaching your bank is that banks typically loan to businesses that are up and running. There is less risk in loaning to a business with an established track record than a startup. This fact alone prevents many startups where bank loans are the only option available from ever getting off the ground.
Collateral Could Get Your Startup Loan Approved
Business loans from a bank are usually secured by some kind of collateral, often your home. The collateral lowers risk for the bank; however, you risk losing your home should the business fail.
Another problem with starting your business with a bank loan is that the bank might not approve the amount you need for the loan. Your bank might only approve 60 or 70 percent of the amount you’ve applied.
Not everyone has access to the cash they need to fund a startup. Bank originated business loans can get you the capital you need to launch your business if you can survive the application process and meet your bank’s guidelines for approval.
Once you’ve got the loan make sure you have a plan to keep the business going once the bank’s cash dries up. You’ll still have to make loan payments in addition to paying all of the other bills associated with running your new business.