“WORTH THE RISK”
by Contributor
(Sep. 20, 2019) — One of the biggest challenges for many startups is to get the funds needed to get them up and running.
A little saving may be able to cover the expenditures such as hiring employees, purchasing equipment, maintaining inventory, and paying for additional expenditures to get your business off the ground. But it’s not enough. You will need another financial cushion to keep your startup afloat.
The problem is, your business doesn’t have a robust profit history under its belt yet. When such is the case, banks and traditional lenders will likely turn you away. Otherwise, they charge sky-high interest rates to you, which is not really a good option to pursue, considering that you’re just about to start your business.
Further, most lenders consider other factors as well, such as cash flow, current debt load, collateral, credit, industry, and time in business, all of which might be difficult for you to check out. The US debt Stats aren’t faring well, either, which makes your probability of landing a loan more stringent than ever.
Fortunately, several personal loan alternatives can provide business startups with much-needed funds. Take your cue from the following.
Term Loans
A term loan is the most common lending option among startups and small businesses. This loan works by giving the borrower a lump sum to be repaid with a fixed interest rate on top.
It’s for big purchases where you know precisely the amount of money you’ll need. It also allows you to spread the payment over a period of time, which is advantageous for you. Now, if you just want a working capital at your side, since you need to start paying interest fees when the loan becomes active, a term loan might not be a good idea.
It’s better to go after SBA (Small Business Administration) CA (Community Advantage) loans, as far as term loans for startups go. SBA loans for startups may be limited, but the CA loan is specifically projected for businesses. These loans are also the most competitive when it comes to low-interest rates because the government guarantees them. It minimizes the interest rates that lenders charge and reduces your risk, too.
CA loans are best for startups because they’re designed for new or underserved businesses. Since the SBA will guarantee 85% of the loan, which is quite high even for an SBA loan, the lenders will only charge low-interest rates. And that is good news for you.
The only drawback is that the funding and application process for these loans is comparatively longer compared to other loans. But if you’re patient enough to wait, you’ll be able to get your hands on one of the cheapest loans in the market.
Business Lines of Credit (LOC)
A business line of credit, also known as revolving credit, is one of the most advantageous funding options for new businesses. Technically, it’s not a loan but is a standing amount of money that a bank extends to the borrower.
You can draw upon the available line of credit as long as it will not exceed the limit. The money you will borrow must be paid back at a specified interest rate and within a specified timeframe. But unlike a loan, only the money you actually used or was drawn will be charged with interest.
For example, if you borrowed $20,000 worth of line of credit from a bank, but only draws $5,000, the interest to be charged will only be for the $5,000 alone.
A line of credit can be a convenient source of funds for startups in case of emergency. However, it’s recommended to explore other lending options first because lines of credit are unsecured. The interest rate to be charged will depend on bank rates movements. It will likely result in a very high interest relative to the amount of money you borrowed.
Personal Loans
Personal loans come in two forms: secured and unsecured. Although a secured loan usually requires collateral or guarantee, it has a more affordable and lower interest rate than unsecured loans.
It often uses the inventory or property as collateral to estimate the interest and repayment term of the loan. The lenders are expected to appraise the collateral of insurance appropriately as they will use them to repay the loan in case it defaults.
On the other hand, if the lender knows that you will pay the loan on time and also believes that your new business is comprehensive, then you can get an unsecured loan.
Such is the type of loans like CreditNinja’s Bad Credit Loans that requires no insurance pledge or collateral in case you fail to repay it. However, you’ll only qualify for this loan if you have a good credit score and that lenders will consider you a low-risk borrower. For startups, the struggle is double because getting an unsecured loan will require a successful track record.
Installment Loans
Installment loans are written to meet the needs of your business. You pay these loans back in equal monthly installments.
From the term itself, this loan is payable through equal monthly installments which cover the principal amount and the interest. You will receive the full payment after signing the contract. You will then compute the interest from starting the day you receive the loan up until the final date.
If you can settle the installment prior to the loan’s payment period, it is possible to modify the interest and negotiate to lower it. And since the loan is known as a business cycle, it’s an excellent loan option for startups. It’s typically a four-month loan with low interest that you’ll pay in installments quarterly, semi-annually, or annually.
Balloon Loans
Another good loan option for startups are balloon and interim loans. A balloon loan suits best for businesses that have to wait for certain dates before receiving the payments from the clients.
Instead of paying a fixed amount every month to gradually settle your debt, you will make small monthly payments. Since these payments aren’t enough to pay off the loan before its due date, you have to make a final “balloon” payment for the remaining balance. This payment might be significant.
This type of loan is somewhat similar to installment loans. But they are given under different names that you can only recognize when you sign the contract and when the total payment is received. Another good thing about this loan is that you will only pay the interest as long as the loan is alive.
401(k) Plan
If you’re not employed and planning to start your own business, funds you’ve accumulated in your 401(k) over the years can be your lifeline. You can actually use it without penalty if you follow the appropriate steps, all thanks to provisions in the tax code.
Although the steps are straightforward and easy to follow, they can get legally complicated. Hence you’ll need someone with the appropriate retirement plan and experience in setting up a C corporation to roll your retirement assets. But before you dive into this option, remember that you’re using your retirement funds to put up a business. If things don’t pan out, you will not only lose your business; you’ll lose your nest egg as well.
Takeaway
It might feel as if you’re trying to search for a needle in a haystack, but it’s important to know which financing option suits best for your young business. You’ll also need data to prove that your business is worth the risk for the lenders. That being said, consider a business loan through one of our recommendations listed above if you’re a startup looking for working capital to grow your business.