Pros and Cons of Startup Loans – Funding Your Business

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Are you looking for ways to get more funding for a business venture? Money is an important element in launching a startup. If you want to have a successful launch, then you first need to find a solution to your financial woes.

One way to get funding for a startup is with a loan. Before applying for one, make sure you know the pros and cons.  

Barriers to Bank Funding

Most people approach their bank first when they think of applying for a loan, whether it is to purchase a house or a car. While banks are more likely to approve your application for a car or home loan, they will not be as keen to approve your startup loan.

A startup loan has strict requirements and that’s why only a select few get approval for one from the bank. The good news is that banks are not the only source of financing for your startup. Just make sure you pick one that suits your venture.

Pros of Startup Loans from Banks

  •    Convenience and Accessibility. Even though the chances for approval are low, many entrepreneurs still choose to apply for a loan from a bank because they provide convenience. Most business owners are already familiar with the banks’ application processes and perhaps even dealing with the institutions they have a professional relationship with already.
  •    Keep Full Ownership. Bigger banks offer financial products catering to small businesses and startups. Unlike angel and venture capital investors, financial institutions don’t take a portion of the business when they provide financing.  
  •    Low-Interest Rates. As stated on nation 21 loans`s website, Another reason to get a startup loan from banks is that they provide relatively low-interest rates. Private equity lenders and credit cards have higher interest rates. The startup enjoys tax benefits by paying the interest of the loan.

Cons of Startup Loan from Banks

  •    Difficulty Getting Approval. One disadvantage of using a financial product from a bank is its strict requirements for approval. Banks also have a long approval process that can take weeks or even months to complete. Traditional financial institutions verify all details and credentials from borrowers before giving approval.
  •    Long Application Process. The application process can be frustrating and tiring. Banks require a lot of documents that might seem unimportant. You need to make sure you submit all the requirements to improve your chances of getting an approval.
  •    Establishing Trust. Another problem startups face when applying for a loan from banks is that they usually want to deal with organizations that are already operational. Startups have no track record that banks can base their decisions on. This is the main reason why many ventures fail to get funding from traditional financial institutions.

Alternative Sources of Funding for Startups

You should not give up if banks don’t want to provide funding for your startup. There are other sources of financial assistance you can go to for your financing needs.

Small Business Administration Loans

The Small Business Administration is an agency providing help to small businesses. They help startups get capital by acting as a guarantor on loans. Keep in mind that the agency is not a lending company, rather they have a list of lenders who are willing to work with small businesses. Aside from helping in getting loans, the SBA also helps to develop new entrepreneurs through training, counseling, and education. This agency also acts as an advocate for small businesses.

By paying your SBA loan on time, you increase your chances to get an approval from banks in the future. Another advantage of working with the SBA is that the agency acts as a bridge between borrowers and lenders. On the other hand, the SBA has strict rules and guidelines. The agency looks at data of the company from the last two to three years, which gives many startups a disadvantage.

Angel Investors

Another alternative source of funding is to seek the help of an angel investor, or a rich individual willing to provide money in exchange for equity in your business. While the amount and share in the company vary from one investor to another, the typical investment is less than $1 million.

Angel investors work in groups to find deals and invest with each other. However, some investors do work alone. Angel investors will also have experience in the industry and can act as a guide when needed, providing valuable connections through their network. Angel investors also usually offer flexible agreements.

The disadvantage of dealing with angel investors is that they will have control over part of your company. They also rarely provide additional investments due to the high risk involved.

Venture Capital Funding

Most startups are more successful in getting venture capital funding than getting an approval from banks. A venture capitalist is an investor who is willing to provide funding in exchange for equity in a startup. The investor only gets their money back if the business goes public or is acquired by another entity. Venture capitalists only care about the money and they look for investments that can provide them with high returns.

Venture capitalists have the benefit of being able to provide large amounts of money upfront, as well as offering help to grow the company. Funding from a venture capitalist will give the business credibility right away. This investment source also opens many networking opportunities.

On the other side of the fence, venture capitalists only care about enriching themselves. They want to make sure that their investment does well all the time. They will not think twice about ousting you from your own company if they think you are a liability.

Family and Friends

Another option is to approach family and friends about your company financial problems. You can use your existing relationships with people to borrow money. However, borrowing from close relatives and friends is sometimes a double-edged sword. Your relationship can turn sour if you can’t return the money on time.

While banks continue to be the top source of financing, other options might be more appropriate for your company’s needs. No matter what you choose, it is important to weigh the pros and cons of each option to make a smart decision.