Start-up costs for a new business can be considerable — purchase of goods and equipment, marketing costs, payment to employees and the list goes on. As it’s not always feasible to bootstrap your way through major expenses, you may want to consider external funding. Loans from commercial lenders like banks or private lending institutions may be an option, but consider the pros and cons of seeking a commercial loan.
• While commercial lenders will review your business plan detailing the potential use of the funds that you’re seeking, they neither have a say in your business operations, nor in how you manage your funds.
• Commercial lenders also are not entitled to your profits. Their only look-out is the debt repayment.
• A business loan usually has a low interest rate in comparison to many other funding options (like credit cards, finance companies) though the repayment terms of the numerous commercial loans may vary.
• The interest payments on your business loan can be deductible on your taxes. That perhaps is one of the biggest advantages!
• A small business loan can have access to large sums depending on the actual requirements of your enterprise. The money is available for immediate use, builds a credit rating (which helps in securing future loans) and also creates a good financial reputation for your business from early stages.
• For a start-up, commercial lenders follow strict guidelines and therefore require more information – thorough knowledge of your business’ potential structure and general modus operandi, information about other potential investors, and profit and cost predictions – and a lengthy review process. Lenders also need to be assured that you have a good credit rating and you are trustworthy so that you are more likely to repay the loan.
• A commercial lender’s rates are dependent upon government policy and the whims of the market. Rates may fluctuate in the early stages while profits may not be able to keep up. Remember that small business loan interest rates tend to be high in the first place (and continue to increase as you borrow more).
• Most commercial institutes will insist that you provide collateral in the form of a property asset (stock portfolio, house, etc.) in order to secure themselves. In case your business goes kaput and you cannot repay your loan, the lender can reclaim its debt by liquidating whatever you proposed as security. Hence, you risk losing a valuable asset.
• A bank loan belongs to the bank. Thus, a loan appears on the liability side of the balance sheet. It affects the valuation of your business.
Whichever source of funding you seek, remember there will be pros and cons associated with each option. Choose wisely depending on your financial status and requirement criteria.