To start a new business, the first and foremost concern for an entrepreneur is raising the capital. An entrepreneur might spend months in arranging funds for starting the business.
Many a time, taking a business loan turns out to be the best option. Numerous options are available in the market as far as start-up loans are concerned.
What is a start-up loan?
A start-up loan is a loan which is taken by companies to meet the financial requirements of their start-up.
Entrepreneurs of the new start-up can use this loan amount to buy machinery or equipment, furniture, raw material, construction of the real estate, etc.
Eligibility criteria for Business Start-up Loans
Start-up companies can apply for a business start-up Loan with either private/government banks or other financial institutions.
Start-up loan providers, banks, and other financial institutions have some basic minimum eligibility criteria for loan approval.
However, these basic eligibility criteria vary from institution to institution. Some of the basic eligibility criteria for applying for start-up loan are:
- The company’s business should not fall under the blacklisted list.
- The location of the firm should not be in the negative location list.
- Type of business. Most of the financial institutions avoid giving start-up loans to charitable firms, trust, or NGOs.
- Different institutions have set different minimum requirements, as far as, minimum turnover is concerned.
- Minimum requirement of the period of running of the business.
In addition to this, the financial institution does a thorough background check of the entrepreneur and the company. Based on their checks, they can approve or reject the loan application.
Is a Start-up Loan Right for Business?
Borrowing funds is one of the most common ways to fulfill the capital requirements of a new start-up. New start-ups take time to set and start earning profits.
During this time, companies need to take care of their expenses like rent, electricity bills, etc.
Taking a start-up loan helps the company in the smooth running of its business during its ramping period. Start-up loans have numerous advantages. However, entrepreneurs need to use the amount wisely.
Document & Requirements for Start-up Loan
Documentation for start-up loans varies from institution to institution. Most of the private and government financial institutions are very firm for the documentation. However, other lenders require only KYC documents and important papers and documents.
Common documents required for a start-up loan.
- Detailed business plan, plans for the future growth of the business.
- Credit report of both entrepreneur and business
- Details of future expenses and cash flow
- Tax returns of both personal and business accounts
- License and registration paperwork to do business (if applicable).
- Other financial documents like a bank statement, unpaid invoices, etc.
- Relevant legal agreements. For example, lease papers, franchise agreement, etc.
In case the new start-up takes a loan from alternative lenders other than financial institutions, they may enjoy some leverages.
This would further turn out to be beneficial for businesses with an excellent idea but low on cash flow. In such a situation, having a detailed business plan could be very beneficial.
Options for Business Start-up Loans
In most cases, the owner of new start-up companies prefers approaching banks and government financial institutions. They find it easy to approach.
However, there are other options available in the market. It’s advisable to check other financing alternatives. You never know it might turn out to be a better deal in terms of tenure and rate of interest.
1. Start-up Consultants
While starting a business, companies face numerous challenges. Arranging capital or funds is one of the biggest challenges faced by the business. Applying for a start-up loan can solve most of their finance-related issues.
However, getting a loan approved can be quite difficult, especially for new start-ups. In addition to this, applying for a business start-up loan involves a lot of paperwork. Hence, taking guidance from professionals- start-up consultants could be highly beneficial.
Start-up consultants not only help the businesses in getting the best loan deal but provide various other services. This includes: creating a business plan, getting insurance for a start-up, etc.
In exchange for their services, these consultant companies charge a fee from the start-ups. Believe us, services provided by an experienced and knowledgeable consultant is worth every penny.
2. Equipment Financing
Taking a loan from the bank is one of the traditional ways of arranging finance for the start-up. However, as far as start-ups are concerned, the loan approval criteria are quite strict.
Also, the terms of the loan may not suit new businesses. If you have a good relationship with your bank, maybe it is time to use it in your favor.
In case you don’t agree with the business start-up loan terms, consider the option of equipment financing. This loan helps in covering the expense of machines and other equipment.
Equipment financing is the same as any other loan. The firm has to make payments monthly over a long period. These loans are more lenient in their terms as they take machinery as security. In case of any discrepancy, the bank can seize your machinery.
3. Invoice Financing
Invoice financing is another alternative method for arranging funds for a startup company. However, this financing option applies to those companies which get payment from the customers in the form of invoices.
This is convenient and one of the fastest ways of arranging finance. The best part of opting for this finance alternative is the little paperwork associated with it.
Crowdfunding is quite a new alternative to a traditional way of a start-up business loan. Numerous firms allow new start-ups to raise finance for their business.
In this, the business or entrepreneur of the new start-up share their business idea and plan with a group of people. If the group likes the vision and idea of the company, they lend money for the same. This is a multiple backing or donation scheme.
5. Personal and Friends Funding
Personal or friend funding is also a good option. However, the risk factor involved is very high. If you are using your personal funds for financing your business, it’s better to have a list of all the expenses so that you don’t have to face any kind of financial crunch.
It’s advisable to create firm credit. This would help in keeping your assets separate from your company’s assets.
Numerous loan start-up options are available in the market. It’s advisable to check all the alternatives and select one which suits your needs and requirements.