December 4, 2022

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Can a Start-Up Get a Loan?

Approximately 80-90{de3fc13d4eb210e6ea91a63b91641ad51ecf4a1f1306988bf846a537e7024eeb} of start-ups fail before their first year. Failure is usually due to various factors, but financing plays a critical role in a start-up’s success or failure. A loan goes a long way in financing the initial venture of the business into the market.

Banks offer loans to start-ups at higher interest rates due to the increased risk. Start-ups have no financial history that a bank can look at to determine whether the business can repay the loan. Additionally, the bank may have limited to no personal data on the entrepreneur of the start-up.

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What does a bank look at before financing a start-up loan?

There are various aspects that a bank will consider before offering a loan to a start-up; these include:

Collateral

It would be virtually impossible for a bank to offer a start-up a loan without some form of collateral. This collateral could be any significant asset, such as a home or any other asset with substantial value. Collateral is the only fallback that the bank will have should the start-up default on the loan. Of course, the lower the collateral value, the lesser the loan amount a start-up can access.

Cash Reserves

Most banks will require that a start-up has cash reserves of at least two to three months to service the payments. These reserves are over and above the 10-20{de3fc13d4eb210e6ea91a63b91641ad51ecf4a1f1306988bf846a537e7024eeb} amount that the start-up must put down before accessing the loan. Many start-ups have accessed a loan but ended up cash-strapped after a month with no way of making their payments.

How to improve the chances for a start-up to access a loan

Now that it is clear that a start-up can access a loan, what should an entrepreneur do to increase their chances of accessing a loan? Here are some tips to follow.

Consider putting up personal assets as collateral

As discussed above, putting up collateral is a sure way of getting a start-up loan. Putting up personal assets such as a home or a vehicle as collateral will make it easier to access the loan that the start-up needs. Putting in some personal savings into the business will also illustrate the entrepreneur’s commitment to ensuring its success. Personal collateral will give the bank more confidence in the business, given the entrepreneur’s buy-in.

Account for how the start-up will utilize the loan

A start-up needs a watertight business plan that accounts for how the start-up will utilize the desired loan. A business plan will show how much money the start-up will channel into different facets of the business. From the marketing to production and funding distribution channels, the business plan should outline each cost. Most start-ups borrow without clearly defining how they will put the loan to use. If the start-up accounts for how each dollar will be spent, a bank will have more confidence in providing them a loan.

Talk about any previous business experience with the bank

An entrepreneur who has previous business experience should let the bank know about it; this will work for the business’s good, especially if the start-up is in the same category that the entrepreneur has previous experience with. A bank will have more confidence in an experienced entrepreneur as opposed to a greenhorn in business. Even if the individual is still wet behind the ears, they can consider getting a partner who has more experience in the industry. A bank will favor experience over inexperience any day.

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What loan options are available for start-ups?

Various loan options are available for start-ups; these include the following:

Equipment Financing

A loan facility does not have to be a blanket option. A start-up can choose to get financing for equipment only, especially if they are in the production sector. Equipment financing loans are designed to purchase machinery and equipment that a start-up will need. The beauty of such a loan is that the equipment will be the collateral, therefore, can be easier to access. Additionally, the repayment of this loan is spread over an agreed period, payable monthly.

Credit Cards

Business credit cards are another loan option for start-ups. Before accessing this credit facility, an entrepreneur’s credit score will be assessed. Additionally, the entrepreneur may be required to put up a personal guarantee before the cards are issued. This loan option works wells to separate personal and business expenditures, and these can be easily tracked with receipts.

Crowdfunding

Crowdfunding is a new yet trendy means of accessing business loans for a start-up. An individual will share their business idea on a crowdfunding platform to raise funds to start their business. If the business idea is viable, one can raise a reasonable sum of money to fund their start-up. While this kind of fundraising is promising, it requires a lot of marketing effort from the entrepreneur.

Family Funding

Another viable way of getting a loan for a start-up is by borrowing from friends and family. While this may be a route that most entrepreneurs avoid, it is a gamble that can have a great payoff. Family will more often than not back any profitable business venture, and getting them to lend the start-up some money will be an easy option. However, an entrepreneur should keep this transaction legal and professional by drafting the necessary documents to make the loan repayable.