Launching a startup can be an exciting time. As the business gains traction and grows, it can present entrepreneurs with a variety of issues and challenges that they will need to overcome. The biggest challenge they will face will be finding financing for their operations and cash flow requirements. Here is everything you need to know about securing the finance you need to survive the growth phase of your startup business.
Why Institutional Lenders Don’t Lend to Startups
Startups can forget about applying for institutional finance. This kind of loan is only available for companies with established track records. If you do try to secure a loan with a bank, they will ask you to secure the loan value using your assets. By signing this surety, it means that if the company were to fail, you would be personally liable for the debt.
Where can Startups get Finance?
Micro lenders are the alternative that startups have to the large corporate institutions. These firms are not as concerned with the risk of lending to start-ups as their business model accommodates this factor. Therefore; a micro lender will gladly arrange a tailored small business loan to suit a startup, without the need for an extensive due diligence on the financial health of the company.
3 Reasons Why a Startup Needs a Loan
#1 New Equipment Purchases
All startups need assets. Computers, networks, servers, and bandwidth all cost money and paying for this kind of equipment expenses with cash is just not a feasible possibility for start-ups. A small business loan is an ideal way to get the office equipment you need, without the need to layout a massive cash expense.
#2 Support Cash Flow
As your startup grows, the strains of growth will also impact your finances. You may find that you struggle to meet the cash flow demands of your creditors and manage your payroll while supporting other business operating expenses. This cash flow issue is a common occurrence in the growth phase of any start up, and a small business loan is the financial vehicle you need to overcome these cash flow shortfalls.
#3 Build A Credit Profile
Startups have no credit profile, and this prevents them from obtaining institutional finance as discussed. However, using a micro lender to take a small business loan will be the first step in building your creditworthiness to a level where your company will be able to apply for institutional finance successfully.
When You Don’t Need a Loan
Sometimes a loan will not be able to solve a financial mistake. If your business is in desperate need of a financial solution because you have mismanaged funds, then a small business loan is not for you. The last thing you want to do when you are experiencing a financial predicament is to think about taking of further debt. This mistake could end up costing you your company when the creditor forecloses on your business to recover their outstanding loan amount.
Wrapping Up
Small business loans from micro lenders offer a viable financial vehicle for start-ups to take advantage of while they are in their growth phase. Who you choose to use as your micro lender is as important a task as sourcing the loan itself. Protect yourself and your company from predatory lenders and fly-by-night operators that are looking to take advantage of startups in need.
Choose to work with professional and established micro lenders that have a good market reputation.
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