5 Important Factors to Consider When Choosing Small Business Startup Loans

By: Paul Raymond0 comments

Every business requires capital to grow and expand. Whether you need money to even up your cash flow or open other branches, you will have to source for these funds with a lot of caution. There are several funding options available for startup businesses and entrepreneurs are likely to get confused on which financing method best suits them. The entire process of being approved for a loan may be a long and daunting task, but it is not impossible; therefore, you need to put a lot of consideration when applying for any form debt financing.

 

Below are some crucial factors you need to keep in mind when choosing small business startup loans:

 

 Associated risks

Funding of each kind has its benefits and pitfalls. Selecting a loan with the risk factor in mind is important. Your business may fail hence repaying your loan may be difficult. Banks have penalties for defaulters or late repayments. You could even lose your assets if they were used as collateral to secure the loan.

Borrowing money from family and friends may lead to broken relationships if you fail to repay your loan. Government money may be free, but it comes with a lot of restrictions that if you don’t follow, the grant may become payable. It is important to understand each funding option and the risk associated with it. This will help you choose what works for you.

 

 Cost of capital

The cost of finance is a fundamental factor that you should never ignore.  Different financing options have different cost implications. You should go for the most affordable.  If you choose debt financing as a source of capital for your business, you will have to contend with the interest rates that could be high or low depending on the state of the economy. Interest rates have a way of eating into your profits so go for lenders with the best rates.

Equity financing may not have any form of debt liability, but it means you will have share ownership of your company. The shareholders will have a say on vital matters of your business that you may prefer keeping private. You could even lose your business in a forced takeover. Grants, on the other hand, have the set rules and regulations that you must follow to the latter.  You may be obliged to employ a certain number of employees or take part in activities that do not interest you. Choosing financing options with the cost implications in mind is important to save you from making a wrong financing decision.

 

The eligibility criteria

Lenders have different requirements for your loan application to be approved. Ensure that you meet each requirement. Lenders will look into your credit score, payment history, your business risk, and the ability to pay your loan. Ensure you know what your potential lender wants for you to get any loan package.

 

Control

If you don’t like sharing the ownership of your company, don’t go for equity financing. When you float shares, the management of your business is likely to be diluted. This sort of dilution will mean that you will have to share vital information about your business with strangers.

To avoid this kind of situation, opt for debt financing that will leave ownership of your business in your hands once the loan commitment is over. The type of investment option you choose has an impact on the independence of your company.

 

Repayment terms

The payment period has an impact on the loan affordability. Short term loans and long term loans have different interest rates. Long-term loans will have to be repaid over an extended period of time. They may be expensive in the long run, but they don’t affect your cash flow because the repayment amount will be spread over a longer period. Short term loans, on the other hand, will require huge installments and this may cause a strain on your finances forcing you to renew your debt always.

 

If you are planning on buying an asset to meet seasonal business needs, then a short term loan would be ideal. They are also your best bet if you want to sort immediate business needs. Despite short-term loans being desirable, they pose a lot of risks especially if your finances are shaky. For that reason, go for long term loans because of the flexibility they offer.

 

It is important as an entrepreneur to choose small business start up loans that are affordable and flexible so that you don’t entangle yourself in a cycle of debt.


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