Where to get the money for startup – is a bank load a good idea?
Every firm needs money for constant functioning and development. Entrepreneurs in early stages of development do not have their own capital and that is why they need to look for external sources of finances. Can a startupper get a loan? Is it profitable for them?
Entrepreneurs at the beginning of their careers
Young entrepreneurs, while establishing their startup business, very often use the opportunity to get financial help for the development of their business. The financial help has a seasonal character; therefore it is difficult to treat it as a Stable source of funding. In turn, the support of business angels and venture capital investment, leads to allowing another company to have access to the company or market shares. It is not unrestricted either.
This is why sooner or later and among other things, many young businessmen gain an interest in getting a loan.
Banks and startups
From the bank’s perspective, a young founder of a startup is a fairly risky client. Most of young businessmen did not give the banks a chance to get to know them, hence why their credibility is marked as low. The future of startup is uncertain. It is also known that many young entrepreneurs close their business down after a very short time, concluding that their idea was a dud.
On the other hand, banks need to keep up with their competitors, so they cannot allow themselves to fully pass off inexperienced entrepreneurs. Currently, most banks have something to offer to startuppers. Let’s not count on a lot though. An entrepreneur without wealth and their own capital, will not get a loan on favourable terms. It is unlikely that they will get a loan in the first year of starting their business either.
Advantages of taking out a loan
If we meet certain conditions and have a realistic chance of getting a loan, this form of funding is definitely more available than donations or help from foundations, which additionally have the right to tamper with the development of the startup to some degree.
Besides that, paying off one loan in time and fulfilling the agreement with the bank increases our credibility. During the next year or when getting another loan we can expect better terms. This involves i.a. the amount of the loan.
We can get the new commitment straight after paying off the previous one. The loan is characterised with easy renewal, which is a great advantage in comparison to the sources coming from the external capital. Even though the loan money is put towards a specific thing, as specified in the contract we have with the bank, no one demands to be in control or make decisions in the business.
Disadvantages of stratup loans
Of course, there are many disadvantages to small and new businesses taking out loans, which dissuades many businessmen from taking that route. A loan for a new company usually has a very high interest and is characterised by a high service charge. The bank, in order to minimise risk, Requires securing of the loans and if the company does no have any wealth, the security takes form of a private property, e.g. a house or flat.
A short- or long-term loan?
Short-term loans are easily available to young entrepreneurs. They are treated as a source of funding the current business, purchase of goods or paying off important pledges. Their amounts are also lower than in the case of investment loans (long-term) and their admission terms much easier.