Globalization and open market economy have made more and more start-ups come up in the past couple of years. However, launching a start-up is easier said than done because it is not just about having a brilliant business plan and a location to set up the office. Every start-up needs adequate financing, especially when it is at the stage of just starting off. Financing is needed to help the start-ups start and expand the operations, develop new products and services, market those products and services, and so on, and start up business loans can be of huge help in this regard.
A start up business loan is a type of financing that is aimed particularly at start-ups with no or little business history. These loans are forwarded by financial institutions, banks, venture capital companies, non-banking financial companies, and the likes. With so many funding options available, it is natural for the new entrepreneur to get confused with which way to take. On that note, take a look at the following facts about start-up loans before you go ahead and avail the loans for yourself.
The eligibility criteria for start-up loans
There are times when even banks do not agree to offer loans to the start-ups. Being a pretty high-risk investment, the banks are naturally worried about running in losses. Thus, banks have really high margins and strict guidelines in place for offering start-up loans to the new entrepreneurs.
For one, the business needs to meet the criteria for start-up, as set by the country, and it needs to be registered as a start-up within the country. Other important limitations are like the business needs to not more than a certain years old (for instance, three to five years). The annual turnover of the start-up in the previous financial year also has to be within as particular limit, as stated by the bank. Another general rule is that the business needs to work towards developing or deploying something innovative, or focus on unique processes or services driven by intellectual property or technology.
Furthermore, the business must not be formed by reconstructing or splitting up an enterprise that is already in existence. Failing all these criteria will not make a company to be deemed eligible for a start-up loan by the banks, and even several other financial institutions. All these factors make the entrepreneurs look for other options to gather funds, like using their credit cards, crowd funding, grants, personal loans, and so on.
Different kinds of start-up business loans
Equity assistance and growth capital
Entrepreneurs avail this kind of loan for the start-up from the banks. Many financial institutions and banks provide loan schemes which are particularly made to fund the start-ups and their specific needs. Different banks might give different names for the start-up business loans. The equity assistance and growth capital schemes offered by the financial institutions can be used for brand building, creating distribution network, marketing, research and development, and software purchases. It usually also involves offering a revolving fund for technological innovation that offers financial assistance to medium and small scale industries for up-scaling, demonstration, growth, and the likes. Banks also offer capital financing for start-ups.
Loans for equipment
In these types of loans, the equipment which is bought while, starting the venture stays as collateral with the bank. This lets the lender have a slightly high risk but a low interest rate. The borrower can repay the amount used to buy the equipment as revenues, which are generated from the business. This is same as the line of credit and the applicants need to have a good credit score. The documents that are needed for this loan include a credit report, a vendor quote, and a statement showing the intended use of the equipment. A major benefit associated with loans for equipment is that the equipment’s depreciation can be utilised by the consumer as a tax benefit for years on end.
Rollover for start-ups
Rollover for start-ups is also termed as retirement money. Under this kind of loan scheme, you get to borrow even hundred per cent of the retirement savings. It allows you to use the retirement funds without withdrawing penalties or taxes. The entrepreneurs can use the retirement savings and let it help their business grow. It can be used both as the fund for growing the business, and after the business starts to earn profits, you can start saving your retirement money again using the profits that you have earned.
Business instalment loans
Business instalment loan is provided by many of the leading banks and financial institutions. It helps you meet the immediate needs of cash for expansion and day to day functioning. It can be broadly categorized under personal loans, and just like personal loans, it is an unsecured loan. However, the interest rates for business instalment loans are much lower than personal loans.
The method to approach banks for the start-up loans
Before approaching a bank or investor with a funding request, you need to prepare a proposal which explains in detail the business model, revenue model, the background of the promoter, estimated growth rate, estimated sales, estimated profits, and so on.
In short, this proposal needs to have all the crucial details related to your business. Start-up borrowers can meet the borrowing requirements and get the best possible terms if they contact the financial institutions or banks in a proper manner. You need to clearly understand the criteria that banks use to screen, process, and rate the loan applications and the significance of giving exact information. As the commercial credit organizations expand the database, it has become really easy for the financial institutions to track the past repayments and default acts of the loan applicants.
So, that are the crucial facts that you need to know about start-up loans, and hopefully, this will make it easier for you to understand the process. Make sure that your start-up can meet all the criteria, and then, you can effectively secure the finance for your business.