Advantages and disadvantages of Startup Business loans

Shubham Kumar Shubham Kumar
Feb 28, 2021 3 min read
Advantages and disadvantages of Startup Business loans

Sitting on a brilliant business idea with no money to back it up? Funding is a tricky issue for most startups. Finding an investor is always difficult, and the lack of money gives most entrepreneurs jitters in the initial days. That is when they look at startup loans or guaranteed payday loans – two interesting funding sources you too must have heard of.

While business loans are helpful in most situations, they have some disadvantages too. Let's have a look at both the pros and cons of startup business loans so that you can decide if they’re the way for your startup.

Advantages

Keep control of your business

Everybody wants to upscale and keep all their business’ shares with themselves. This pleasant situation is made possible by business loans. The owners keep their company’s hold and also enjoy the luxury of upscaling their startup.

With investors comes the hassle of managing the board with their preferences. Having distributed stocks reduces your profits with time. Lenders usually have no interest in your management. They care only about money and give out loans without asking for extra perks.

Temporary in nature

Business loans are for a limited time. After the whole loan is repaid, the lending institution won't bother you. On the other hand, attracting investors comes with an obligation to pay dividends to the shareholders regularly, which may last as long as the company.

With time, the dividend sum increase with the increase in the company’s worth. Startup business loans, on the contrary, reduce steeply as you keep repaying. This temporary nature of loans makes them worth a try for those looking to stay financially freer.

Build business credit

As the company grows, production increases rapidly, and so does the need for money. Even if you did not start your company with a loan, you might need to expand or design a new product or service.

A credit score important for lenders to consider your loan application. Taking a startup loan and repaying it on time can get your company a good credit score, opening the gates for future loans. Without a credit record to build on, some lenders might not give you a loan later if you need one to expand.

Disadvantages

Not easy to get

Getting startup business loans approved is a tough cookie. Unless you already have an established business or some collateral to pledge, there's a very little chance that a lender will trust you.

With the recent financial crunch they have found themselves in, banks and NBFCs have a strict policy concerning lending. Only businesses which they believe can repay the loan can get the loans. With such high scrutiny, it becomes infinitely difficult for a new and fresh startup to get loans. The difficulties in availing of loans are decreasing with time, but the hassle is significant even today.

A high rate of interest

Lenders' most significant way to earn money is through interests. These interests can break the backbone of any small business. As a small business owner, it gets challenging to manage the competition and interest rates all at once.

As time passes by, every business faces a low-revenue phase. High interest rates during those low phases can hurt you even more and potentially result in bankruptcy. Interest accrues as you delay payments, and you might soon find yourself into a black hole of financial trouble. To avoid this, however, you can plan repayments efficiently and opt for lower-interest loans.

Less Money to Invest in Business

Startup loans naturally come with a repayment obligation. As you repay heftily to the bank every month, you will be left with little cash to reinvest in your business’ growth. You might even have to compromise on buying equipment or hiring new employees.

These restrictions can hamper the speed at which you had envisioned your business growing. However, better cash flow management can save you from this trouble as well.

Conclusion

As you think and analyze the advantages and disadvantages of bank loans, understand that opting for a small amount to start your startup is not a bad option if you are a good planner. You may look at guaranteed payday loans in the beginning and think about other options later.
Let us know what you think about taking a business loan for your budding startup in the comments below.

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