If you need to fund your business, there are various funding solutions available. Some are traditional such as bank loans; other less conventional approaches could include asset-based financing.
Before choosing between bank or other loans for startup financing purposes, it’s essential that you do your research. Doing this can help avoid costly errors while giving your startup a necessary boost towards success.
1. Know Your Needs
No matter where your business stands in its development process, funding is vital to its success. Before applying for loans or grants, however, it’s essential that you evaluate all of your needs carefully in order to secure appropriate solutions for them.
Figuring out your needs involves establishing the amount and purpose of money you require as well as how it will be paid back – this will enable you to avoid taking out loans that are too small or cannot be repaid in time.
An effective way of doing this is to compile a list of everything your business will require – equipment, office space, furniture, inventory etc – then start researching lenders who offer the type of loan you require.
Your startup business loan application process should also include providing a thorough business plan which details financial projections and shows how the funds will be utilized. Being prepared will make the entire loan application process much smoother.
2. Prepare Your Business for Due Diligence
No matter if you are applying for startup business loans or traditional commercial loans, due diligence preparation should always be an integral part of the application process. Due diligence involves reviewing financial records, contracts and other details about your company in order to verify its safety and security.
Due diligence requirements will depend on the nature and expectations of your business and buyer. For example, when selling a technology company, due diligence typically includes research into ownership of intellectual property applications, license agreements, employee assignments of proprietary rights as well as other issues.
Before initiating the due diligence process, make sure that you have an organized list of documents you’ll need. Since this may be quite extensive, consider creating a system that makes sense for both yourself and any potential buyers or investors.
3. Collateral Can Help
lenders typically prefer borrowers with collateral because it helps reduce risk and provide more lenient terms. This allows startups to secure lower interest rates and larger loan amounts while mitigating risks more effectively; however, this may present certain dangers.
If you fail to make payments on time, lenders may seize assets as collateral against losses and liquidate them at great expense if necessary. Therefore, it’s essential that when selecting collateral you make informed choices.
Collateral can come in the form of real estate, equipment or inventory – it’s up to both parties involved to determine which form best meets their needs.
Dependent upon your situation, business assets could serve as collateral for startup business loans. This is particularly advantageous if your business owns high-value inventory or equipment that could secure the loan.
4. Compare Lenders to Find the Best Deal
When looking for startup business loans, it is best to compare lenders in order to find the best offer. You should evaluate available loan amounts, repayment terms and fees offered by each lender in order to find your perfect fit.
Lenders evaluate each application based on your personal credit score, debt balance, income and possible assets – as well as your financial history – including any record of repaying past loans on time.
If your credit history or score are subpar, alternative funding sources such as personal loans and asset-based financing (such as invoice factoring) could provide the funding you require.