Even when starting a business with a one-person setup and bare minimum resources, it is necessary to have some funds. You need money for website hosting, domain registration, registration of business-name and the latest equipment for your business. These are few of the necessary expenses of any company willing to see success in the recent years. In fact, the Entrepreneur states the average minimum cost to start a business as $30,000.
This amount is only feasible to a handful few without a loan. A few business aspirants have been saving up for years or have been working many odd jobs to gather the money. For them, coughing up a few thousand dollars as business capital is not as challenging without a business loan. How about the people who are starting from scratch? There are several rags to riches stories in the realm of business and commerce, and none of them could have started without a little help from their lender “friends.”
Always consider options other than personal debts
Many opt for start-up loans, business loans and even consolidation loans for funding their entrepreneurial dreams. Raising $30,000 is not as difficult when you are in touch with venture capitalists and crowdfunding platforms. These help the business aspirants to stay away from personal loans. Consolidation loans often help businesses pay off the small debts and provide extra funds to the business owners for new projects. Consolidation loans often help with business scale-ups, new investments, and repair of credit scores. National debt relief websites can provide you all the information you need on business loans and consolidation loans to keep your business profitable.
How to understand the importance of debt in business?
Relating debt to risk is the only way you can judge if taking the risk of going into new debt is worth it. All entrepreneurs, whether veterans or newbies, should look at debt as a factorial of risk. Without risk, there is no way to factor in the effects of debt in the daily business operations. The standard method for all business owners to weigh the nature of debt is by checking the debt to equity ratio. The ideal way to balance the debt to equity ratio is by keeping it below 2. Excessive risk is when the ratio goes above two by a significant margin. You can think of your debt as the advance you are investing in your business. Now, think of the possible return and try to understand how big a risk you are taking. The ratio can also reveal the unleveraged business profits you can utilize to avoid a personal loan to keep functioning.
When is the right time to look for fresh financing?
Sometimes, there is no visible way to improve the profits, and personal debt is the only way out! In such cases, you have to evaluate if the time is right for a personal debt or any variety of debt, for the matter of fact. Here are a few situations where a new debt might be conducive to growth and profits:
- The start-up is in its growing phase, yet there are no new investors interested in the shares.
- When the company is close to breaking even, and there is no way equity is easy to raise.
- The start-up is no longer young. It has over ten years’ worth experience, and there is no fund remaining from the old investors.
When should you NEVER take a fresh loan?
All 3 cases show stability and a standard line of profit. There is more than one way the start-up can pay the debts and the installments to the debt company. Therefore, some instances are not ideal for taking out a fresh loan. When there is no visible source of revenue, and the existing cash flows are dwindling, it shows that the business operations are ailing. There is no way the added burden of new loans can help the company in the recent future. If you identify with this situation, it is inadvisable for you to go for a personal loan or a business loan. Often small business debt companies will provide a new loan to an ailing startup based on faith, but that does not guarantee the recuperation of sales in any way.
How to optimize a business loan for any small business and startup?
Many people will try to tell you how equity funding is a better option for your start-up, but think about it this way – will you be comfortable in selling a part of your company to someone you probably do not know at a fraction of the price it may be worth two years from now? Business loans seem like the viable option for SME owners and start-up owners to fuel their ideas. Loans are much easier to understand and they do not have any control over business operations! While taking out a new loan, you need to ensure a few things to protect your business from the known “evils” of debt.
- Decide on the duration for your venture and work on an exit strategy, just in case the business idea does not work out!
- Get an idea about your personal savings and keep it safely far away from your business funds.
- Add the low-cost or zero cost funds available from the family members and friends.
- Check the deficit amount, and that is the indicator of your actual funding requirement.
- If your fund requirement is medium to large-sized, you may want to opt for a mix of debt and equity funding.
- Start with a small loan. If your startup sees success by the end of stipulated time, you can go for a larger loan.
Loans are not bad! In fact, loans are vital for a startup. Sometimes, regional banks, online loan companies, and consolidation companies provide lucrative rates for small business loans and startup loans. Always compare several loan terms, interest rates, and APRs before deciding on the company you think is best-suited for your business aspirations.
Author Bio: Marina Thomas is a marketing and communication expert. She also serves as content developer with many years of experience. She helps clients in long term wealth plans. She has previously covered an extensive range of topics in her posts, including business debt consolidation and start-ups.