Let’s face it. Accessing capital to start and grow a business is one of the biggest challenges for small businesses. A business start-up loan is a great way to acquire the capital you need to start your business and take it to the next level.
Once you have your finances sorted, you can grow your business and improve your returns.
Let’s go deeper.
What is a start-up loan and how does it work
A business start-up loan is used to finance the start-up expenses of your business. These costs may include the purchase of inventory, machinery, working capital or the renovation of business premises.
What are some best practices for using a start-up loan to grow your business?
1. Assess your start-up expenses
Calculate your startup costs. It is prudent to seek financing when you have clearly defined your borrowing needs.
When starting the business, some costs are one-time expenses, while others are recurring expenses that recur from month to month.
Common start-up costs:
- Purchase of machinery
- Furniture and lighting
- computer facilities
- Relevant business permits and licenses
- Recurrent expenses; employee payroll, taxes, rent payment
2. Prepare the necessary documentation
As a fledgling business, you may find it difficult to demonstrate historical earnings to prove to the lender that you can repay the loan you are requesting.
This is when a business plan becomes useful for a startup.
A business plan explains how you will turn your idea into a viable business. It is backed by future sales, earnings, cash flow, and when you expect to break even. It lays out your value proposition to the market and why you think your idea will fly.
Besides a business plan, here’s what you need to apply for a loan.
- Company registration documents
- Applicable permits and licenses
- Some lenders may ask for tax returns, personal tax returns, and a resume to show your professional competence.
3. Assess your business start-up loan eligibility
Then you assess whether you can avail this loan from the available lenders.
Although eligibility criteria vary by lender, you will need to pay attention to the following areas:
- Your company’s projected cash flow
- Your turnover
- Your personal credit
- How long have you been in business
4. Select an appropriate start-up business loan type
There are several start-up business loans available from financiers. You need to select the loan that best suits your startup.
Here are the most common business start-up loans you are likely to come across;
- A business line of credit
- Equipment Purchase Financing
- A business credit card
- A line of credit builder
How do you know if you need a start-up loan and how much should you borrow?
- When the cash you generate from your operations is not enough to cover your operational expenses. The funding shortfall may be the result of late payments from your customers.
- When you need to buy expensive machines that will help you improve your production efficiency.
- When it is necessary to upgrade to more efficient technology to maintain a competitive advantage in the market.
- The rapid growth of the business results in constant huge orders that overwhelm your internally generated cash flow. This would result in the need to make huge inventory purchases, increase production, or move to larger premises.
- The need to hire highly skilled employees to help the business move to the next level.
To figure out how much you will need to borrow:
- Have a breakdown of your startup costs
- Be realistic in your projections: don’t underestimate expenses and don’t overestimate benefits
- Be thrifty by avoiding unnecessary expenses. Focus on essential costs and avoid luxury items whenever possible.
- Forecast your business cash flow
- Choose an appropriate financing method.
Tips for applying for this type of loan
To be successful in applying for start-up business loans, make sure you meet the financier’s eligibility criteria.
Moreover, you must compare different lenders in the market. Check if they are reputable, accessible and affordable.
The type of loan you are looking for will determine which lender you go to. If you are considering getting loans online, fintech lenders will approve you and lend you funds at any time.
Entrepreneurs who are starting businesses have the opportunity to apply for start-up business loans to fulfill their business dreams. Apply for an affordable loan today and turn your business idea into a vibrant business.