10 best ways to collect start up business loans (2019)

An entrepreneur seeks to start up business loans for initial capital adequacy. Every year a significant number of Americans launch their personal businesses. According to the study of U.S. Small Business Administration, in 2010, there were 27.9 million small enterprises in the U.S. The majority of these businesses were identified as “non-employer” businesses by the government. That means the owner of the business is the only person working at his or her business. In this situation, they require small business start-up loans for appointing new employees. Startup loans increase the liquidity position of a business so that employer can appoint new employees.

Only about half of newly established businesses survive for five years. Only one- third remain in the business operation after 10 years. Despite this rate, a small percentage of business matures into stable small to mid-sized businesses, while a microscopic fraction is becoming the stuff of legends – like Apple or Hewlett-Packard, businesses born in garages that ultimately climbed to the highest ranks of American business.

A recent study has shown that over 94% of new businesses fail during the first year of starting operation. Lack of fund is one of the common reasons for failure. Money is the most essential element of any business. Before starting any business one need to find a way to finance its commencement. Therefore, owners need adequate startup business loans. The Small Business Administration of the USA states that in 2009, the Ewing Marion Kauffmann Foundation anticipated the average cost of starting a brand new small business in the U.S. to be near about $30,000.

To start a business with little money is possible if an owner has adequate business funding start-up sources. The need for business startup funding depends largely on the type and nature of the business you are willing to start. Here is a comprehensive guide to funding that lists 10 best funding options for startup loans that will help one raise capital for his or her business.

start up business loans

1) Bootstrapping or Self-funding:

Self-funding, popularly known as bootstrapping, is an easy and effective option of startup business loans, especially when you are about to start your own small business. In a startup, an entrepreneur faces trouble to get funds without first showing some transactions and a plan for potential success. You can invest from your own savings which will be easy to raise fund due to fewer formalities/compliances, plus fewer costs of raising fund.

Self-funding option or bootstrapping should be considered as the first funding option because of its numerous advantages. When you have your own saved money, you are strictly tied to the business. On the other hand, investors consider this as a strong point. But this option is suitable only when the initial requirement of the fund is small. Some businesses need to fund right from day one and for such business situations, bootstrapping may not be a good choice.

2. Family and Friends:

If you can’t tap your own bank, or if your credit score of a bank isn’t good enough to convince a bank to lend you fund. you can always go to the people who know you best. Family members and friends will be an easier source to persuade than unknown bank officials. It is one of the best option to collect a startup business loans.

They are also more likely to evaluate past your previous record of bank loan, current account balances in banks and credit score at the time of determining whether you are worthy of the risk of extending a loan. Moreover, they are not likely to demand stringent loan repayment terms or high-interest rates. But in the case of friends and family members, you may escape interest high or total interest rates altogether.

Taking a loan from a personal friend or family members is a very popular option for a start-up loan. It requires no collateral. A survey operated by Pepperdine University found the result that 68% of responding small business owners used financing from the owners’ family and friends. Thus relatives help to start up business loans for starting a small business.

It is Needless to say that borrowing from friends and family comes with its own risks. If the business fails, or it takes much time than anticipated to repay the loan, your relationships may suffer. When you default on a bank loan or credit card, you don’t have to sit down for Thanksgiving dinner with the loan officer or bank or Credit Card Company. If you fail to pay back friends, you may never hear the end of it.

When you decide to borrow money from those close to you, you should have all the terms of the loans clearly written out in paper. That may includes how much is to be borrowed, the timetable for repayment and the amount of interest charged and so on.

3) Crowdfunding Option:

The option of crowdfunding is one of the newest and effective ways of funding a startup business that has been obtaining a lot of popularity lately. It’s like taking a loan, pre-order, investments or contributions from more than one person at the same time. It is one of the best options for start-up business loans.

Crowdfunding works as follows– An entrepreneur will put up a thorough description of his or her business on a crowdfunding platform where he or she will mention the targets and goals of his business. The overall plans of taking start-up business funds are making a profit. It determines how much money he needs and for what circumstances. And then consumers or investors can read about the business plan and give money if they like the idea of the business.

Those giving money will make online pledges as security with the promise of pre-buying the product or providing a donation. Anyone can contribute fund toward helping a business that they actually believe in.

The most advantageous thing about crowdfunding option is that it can also propagate interest. Hence assist in marketing the product as well as financing. It is also a benediction if you are not sure if the product will create demand for which you are working on.

This process can reduce professional investors and so-called brokers by putting funding option in the hands of general people. It also might allure venture-capital investment below the line if a company has an especially successful campaign.

It should be kept in mind that crowd funding is a competitive place to generate funding. so unless your business is absolutely in good position and can gain the attention of only an average consumers by just a description and several images online, you may not retrieve crowd funding to work for you at the end. Kickstarter, Dreamfunded, Onevest RocketHub and GoFundMe are popular crowd funding platforms in US.

4) Angel Investment:

If you can’t get sufficient cash from the financial institutions or your own assets and you don’t have a rich family, you can always look for a rich non-relative. Many well-off individuals have an interest in investing in startup business – often in return for an equity stake in the new venture. These investors are popularly known as angel investors. Angel investors are individuals with surplus money in hand and willing to invest in upcoming startup businesses. Angel investment can be a good option to collect start-up business loans to meet up working capital.

They may also work in groups of a network to collectively screen the start-up proposals before investing in them. Most often, an angel investor has been successful in a certain industry and is looking for new such opportunities within that same industry. Not only the angel investors can offer financing option to get your venture off the ground, but also some are eagerly in providing guidance based on their personal experience. They can also leverage their existing links or contacts within an industry to open new doors for your business.

To find these angels you have to make some research on it. Many angel investors like to keep a low profile and can only be recognized by asking other businessmen or financial advisors. Other angels may have joined networks to make it easier for potential startups entrepreneurs to locate them.

An angel investors have provided support to start up many prominent companies in the world, including Yahoo, Google, and Alibaba. This alternative option of investing generally occurs in a company’s early period of growth, with investors looking for up to 30% equity. They prefer taking more risks in such investments for higher returns. Angel Investment as a funding alternative has its demerits too. Angel investors invest lesser fund than venture capitalists do.

5) Venture Capital:

Venture capital firms provide direct investment facilities in new companies in exchange for an equity share in the business organization. Since most of the Venture capital firms are partnerships investing firm, they are likely to be highly selective and usually pitch money only in businesses that are already settled and have shown the proficiency to generate profits. Sometimes, they search for a profitable business to provide new business loans.

Venture capital firms invest in a business firm with the hope of drawing out their equity stake if the business gradually holds an initial public offering (IPO) or is sold to a richer existing business. Venture capital provides mentorship, expertise and acts as a litmus test of where the business is going, monitoring the business from the scalability and sustainability viewpoint.

A venture capital investment may be suitable for small businesses that are beyond the startup phase and started generating revenues. However, there are a few disadvantages to use Venture Capitalists as a funding option. Venture Capitalists have a short cord when it comes to companys’ loyalty and often looks for recovering their investment within a short time window. If you have a product that will take longer than that to get to market popularity, then venture-capital investors may not be very keen to invest in your business.

They typically look for larger opportunities that are a little bit more profitable and stable, companies having a strong clan of people and a good fascination. You also have to be flexible with your venture and sometimes lose a little bit more control. So if you are not ease with too much mentorship or this kind of compromise, this might not be the best option for you.

6) Business Incubators & Accelerators:

If you have a good plan for a business but need a lot of money and guidance in getting it up and running it, a business incubator could be the option to go – if you can get your venture into one. Early stage businesses can consider the option of Incubator and Accelerator programs for start-up business loans. In almost every major city, these programs assist thousands of startup businesses every year.

Business incubators are the organization dedicated to providing services and funding support to fledgling companies. Most business incubators are run by venture capital firms, govt. agencies, and universities with the aim of nurturing new businesses in their earliest stages by providing infrastructure, financing marketing, and networking assistance.

 A prospective business entrepreneur has to fulfill a lengthy application process to become involved in an incubator assistance program. The requirements of application differ among various incubators, but the prospective owner must demonstrate a strong likelihood of advancement for the business. National Business Incubator Association listed the business incubators in the US.

Although used interchangeably, there are some fundamental differences between the two terms- Incubators and Accelerators. An incubator is like a parent to a newborn child, who nurtures the business by providing shelter, tools, training, and network to a business. Accelerators also more or less the same, but incubator helps or nurtures a business to walk, while the accelerator helps to run or take a giant leap.

These programs usually run for 4-8 months and crave time commitment from the startup owners. The additional benefit is you will also have good connections with investors, mentors, and other fellow startups through using this platform.

7) Bank Loans:

Normally, banks are the first option that entrepreneurs go when they are thinking about financing. Most of the banks provide start-up business loans taking colateral. The bank provides two kinds of financing options for businesses-one is working capital loan, and the other is funding. Working Capital loan is the loan which is required to run by the business one entire cycle of revenue-generating operations, and the limit is usually decided by hypothecating both stocks and debtors.

The banks are very much cautious of bad credit. Funding from a bank may involve the usual process of sharing the venture plan and the valuation in detail, along with the main project report on which the loan is sanctioned.

Traditional bank options are lines of credit, term loans and commercial mortgages to buy properties or business refinance. The U.S. Small Business Administration (SBA) provides general small-business financing through banks, with its 7(a) loan program, disaster loans and short-term microloans. SBA loans range from about $5,000 to $5 million and the average loan size is $371,000. 

8) Microfinance Providers or NBFCs:

Do not get disheartened when you don’t qualify for a bank loan. There is still a fun rising option. Microfinance is general access to financial services to those entrepreneurs who would not have access to conventional banking services. This option is increasingly becoming popular day by day for those whose requirements are limited and mainly credit ratings do not favor by banks. Similarly, Non-Banking Financial Corporation’s (NBFCs) are corporations that provide similar Banking services without meeting so- called legal requirement or definition of a bank.

9) Government Programs:

The Government of the US has launched several programs to support startups. In the US, there is a fund for entrepreneurs called small business lending fund and a dedicated portal for Government grants which are available for local businesses. A Government can be a good option for taking start-up business loans with low interest.

If you are eligible with the mentioned criteria, Government grants as a financing option could be the best source. All you need is to make yourself aware of the Government initiatives in this regard.

10) Raise Funds By Winning Contests:

A number of contests have extremely helped the entrepreneurs to maximize the opportunities for raising fund. It encourages the new business owners with brilliant business ideas to set up their own businesses. In such competitions, you either have to comprise a brand new product or prepare a alluring business plan. Additional advantage is winning these competitions can also give you some special media coverage.

You need to make your venture project stand out in order to promote your success in these kind of contests. You can either represent your idea personally or pitch it through an outstanding business plan. It should be magnificent enough to convince anyone that the project you are working on is worth investing in.

Conclusion:

Startup business loans are inevitable to quickly set up a buiness. In order to grow fast, you probably require outside sources of capital. If you use self-funding and remain in operation without external funding from different sources for too long, you will not be able to take the ever-rising advantage of market opportunities. While the abundance of funding options may enhance the possibility of getting investors.

A responsible business owner should ask themselves how much financial assistance they really need. To be a diligent entrepreneur you must weigh the advantages and downsides of available funding sources and determine which option of cash provides the greatest return at the least cost. But you don’t always have to limit those funding options. Many small businesses can be started with money obtained from a portfolio of different sources.

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