The Top Pros and Cons of Startup Business Loans - Fora Financial Blog
Close
The Top Pros and Cons of Startup Business Loans
March 18, 2022
Pros and cons of startup small business loans

The Top Pros and Cons of Startup Business Loans

There are numerous ways that entrepreneurs can acquire funds to jump start their new business ventures. Many turn to their personal savings, family and friends, crowdfunding, Small Business Administration (SBA) loans, or business credit cards. In addition to these financing options, some entrepreneurs pursue startup business loans.  

Although there are benefits of receiving a startup business loan, most notably having money to get your business up and running, there are also some downsides to consider.  

Having a loan for your new business can help you grow your venture, but you should also remember that your company is inexperienced. The first few months of running a business can be stressful, and it takes time to generate revenue. In addition, it takes time to determine what your business’s short term and long-term funding needs will be.  

As you can see, applying for startup business loans isn’t a decision that should be taken lightly. In this blog post, we’ll explain the pros and cons of startup business loans, so that you can carefully weigh your options.  

What Are the Pros of Business Loans for Startups? 

1. You’ll Have Money to Start Your Business

Starting a business requires enough working capital to afford initial expenses, such as:  

  • Inventory  
  • Real estate  
  • Equipment  
  • Payroll  
  • Hiring expenses  
  • Marketing costs  
  • Necessary technology 

Depending on your business’s industry, you may need more funds than you can borrow from savings, family, or credit cards to get off the ground.  

If your business requires a large initial investment, such as inventory or equipment, you may need a startup business loan to afford necessary expenses. That way, you can make sure that you’re putting your best foot forward as you start this new business venture.  

New call-to-action

2. You Can Retain Business Ownership

A startup business loan may be an alternative to seeking investor financing, who may ask for a share of equity in your company.  

By funding your venture with a traditional loan, you’ll have more leeway when considering potential partnerships. For example, you’ll have the option to choose investors based on strategy, rather than monetary value.  

Also, it’s important to note that investors may have the power to make other decisions that directly affect your business. If you feel strongly about maintaining control over your business, applying for a startup loan may be a better funding option. 

3. You Can Protect Personal Wealth

A startup business loan can help separate your personal wealth from your business’s finances. Starting a new enterprise involves risk; the most well-planned venture may face obstacles that are out of your control as the business owner. Therefore, you should think twice about pledging personal wealth such as home equity, retirement savings, or money needed to live.  

Ultimately, procuring a startup loan can allow you to open your business, without putting your own finances at risk to do so.  

4. You Can Build Business Credit

Eventually, your business may require a large cash infusion to afford inventory, expand your operations, or afford marketing costs. When you pursue financing, it’s beneficial to have a history of responsible credit use to show your lender.  

As with personal loans, having a strong credit history indicates reliability as a borrower and lowers investment risk for the lender. However, if you have poor credit, you’ll find it challenging to qualify for funding with good terms.  

By taking out and paying back a smaller loan amount first, owners increase the chance of their business being approved for a bigger loan in the future. It may also help secure lower interest rates.  

Startup-Business-Loans-2

What Are the Cons of Business Startup Funding?  

1. They Can Be Hard to Qualify For

From a business lender’s perspective, startup loans are a risky venture. New companies fall short of all the metrics banks use to determine loan eligibility, which include:  

  • Revenue  
  • Financial records  
  • Credit history  
  • Proof of business longevity  

The difficulty of obtaining a startup business loan is its biggest caveat. This is especially true when the loan applicant lacks strong personal credit, assets for collateral, and large down payments.  

2. Startup Loans Can Restrict Cash Flow

Term loans typically require monthly payments for some combination of interest and principal. Missing loan payments can mean irreparable damage to business and personal credit.  

Small business owners should consider how making regular loan payments will factor into their budding organization’s finances. Having monthly payment obligations could restrict cash flow to run or grow the business.  

Before applying for a startup loan, review your business plan and consider your business’s consistent expenses. For example, if you’re already paying for utilities, rent, and inventory, it might be too challenging to also make loan payments. In addition, it will be even more challenging if your cash flow is limited, and you aren’t earning significant sales yet.

3. Less Need for Bootstrapping

Limited working capital can be a powerful motivator. Well-funded entrepreneurs may be tempted to throw money at issues, whereas lack of funds might force them to be more creative in stretching the startup funds they have.  

Startup history is littered with stories of expensive failures. When it comes to building new businesses, deep pockets don’t guarantee success, sometimes even hampering it. So, before you take out a business loan, make sure that the funds are necessary and won’t hinder you in the future. 

4. Your Personal Credit Score Might Be Put at Risk

A small business loan won’t guarantee that your personal finances are protected. Given the extra risk of lending to small businesses, many financial institutions require a personal guarantee, which means banks can come after you for repayment if the business defaults. Therefore, your personal credit score and assets may be impacted.  

If you’re concerned about how your personal credit could be affected, we suggest waiting a few months until your business is more established. That way, you’ll be able to repay your loan on time, while ensuring your personal credit remains intact. 

5. You Won’t Know How to Best Utilize the Loan Yet

When experienced business owners receive a loan, they’ve had ample time to understand their operations and know how the loan can benefit them. In comparison, as a new business owner, you’re still identifying the ebbs and flows of your company.  

Currently, you’re simply trying to attract new customers and ensure that you can afford necessary expenses. However, in a few months you might decide that you want to invest in a certain type of inventory that’s selling out or that you need to hire more employees.  

By waiting a few months to apply for a business loan or line of credit, you can make sure that you’re using the financing for the right areas. 

6. You Might Not Even Qualify!

Many alternative and online lenders won’t supply financing to startups. Other loan providers have a time in business requirement and won’t provide loans to businesses that haven’t been operational for a certain length of time.  

Before taking the time to apply, conduct research or contact lenders directly to find out if they provide financing to new businesses. By doing this, you won’t waste your time compiling financial information and applying, only to be declined due to your brief time in business.  

Next Steps: Seeking a Startup Business Loan  

After reading this list of pros and cons, hopefully you’re able to determine if you think pursuing startup funding is right for you. If you want to pursue startup business loans, we suggest researching popular funding options next: 

  • Small Business Loans from Alternative Lenders 
  • Business Lines of Credit 
  • SBA Microloans
  • SBA 7(a) Loans 
  • Business Credit Cards 
  • Merchant Cash Advances 
  • Equipment Loans 
  • Inventory Loans 

Conclusion: Consider All Aspects of Start Up Business Financing Before Applying  

There are pros and cons to pursuing a startup loan, such as issues with ownership, eligibility, risk to personal credit, and the cost of repayment.  

However, qualifying for a small business startup loan could mean having money to start a company unattached to loved ones expecting repayment, or investors who will want ownership in exchange for their investment. Small business owners should weigh all considerations before deciding to move forward with this loan option.  

Have you pursued business financing as a new entrepreneur? Or did you wait until you had an established business before starting the application process? Tell us about your experience with startup business loans in the comment section below!  

Editor’s Note: This post was updated for accuracy and comprehensiveness in March 2022. 

Fora Financial

Editorial Note: Any opinions, analyses, reviews or recommendations expressed in this article are those of the author's alone, and have not been reviewed, approved, or otherwise endorsed by any of these entities.

Fora-Logo_TEAL-KNOCKOUT
Post by:
Fora Financial is a working capital provider to small business owners nationwide. In addition, the Fora Financial team provides educational information to the small business community through their blog, which covers topics such as business financing, marketing, technology, and much more. If you’d like to see a topic covered on the Fora Financial blog, or want to submit a guest post, please email us at [email protected].