How to Finance a Startup Business

U.S. dollar banknotes, on July 17, 2022. Dado Ruvic/Illustration/Reuters

Starting a business can be tricky. Conventionally, in any industry vertical, you will need initial working capital to start up the business. One way to raise capital is to seek out venture capitalists or investors ready to fund your endeavor.

If you are unable to raise capital this way, your next option should be to seek out a business loan. In most case scenarios, this would require some minimum revenue resources to start with. This article explores alternative options that aspiring business owners can use to fund the foundational building of their enterprise.

How to Get a Startup Business Loan With No Money

Getting hold of a startup business loan could be a viable option to get your business idea off the ground if you don’t want to dig out your savings. However, it’s imperative to have a clear idea of how much money you can borrow. If you get paid more than what you require, keep in mind that you will end up paying unnecessary charges from accrued interest.

Given below are a few methods you can apply to finance a startup business.

READ MORE : Role of Finance in Startups

Crowdfunding

This may not be one of the first things that come to mind; however, platforms like GiveSendGo and Kickstarter have been providing viable fund-raising solutions for many aspiring entrepreneurs to start their business in specific niches.

The process is simple: Once you join a platform, you put up a description of your product or service and the target amount of money (or goal) required to start operations. You can set up rewards for contributors based on how much they contribute.

Once you reach the target in donor contributions, you just need to pay a small percentage of the target amount—instead of paying loan interest—something like 3–5 percent of the collected amount.

The downside is that crowdfunding is not a reliable way to raise revenue. According to reports, just around 20 percent of crowdfunding projects meet with a substantial degree of success. If the target funding is not reached, you will not be qualified for receiving the funds, and donors will be refunded their money.

Also, crowdfunding mainly is observed to be successful only in specific niches such as technology, gaming, social, and design projects. So if your startup concept is not connected to those niches, your probability of success would be low based on statistics.

Business Loans

For most conventional lenders to provide you with a business loan, you will need to show that you have a minimal level of positive cash flow. In the scenario where a borrower has negative cash flow or zero revenues, some money lenders will be ready to finance your business requirement if you submit supplemental documentation. This could be something like a detailed business plan which clearly states that your business will be able to repay the debt within a stipulated time frame.

Equipment Financing

Some lenders would also be willing to facilitate a loan through equipment financing. This means the lender will finance the necessary equipment to get your business running. This ranges from basic electronics like laptops and phones to large machines for a manufacturing plant. In this model, the equipment that the lender finances stands as collateral, which the lender can repossess in case the borrower fails to meet repayment obligations.

Business Credit Cards

This works identically to a regular credit card. The lender provides a stipulated credit limit. Whatever credit is utilized during a pay cycle needs to be repaid every month at a specific date; if that is failed, the due amount begins to accrue interest, and will keep compounding until it is paid. The positive side is that if you plan your finances well ahead, you can avoid paying any interest while gaining access to considerable credit.

READ MORE : 5 Tips to Start a Business the Right Way

Online Startup Business Loans

Prior to seeking out online startup business loans, it is essential that the prospective entrepreneur does a self-evaluation to ascertain whether or not they qualify for the various kinds of loans available in the market.

If they have no minimum revenue qualification to show, the next factor most lenders will ask as criteria to qualify would be some kind of collateral in the form of property or any high-value personal possessions.

In case both the above-mentioned options are not viable for a business owner, there are various online startup business loans that can be considered which provide loans based on different criteria.

Personal loans are one of the easiest loans to access, because they do not have stringent criteria. However, almost all lenders of personal loans check your credit history to set the terms of your loan. In case you do not have a credit history or have a bad credit history, it’s highly unlikely that a lender will provide a personal loan.

An alternative solution, Upstart, utilizes artificial intelligence (AI) to assess your professional history, educational background, and location of residence to determine your eligibility for a loan in lieu of a credit history. The application and loan-approval process are relatively quick, and you can have access to your loan within 24 hours, with the loan term spanning from three to five years. The borrower who wants to finance a startup also can choose the monthly repayment date as desired. The portal levies an annual percentage rate that starts from 5.31 percent and can go as high as 35.99 percent. There also is an origination fee that is charged with every loan.

For business owners with zero cash flow to start their business, invoice factoring provides a viable option. With this, the business owner can get paid immediately for outstanding invoices. Online portal Riviera Finance provides this service, for example, and the criteria to qualify are lenient. Such lenders generally pay up to 95 percent of the presented invoice. The repayment contracts can be signed for as long as six months.

An added benefit is that portals such as Riviera Finance offer non-recourse factoring. This means that if the original client who owes the business owner payment is unable to make the payment on the invoice, the lender will assume all risks and liabilities.

Easy Approval Startup Business Loans

For startup owners, online business loan providers are relatively more flexible in terms of repayment schedules and interest rates. Here are some options that new business owners can consider:

• Kabbage—For a business owner looking to gain easy and quick access to funds to start up a business, Kabbage is a worthwhile option. The application process is quick and simple, and minimal documentation is needed. There are no fees in the name of account maintenance or prepayment penalties.
• Lendio—This is not a business loan provider, but an online business loan marketplace that an entrepreneur can use to access both traditional banks as well online lenders. An individual can choose from a wide range of options to apply for, including conventional business loans, equipment financing, invoice factoring, credit lines, or business acquisition loans.
• Fundbox—This AI-powered online lending platform offers quick solutions with a loan approval time of around three minutes, and funds are disbursed the next working day. They provide credit lines of a maximum $150,000 over a repayment term of 12–24 weeks.