A startup business loan is a loan given to firms by financial institutions with the understanding that the capital will be repaid together with the interest the institution chooses in the future. This loan can be used by businesses as working capital, to cover short-term cash flow needs, to buy machinery and other equipment, etc. For the founders, using startup business financing has a variety of advantages.
8 types of cheapest Startup Business Loan
Working capital loans: Often known as collateral-free loans, these are borrowed funds firms use to cover their ongoing working capital needs. Loans for working capital often have a short repayment duration of up to 12 months. Due to their short terms, working capital loans have higher interest rates.
Letter of Credit: A Letter of Credit is a sort of credit limit in which the lender offers financial assurances to the firms’ suppliers. It is most frequently used by enterprises engaged in trading. The LoC is essential to maintaining effective trade because export and import in the global economy frequently deal with numerous unknowable circumstances.
Term Loans (Short & Long-Term Loans): Among the most popular types of loans, term loans are those that have a set repayment schedule. They can be broadly divided into long-term loans and short-term loans (up to 12 months) (up to 5-10 years). Depending on the number of funds required, the lender determines the tenure for the same.
Overdraft Service: A loan provided by banks is the overdraft facility, which enables business owners to withdraw money from their accounts even when there is no money in the account. Daily interest is assessed on the amount deducted from the authorized limit. This kind of business loan is frequently given in exchange for security, commonly an FD with the bank.
Loans under government programmes: The Government offers several loans designed exclusively for startups. CGTMSE, Standup India, PMEGP, Startup India, Mudra Scheme under PMMY, and PSB Loans in 59 minutes are a few well-known government lending programmes in India offering a startup business loan.
Equipment Financing or Machinery Loan: As the name implies, lenders offer equipment or machinery loans to help businesses buy the equipment they need to operate. Businesses that use this loan receive tax exemptions from the Indian government, albeit the terms and circumstances vary from lender to lender.
Invoice Financing: Using their outstanding customer debt as collateral, firms can borrow money through invoice finance. It aids companies in increasing cash flow, paying workers and suppliers and reinvesting in operations and expansion. Businesses give the lender a portion of the invoice total as a fee for this startup business loan. The structure of invoice financing may be such that the client is unaware that their invoice has been financed, or the lender may expressly control it.
Directly from the processor that clears and pays the credit card payment, merchant cash advance providers give money to businesses in exchange for a percentage of their daily credit card revenue. The amount of your monthly card sales determines the loan’s size. Depending on the lender, your eligibility may be up to 200% of the value. The amount of advance eligibility increases with your sales.
How can a new company apply for a startup business loan?
- By going to the lender’s website, you can apply for a loan online. Most vendors offer an online form that must be completed and submitted along with additional papers.
- You can obtain an application form from the lender’s nearby branch office and complete it before submitting it with the required supporting documentation.
The following are some advantages of utilizing starting company loans:
- You have enough money to expand your company’s activities.
- You are not required to give up all your ownership rights or equity.
- You can increase your business’s credit score for an upcoming startup business loan.
- You can prevent a loss of your own fortune that is unprecedented.
- You are not required to account to the bank for the revenue and expenses of your company.
With revenue-based financing, ventures act as an intermediary that promises to repay a loan over time by giving the financier a portion of their future profits up until a predetermined number is reached. Businesses can access funding via revenue-based finance without paying interest or sacrificing ownership. With revenue-based finance, a company pledges to repay loans with a predetermined percentage of future profits up to that amount. Revenue-based financing has advantages and disadvantages, just like any other type of financing, and there might be better choices for some companies. Revenue-based financing offered by Velocity often has a repayment amount that usually exceeds the loan’s original balance by a significant difference. When a small business describes operations in its business plan, the fixed-dollar target can be useful. Yet, it’s crucial to understand that the payments will be made from your company’s revenue and make plans accordingly.