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In case you missed it, this is a continuation of Financing for Startups, so please checkout the first article before reading this one.
Though not the first go for most founders, it is actually a credible source of financing with measurable risks and flexible options for both short, medium and long term financing. As a founder, it is advisable to open a corporate account with a startup friendly bank and develop a good relationship with your account officer which will make getting information on loans available much easier. Whether you opt in for personal loans or others, one thing is, you’ll have to be sure that you’ve totally analyzed the pros and cons of the total loan package before taking the decision.
Maintain full control: Lenders have no control over your company. Though you pay interests on loans collected, you still maintain full ownership rights for your business
Yields effective usage: Because it is not a free money, but rather comes with its requirements and documentation, founders usually make good allocations and use of such funds.
Flexibility: Bank loans can be used according to the founders discretion unlike equity funds which are normally restricted for a particular use.
Calculated monthly expenses: Interest rates are usually negotiated at the beginning and as such, you’ll know the repayable amount throughout the loan term and then have the ability to forecast your expenses.
Repayment holiday: Also some lenders can agree for a repayment holiday at the beginning of a loan term, especially when you have tangible reasons for that.
Flexible options: You have a number of options to choose from and the type of loans are dependent on the use and reason for taking the loan.
Time bound: Loan repayments are temporary and span a period of time unlike equity financing where dividends are paid to shareholders as long as the business exists.
Tax deductible: Interest paid on loans are usually tax deductible and as such there is no unnecessary accumulation of taxes.
Focus on profitability: There’s very high difficulty to secure a loan as a new startup with no track record without having a guarantee of security or strong credit history (for personal loans). Unlike VC’s and Angel’s, banks will want to maintain a low risk transaction, that usually requires a track record of a good business standing that somewhat verifies the business ability and willingness to pay back.
Part payment: Some loans require you to make some down payments which sometimes, may even reach up to half of the loan amount.
Complexity: The whole process of getting a bank loan can be time consuming and frustrating as you’ll go through filling a whole lot of paperwork.
High rates: Interest charges are usually high, and do increase as the level of security decreases.
This involves selling a portion of your company’s equity in exchange for capital/funds. If you’re willing to part with some of your right of ownership with investors, then this form of financing is for you. Although a popular type of financing especially in recent times, it helps quite a lot, to know its pros and cons.
No credit history needed: Serves as a major alternative to debt financing as it can be accessed by credit unqualified startups.
Repayment free: No repayment of money collected from investors and this invariably decreases the short to medium term financial burden that yields psychological stress, placed by loan repayments on the startup founder(s).
Networking access: Founders also gain, in addition to funding, mentorship, expert advice and networking opportunities. Since investors usually invest in a niche they are familiar with, they tend to offer strategic advice where needed.
Dilution of ownership: Part with a percentage of your company ownership. In order to gain such funds, you will usually give out an agreed percentage of your company’s stake.
Lose full control of decision making: Once you have investors as part of your business, you’ll discuss and obtain permission from them before making decisions that will affect the company.
Less profits: In addition to losing part ownership rights of your company, you’ll also share the profits and dividends with your investors.
High cost: The cost for equity funding often seems higher, which seems to be a consequence of the risks involved, especially for early stage startups.
It takes much time: The process of acquiring equity funds is usually time consuming and stressful. It can take months to finalize a deal with a potential investor.
A popular source of free money amongst founders. Here you get funding without having to pay back or give up some ownership. As enticing as it sounds, it has some upsides and downsides.
Hassle free funds: This form of financing does not require repayment so it comes in as free money.
Full control: Since it is free money, you retain full ownership of your business.
No credit history: You don’t also have to be creditworthy to qualify for one.
Fierce competition: Just because it is free money, the competition is quite fierce and the process is often long and time consuming.
Sector focused: Grants are sometimes opened for specific sectors and so you may not be able to find one that suits you.
Extra funds: They usually come in small amounts and as such, you’ll need to complete your financing from other sources.
Large volume of paperwork: Usually accompanied by writing long reports of how a fund is spent.
Your choice of funding option usually will depend on your startups’ objective for raising funds, opportunities available, eligibility, preparedness, and the connections you have at your disposal.