Securing adequate amount of funds is perhaps the most challenging task faced by entrepreneurs. Sometimes, the plethora of options creates a paradox of choice, where one is unable to decide which source of finance would be most beneficial.
As an entrepreneur today, you can choose from a variety of funding options. Angel investors and venture capitalists are itching to invest their money in a promising new venture. And now, with the establishment of startups that lend money to other startups, entrepreneurs have a variety of funding options, each with its own set of pros and cons.
But with all the modern ways of lending, most new entrepreneurs are forgetting the traditional way of obtaining money—taking a personal loan. A personal loan can give startups the financial leverage they need to kickstart their business.
Multiple Uses
Applying for a personal loan and getting it sanctioned is a simple process, and the funds are usually disbursed within a week, if not earlier. Sounds like a sensible way to raise money for your business right? Let’s see what this money can be used for.
Preliminary Expenses
The money borrowed from a bank or NBFC can be used to cover the preliminary expenses involved in establishing the company. These would include any professional fees paid to promoters of the company, money paid to register the company, and any incidental charges incurred on stationery or transport.
Machinery and Equipment
If your startup requires certain equipment to carry out operations, you can approach a bank or NBFC and request for a personal loan to cover the expenses. Usually, you aren’t required to provide details on the expenditure of the loan, but banks or NBFCs are more willing to grant a loan to startups planning to install new machinery and equipment.
Working Capital
Working capital refers to the excess of current assets over current liabilities. In simpler terms, it refers to the money available to a company on a day-to-day basis. Working capital is liquid cash that a company can utilise in the event that they need to pay off a vendor or clear any small, outstanding debt they may have incurred. In case a startup is short of working capital funds, they can always take out a personal loan to clear their debts.
IPO
IPO or initial public offering is when a company decides to distribute shares among the public, giving them ownership of the firm in proportion to the number of shares they buy. This is done to increasing the total capital of the company. Startups are generally private, but when it begins to run a successful business, they may require more funds to expand their operations. That’s when they can opt for an IPO. Designing a prospectus, distributing shares, and collecting finances require a considerable amount of time and money, and a personal loan can help with the latter. Apart from these uses, startups can even use a personal loan in their research and development, for innovation, and to create new products and design new services. The characteristics of a personal loan make it an ideal option to new entrepreneurs looking to enter a competitive market.
Benefits of a Personal Loan
You already know the number of ways in which a personal loan can be utilised by a startup for their monetary requirements. But are there any specific characteristics of a personal loan that make it such a feasible option?
Here’s why opting for a personal loan is one of the most sound financial decisions that a startup can make.
No Questions Asked
Personal loans are granted with a certain degree of confidentiality. No one will know where you’ve borrowed the loan from, and your lender isn’t too interested in the purpose of the loan either. Unlike other loans, where you have to spend a large portion of your time explaining to the lender that their money is in good hands, a personal loan will be sanctioned with a lot less trouble.
Quick Disbursal
A feature that makes personal loans a blessing to startups is the fact that the amount sanctioned is usually received within a week’s time. This is especially useful as your business could run into unexpected contingencies, or you may be required to make a purchase in a short notice. Without the right amount of funds, you’d be in a predicament. But if you apply for a personal loan, you’ll be able to make the purchase as soon as possible, as the bank or NBFC will grant you the funds within a short time period, saving you a lot of money and effort in the long run.
Lump Sum
Not only is the documentation process of a personal loan simple, the amount you can ask for usually ranges from Rs.25,000 to Rs.25 lakh! With such a large amount of money readily available, a personal loan is one of the simplest ways to fund your startup and ensure its growth. So if you’re planning to launch your own startup, consider taking a personal loan to help with your finances. Procuring one is simple, and if you can lay out a detailed plan of your to-be company, and show your lender the projected sales and income as well, you might be able to negotiate a lower rate of interest. Before you head to the lender and apply for a personal loan, brush up on your credit score and clear outstanding debts so that you stand a better chance of getting your loan approved. Keep all your documents ready, and be sure to check out different lenders across the industry to figure out which one offers the best terms. Take out an online personal loan today, and bring your idea to life with the financial boost you’ll receive.
A personal loan is a form of lending that involves borrowing money for a business concern, whether a firm or a sole proprietor, to cover the various costs associated with running an enterprise. This includes the preliminary expenses spent on starting up the business, money spent to expand operations, and even funds procured to meet short-term goals of the business.
Unsecured and Secured Loans: The Difference
Based on whether you’re willing to offer an asset as collateral, there are 2 types of loans you can avail.
Secured Loans
A secured loan is where you offer your lender some property as a form of security against the funds they provide. The collateral could be something like a piece of equipment in your factory, or even certain securities that your company has invested in. The benefit of taking a secured loan is that lenders are often willing to grant you the funds at a lower rate of interest. Keep in mind, however, that if you fail to repay the debt, your lender is authorised to seize the asset that you’ve offered as collateral. Before approving your loan, the bank or financial institution you approach will take a look at your asset to ascertain its value. Once they’ve settled on a number, you’ll be provided with a percentage of the value of your collateral as the loan amount.
Unsecured Loans
An unsecured loan can be procured without having to offer an asset as security against the loan. Of course, it’s slightly more cumbersome to obtain one, and the rate of interest might be a tad bit higher than what you would pay on a secured loan. However, since you haven’t offered any collateral, there’s no danger of your assets being seized.
Figure out your exact requirements and determine the amount of money you’ll need as a loan. You may be able to avail a higher amount if you take a secured loan, but you risk losing your asset. So assess your finances and figure out if you’ll be able to repay the loan installments punctually. Apart from secured and unsecured loans, here are a few other types of bank loans for business that you can utilize to expand your business operations
Term Loans
This is the most common type of loan taken by businessmen. When you take a term loan, you’re borrowing a sum of money from your bank or financial institution with the understanding that you’ll repay the amount over a specific term, usually between 1 and 5 years. The terms under which you’ll be granted this kind of loan vary based on a range of factors like the purpose of the loan, your credit rating, and whether the interest rate is floating or fixed. For a bank to approve your application for a term loan, you’ll need to provide them with your reasons for taking the loan. You must also ensure that your business has a strong credit rating, and provide your lender with some form of collateral.
Equipment Loans
The term is quite self-explanatory. An equipment loan refers to an amount of funds borrowed for the purpose of purchasing some piece of equipment to improve the efficiency of your business. Most equipment loans usually have a fixed repayment tenure, fixed interest rates, and fixed monthly payments. The maximum tenure for repayment is generally the expected life of the equipment itself. This type of loan is a lot easier to procure than most other sources of funding. You’ll need to keep up the credit rating of your business and the loan amount will differ based on the type of equipment you’re planning to purchase. In this case, the equipment itself is offered as collateral and your lender can repossess the equipment if you fail to repay the debt.
Merchant Cash Advance
Have you got customers who often pay you by credit card? If so, then a merchant cash advance would be your best option. These loans require minimal paperwork and approval is granted within 24 hours. Your lender will provide you with a loan as an advance, proportional to the expected credit card sales you’ll be making. You repay your lender by giving them a part of your credit card sales every day, along with a fee. This method of financing tends to be more expensive when compared to other business loans, so only opt for it if you’re sure that the loan is worth the cost. These are a few of the most common types of business loans that you can procure from a lender.
Documentation Process
The documentation process will vary slightly based on the type of personal loan you’re looking for. However, there are certain eligibility and documents for personal loan that are mandatory if you’re looking for approval. First off, you’re eligible for a personal loan only if:
- You’re a public or private limited company
- You’re a partnership or proprietorship firm
- You’re self-employed and run your own business
You’ll need to fill out the application form and attach a photograph of yourself and your co-applicant (if applicable).
Your lender will also require details of your IT returns over the last 2 years along with your balance sheet and P/L account statement, Form 16A. You’ll also have to furnish your bank account statements for the last 3 months. If you’re applying for a loan with a co-applicant, they’ll have to bring along their KYC documents. Finally, you’ll also have to provide a certificate of practice, to show that the business you’re looking to fund actually exists. Once you’ve provided the necessary documents and signed the bank papers, your lender will grant you the loan.
If you’re looking to SME loans for growing your business, the best way to go about it would be taking a business loan. It’s a simple source of finance, and will give you the support that you need to take your business to the next level. A personal loan can be a blessing in disguise during times of financial duress. Small businesses are integral to economic growth and on a global level they account for over 95% of businesses creating employment opportunities. Thus, by increasing the funding for SMEs every country is poised for balanced economic growth. Now that you aware of the technicalities involved with personal loan, make an informed decision by looking at your requirement and the options available in the market. The right selection at this stage can take your enterprise to unprecedented heights.
Author Bio:- Anamika Verma writes on various types financial loans and has a vast experience as a financial advisor. Her expertise on financial issues is well sought after and she is known for her in-depth knowledge topics such as debt management, liquid assets, mutual funds etc. She has written more than 1000 blogs on topics related to home loan, business loan, doctor loan, EMI finance, gold loan and loan against property and shares. A post-graduate in finance management , Anamika loves to travel or cook in her free time.