8 TYPES OF BUSINESS LOANS FOR TECH STARTUPS

8 TYPES OF BUSINESS LOANS FOR TECH STARTUPS

Fri-27-Nov-2020-20-11


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8 TYPES OF BUSINESS LOANS FOR TECH STARTUPS
Business financing is hard to get for startups and smaller enterprises. With lenders apprehensive in agreeing to extend $10,000, $50,000 or $250,000 to small businesses – that is, unless they’re backed by bigger firms or well-known names. Until you find a venture capitalist whose name begins with Jeff or Bill, you may need to search for either alternative tools inside a bank (lines of credit or credit cards) and alternative outlets outside the traditional banking system (merchant financing or P2P lending). Here are eight types of business loans that tech startups need to know: 1. Line of Credit A line of credit is when the financial institution lends you, let’s say, $15,000, transfers it into an account, and you have access to these funds at any given times. Rather than having a lump sum payment, a line of credit provides you with continued access. What’s more, you don’t even need to take the entire amount: You could only use up two-thirds of the available funds. One of the benefits of a line of credit is that the interest rate is typically lower, especially if you’re in good standing with the bank or you have an impeccable credit score. 2. Invoice Factoring Businesses are learning that they cannot wait for a client to pay their bill in three months, particularly if you’re just starting out and the cash flow is slow, budgets are tight, and expenses are many. So, where are they turning to? Invoice factoring. This is a new type of debtor finance that allows a company to sell its accounts receivable to a third party at a discount in order to meet its current and immediate future cash needs. These financial transactions occur in two installments: Factoring advance (roughly 80 percent of the receivable). Factoring fee (about 20 percent). With studies showing that two-thirds of all invoices are paid late, this is quickly becoming an invaluable service. 3. Business Credit Card A business credit card is one of the more convenient business loans, though the major downside is the skyrocketing interest rate at the end of the month. But business credit cards are geared towards entrepreneurs, which results in perks and benefits that traditional customers would not be privy to. Again, it is up to you to determine if the additional expense is worth it or not. 4. Term Loan A term loan is certainly a popular form of business financing. These types of business loans are flexible even for those with bad credit. You receive a lump sum of cash right away, and these sums are typically higher to allow you to invest in your firm. Like a business credit card, the one issue is the higher rate of interest. 5. Invoice Financing This should not be confused with invoice factoring! Otherwise known as invoice discounting, invoice financing involves borrowing money against your accounts receivable rather than selling them to a third party. So, a lender will extend you a loan of up to 90 percent of the invoice and then you are obligated to repay the loan as soon as you have the invoice paid by the client. Also, the third party might synchronize your accounts receivable system with your merchant system. 6. Merchant Cash Advances Convenience. Affordability. Easy. These terms could describe a merchant cash advance. This is when a third party advances a business lump sum payment. The business repays the loan by having a certain percentage of future credit card and debit card sales. So, for instance, a lender provides you with $10,000. This amount is repaid by deducting 1.4 percent from each credit and debit card transaction by having your account synched with their system. 7. Non-Profit Business Loan Be warned: Not everyone will have access to a non-profit business loan. Akin to affirmative action, a non-profit business loan is targeted more for women and minorities. So, if you don’t fit into either category, then your chances of being accepted for this kind of loan are low – quite low. 8. P2P Lending When you have exhausted all conventional borrowing tools, then your last may resort may the unconventional: peer-to-peer lending. P2P lending is common for startups that may not fit the requirements and criteria of a traditional financial institution. So, how does it work? Here are a few steps to take: Open an account on a P2P lending platform. Perform a soft credit pull to ensure you meet basic criteria (some say it’s strict because they want to ensure you pay back what you borrow). You will be given a loan grade. Borrower lists the needs for a loan, including the interest rate they’re willing to pay (details matter!). At the end of it all, lenders will place bids. Once the listing is completed, the qualified bids are coalesced into a single loan and the funds are deposited into the borrower’s account. Studies find that, although banks are being encouraged to lend to all sorts of borrowers by the federal government and central banks, the financial institutions remain apprehensive, choosing to place their bets on more established clients or businesses. This is why startups and small- and medium-sized enterprises (SMEs) are taking alternative routes to corporate financing, even by using credit cards. Which avenue are you going to explore to finance your venture?

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  • Joseph

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