Updated: July 21, 2021.
If you’re wondering where to obtain business funding and considering different options such as hard money, conventional business loans, investors, etc., then you should read this post as a guide.
When you began your business I’m sure the back of your mind you were wondering if and when you would need startup or expansion capital for it. As you progressed and became more operational this subconscious thought probably came into reality really quickly. Now that’s time to start considering where to find business capital for a start-up company, we thought we would provide a few options and compare them to each other for you. Authorized User tradelines can help your credit score, but you should know the information that follows, first.
Table of Contents
Business Funding Gut Reaction: bank loans.
In terms of traditional or conventional bank loans, they don’t really exist. Yes, they suggest they offer them if you walked into a bank and asked, but the likelihood of you obtaining a conventional business loan is next to 0%. In addition, bank loans for business funding are generally a bad idea because you begin repayment upon closing the loan. Your interest begins immediately, even before you made a purchase with the borrowed funds. For these reasons, it is a good idea to look for funding that is more flexible. Finally, bank loans typically require collateral. This means that you are putting your business, house, or car at risk when there are other options for funding.
What about Credit Unions for business funding?
Credit unions have been known to take on more risk, despite many disadvantages you’d come to realize once you enter into a relationship with them. But with more risk comes less business funding. With less business funding, you have fewer opportunities you can take advantage of.
Here comes the hard money lender pitch, right?
Hard money, the process through which you borrow money from an individual, is certainly more flexible than a traditional or conventional bank loan. However, with hard money, you will pay extremely high interest rates. In addition to high interest rates, you will also have to pay points. Points are essentially a payment to the individual lender which does not go towards the principal. In other words, you’re already starting off in the red. Lastly, although high in flexibility, the terms for hard money are usually shorter and are accompanied by a balloon payment. That is, the entire loan will become due usually within 36 months. This is as opposed to a conventional loan which you can amortize over 20 years. The bottom line, hard money is even less desirable than a conventional business loan.
Discussing investor relationships in terms of business funding is like discussing cars in general when discussing purchasing a new vehicle. Some are good and some are bad. In some circumstances, taking on an investor may be a good idea. However, as the investor becomes more experienced and prepared to invest, they usually require a larger share of the company that you would be comfortable giving up. Therefore an investor strategy in terms of developing business funding may or may not be a good idea. It’s completely circumstantial.
Unsecured Business Line of Credit (UBLOC)
Finally, the idea of using unsecured business lines of credit may be the most desirable and beneficial to a startup company. Here are a few reasons why:
- Unsecured business lines of credit offer you the freedom and flexibility to use the funds whenever you want. More importantly, it allows you to not use the funds if you don’t need them. Contrast this with the business loan from a large bank that presses upon you strict terms of interest and payback periods.
- A conventional loan from the bank for business funding is temporary in nature, whereas an unsecured line of credit can remain open for years (so long as you maintain the account in good standing).
- Most unsecured business lines of credit offer an introductory rate of up to 18 months of 0% interest. Even after 18 months, you can transfer the balance to a new line of credit at 0%.
In conclusion, here are your options.
- Get a loan from a bank by putting up collateral like your house, car, or a massive upfront fee (cash).
- Get a loan from a hard money lender that only helps you in the short term, that has high monthly payments, and will require you to put collateral as well.
- Find an investor and relinquish hard-earned future profits and control of your company.
- Or last but not least, qualify for unsecured lines of credit giving you the flexibility to expand your business and capture the potential within your industry whenever you want. You are the boss.