Estimated reading time: 2 minutes, 32 seconds

Unless you’ve received some sort of windfall or have another source of cash, you’re going to need money to fund a new business. The easiest and most readily available source of cash is a business loan, a reasonable step to take for a start-up.

Considering A Business Loan

A business loan works just like any other loan for your auto, house, or education. You request to borrow a certain amount, and, depending on your credit, the lender applies interest on the money you get. If your company booms and you pay off the loan, you’re free and clear with 100% ownership of your company and the profits that come with it. If your company fails, then you’re in a worse position.

The problem with a loan should your company falter or folds is you must still pay back the money. Your loss will garner no sympathy from the lender, so you can’t expect the loan to disappear. The lender wants their money back with interest, regardless of the health or even existence of your company. Thankfully, we’re past the days of debtors’ prison, but the consequences of defaulting on a business loan can be just as devastating to your future business opportunities.

So, starting a business with a loan is a risky proposition, but often an easier option to secure funding than from one or more investors. Still, for small businesses, a huge bank loan can be more than necessary and come with prohibitive risk. You can expect a sizable loan when you conduct business with a bank, but your start-up costs may not be that much. Taking out more money than you need is never a good idea and a sure-fire way to get into financial trouble.

Loan Options For Small Businesses

However, there are lenders that offer smaller sized loans to match small business needs. Companies like Shopify Capital or PayPal offer more manageable loan sizes that allow start-ups or small businesses the chance to get their feet under them without looming debt.

Like a bank, smaller loans from these lenders work the same way. The interest rate will depend on your credit score and there will be a specified payback period. However, unlike banks, many of these operations come with restrictions like membership to their site or availability based on longevity of the membership with the company. Further, interest rates may be higher and payback durations shorter. Some of the lenders may consider the monthly income of your business as a determining factor in your interest rate or loan amount.

The small business lenders are a good option and less cumbersome than a bank loan for start-ups, but it pays to shop around (pun intended). Compare rates, options, restrictions, and types of loans available from each before you apply.

Certainly, have a well-shaped solid business plan and a good assessment of the market within which you’ll be competing. In the end, the source of your loan is a business decision that must be determined based on your risk tolerance.

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