Secrets To Funding Startup
There is no doubt in the fact that most startups fail due to lack of funding. Usually, almost all startups initially start their business using business loans. This is because these loans have higher revenue and a better survival rate as compared to personal loans or equity. However, dealing with the funding aspect is not the only concern of the startups which by it can be both stressful and satisfying.
Apart from choosing the right source for funding their business, the startups must also raise enough funds to sustain and survive through the initial stages of the business. That means they will have to determine the type of funding to take and also the amount to apply for.
Ideally, it is found through research that startups that are funded by a business loan tend to have a better chance of survival and in most of the times, they outperform the others that use personal loans or take no loans at all.
It is also seen that comparatively, there are only a few businesses that rely only on equity financing from their owners.
According to a survey conducted on the startups, it was found that:
- In the US about three-quarters of startups have some kind of debt.
- It is also found that about 55% of startups took a personal debt in the name of the owner instead of using their savings. These loans included personal bank loans and home equity lines of credit.
- Apart from that, about 44% used business debt such as bank loans made directly to the businesses or from sources like https://www.libertylending.com/.
- Nearly 24% of firms used trade credit from their suppliers which meant that they waited for about a month to pay the invoices of their suppliers.
The type of debt matters for a business startup and these research details. And financing details are very helpful in that matter.
The research results
Research shows that there is a distinct connection between the use of the loaned amount and venture success.
- As far as the equity-only firms are concerned. They initially used business loans that had higher average revenues and a survival rate three years later.
- On the other hand, startups that used personal loans tend to earn lower revenues and had no survival advantage. This means that using trade credit had no significant effect either way.
As far as the debate between business loans is more helpful than personal debt. There seems to be no specific answer and there are several likely and good reasons for that such as:
- Lenders usually select stronger candidates and lend money to those who have high credit. This is one possible explanation that signifies the differences in the respective lending processes. This practice followed by the lenders usually indirectly helps them to distinguish between more promising and less promising ventures.
- Banks also naturally want their loans to be repaid just like any other lender and therefore while considering business loan applications. They are very careful in reviewing startup business plans. They are very skeptical about the prospects of startups and consider them to be high-risk profiles.
- On the other hand, when comparing personal loans the banks focus on the credit score of the owners. In such situation, they may not even want to know the startups exist.
All these situations mean that the stronger startups will only be able to qualify to get a business loan. It also means that the owners of less-promising startups will instead rely on personal loans to fund their business.
Loan monitoring aids
This is another possible factor that influences the decision of whether or not to grant a business loan to a startup. Banks usually tend to monitor the performance of the firm very closely with intent to increase repayment odds. In case of any warning signs noticed in it they usually alert the business owners.
- The make the reviewing process foolproof, banks also connect the startup clients with expert accountants and lawyers. This approach, however, helps in building a better monitoring relationship that may eventually help the startups to perform better.
- Furthermore, when a startup takes on a business loan it allows it to build business credit ratings that will help them to procure subsequent loans in the future to ensure business growth. Usually, firms that have long standing banking relationships stand a better chance to strike a better loan term.
Considering the equity side, there are several researches that indicate that business loans help startups to raise venture capital. This is because these loans help them to raise their valuations at initial public offerings of their shares if it is underwritten by the banks.
Firms that miss out
There are several firms that miss out unfortunately on these benefits. It is primarily due to the borrowing decisions of these small startup firms. Studies show that some small firms do not want to take on any loan at all. There are a few that applied but their application was declined and a very few actually got them.
Interestingly the study shows that about one-quarter of the firms that could have done well with proper funding did not even apply for a loan. The primary reason for such reluctance is that they were discouraged by the application and the entire loading process. Few were even prejudiced and thought the banks would never like their business plan and will turn them down and therefore they did not apply.
However, after further analysis, it showed that about a third of the discouraged startups were likely to have qualified for the loans that they may have applied.
Suggestions for startups
All these results have serious implications for entrepreneurs.
First, even if a business does not need any loan to survive. It might prove to be beneficial for them as the extra cash could have helped them to grow faster.
Second, if a startup decides to take on a loan they should not stick with easier-to-get personal loans or have their credit cards maxed-out. No matter how much extra effort is required, they must always strive to obtain a business loan.