Launching a new business can be very difficult. If you want to create a startup that grows exponentially, you’re going to need capital and lots of it. While the independently wealthy can throw their own money at their business ventures, most entrepreneurs can’t. One obvious solution is to obtain funding through a business loan. Below are five benefits of using a loan as a way to obtain startup capital.
1. You Won’t Have to Share Your Profits
Many startup companies end up obtaining funding from individuals wishing to obtain partial ownership in the firm without any of the effort. These are sometimes referred to as angel investors or venture capitalists.
The big downside of this kind of relationship as a business owner is that you are sacrificing part of your company. The business may have been your idea. You may have put in all the work to get it off of the ground, and you may be the one with true passion for your business concept. However, some people who simply provided you with funding now get partial ownership, will profit off of your hard work and may have say so in the direction of the firm. With regular business loans, all of this is avoided.
2. You Will Eventually Be Free of the Financial Relationship
If your company is indeed successful, you should eventually be able to gain complete financial independence from that lender unlike other funding options like venture capitalism. The Small Business Administration’s small business loan program, for example, gives working capital loans with a seven year term. After those seven years, the business will be completely free of financial obligations. If a business is successful enough, it may even pay off that debt early.
3. There Can Be Tax Benefits
There can also be tax benefits to assist startup companies when loans are taken out. According to Entrepreneur.com, to obtain such a tax benefit, a startup must create a paper election that is attached to the first year’s tax returns. If this is done, some of the business profits that were used to make payments on the loan can be deducted from that company’s income taxes. Such benefits may not be available with financing options other than loans.
4. Interest May Be Cheaper
A regular loan with a bank will tend to on average have lower interest rates than some of the more exotic financing options that some startup companies utilize. They also charge small businesses far less interest than credit cards. Although a company may need to have credit cards for other expenses, credit is not a preferable option to a regular loan for large investments such as startup expenses.
5. There Are Loans Specifically Designed for Startup Expenses
Startup loans are very common in the banking industry. These are loans from banks and other lenders like the Small Business Administration that are designed specifically to help a company with cash flow, equipment, rent, etc. during the early days of a company before it’s able to get a firm footing.