Home Money & Finance What Startups Can Do If They Need Extra Money

What Startups Can Do If They Need Extra Money

by Olufisayo
Need Extra Money

There are different options for startups in need of extra money, each with their own benefits and drawbacks. Depending on the company’s individual situation, some options might be preferable to others.

Overdrafts for Credit Cards

An overdraft is an amount of additional funds which you have access to if you would like to spend more than the balance in your account. One of the positives of using a credit card overdraft is that it is flexible repayment – you can pay back as much as you can when you can as long as the overdraft remains within the limits.

However, the amount available to companies through this method is fairly limited. Additionally, you will need to repay interest on the overdraft balance until it is fully repaid. These interest rates can work out as very expensive. In fact, sometimes overdrafts for credit cards, if unauthorized can be some of the most expensive forms of borrowing amongst all financial products, even more, costly than the 400% or 600% APRs charged for high cost loans, such as payday loans.

Overdrafts on Business Accounts

Securing a business overdraft can be useful for startups, providing them with a flexible source of short-term funds. This can act as a buffer for businesses and cover them for any unexpected costs or low cash flow.

Overdrafts on business accounts can be preferable to a business loan as there is only the necessity to pay interest on the overdrawn balance.

       

However, these overdrafts are often difficult to obtain and will depend on the lender. Often, lenders can make many demands including a thorough business plan and budget. Not only does this take time to prepare, but it can also work out to be expensive.

Business Loans

When starting a business, you need to spend money to make money. However, you will need to have enough working capital in order to afford the initial expenses of your company. Thus, business loans can equip you with enough money to get started.

Additionally, traditional business loans allow you to retain ownership of your company without parting with any company equity or compromising any control over your business, as you may have to do with investors.

Taking out a business loan helps you free up liquidity as it separates personal wealth from business finances. This means that any potential losses do not come straight out of your pocket. It also means that you can use personal money for other parts of the project if needed.

If businesses opt to take out a business loan, this can help them in the long-term as it helps them build a positive business credit history making them more likely to secure a bigger loan in the future.

       

That being said, there are certain risks associated with taking out a business loan if you are a startup. Firstly, they are often hard to secure. When starting a new business venture, lending criteria to take out a business loan can be very strict. Depending on the repayment plan and the frequency of payments, this may restrict company cash flow as you will always need to budget for these outgoing expenses.

Another frequent problem for startups is requesting a loan before they are sure of its exact purpose. This can start a trend of asking for money and not being fully aware of how to spend it which can result in cash problems for the company in the future.

Finally, business loan lenders may sometimes expect you to have at least one year’s trading with particular annual revenue requirements. These barriers can make it difficult for many startups.

Personal Loans

Some personal loans can be used to fund a new business or existing businesses, although it will depend on the lender and whether there are any specific restrictions for business purposes. These are often a good option for startups as they have no former trading history and, subsequently, may struggle to ensure a traditional business loan.

These can be great for companies that only require a small amount of funds. Usually, personal loans can be secured quickly with manageable interest rates, allowing quick access to short-term funding for your company.

       

Personal loans, unlike business loans, are paid out to you as an individual meaning that it is your personal credit score and financial situation that will be assessed by lenders rather than the company history.

However, this comes with a key downside: you as an individual will be personally liable for the repayment of the loan, regardless of the performance of your business. Subsequently, it is a higher risk and you will need to assure that you could afford any potential losses.

Photo by Alexander Mils from Pexels

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