Most start-ups fail because they run out of cash. The reasons behind this vary from mismanagement to a failure in customer retention. Some start-ups even launch a product without a business model and run out of cash trying to pick up the pieces.
Whatever the case, no start-up is guaranteed to fail. In fact, some of the most successful start-ups were brought back from the brink. FedEx and Evernote are prime examples. The key trait all successful start-ups have in common though is adequate funding.
How do they attain this funding? Many do so by borrowing it from a lender, which is perfectly normal and has the practical benefit of mapped out repayments. The investor is also a lender – so their only expectation is that repayments are made on time. Compared to a financial backer’s expectations, this is easy to manage.
How to choose a lender for start-up business loans
If you are sold on the idea of borrowing, you are halfway there to having the funds you need to strap a rocket to your start-up and send it into the stratosphere of success.
The next step is choosing the right lender for your needs.
For this, you first need to determine two things:
1. How much do you need to borrow?
The amount you need to borrow will determine the lenders you have access to, so establish this before anything else. Most start-ups will need between £10k and £500k to hit the ground running. If you wish to borrow between £10k and £500k, you can apply for a loan with a high street bank or an independent lender, and they also do start-up loans.
2. Do you have collateral to put against the loan?
While some lenders offer both unsecured and secured funding, most offer secured funding only. If you do not have any collateral to put against your loan, this will reduce the number of lenders you have access to. High street banks for example only offer secured loans to new businesses. Independent lenders tend to offer both.
Next up, there are two things you should look for in your lender:
1. The people behind the lender
Just as a lender will look at the people behind your business when lending to you, you should look at the people behind the lender when borrowing. They should take a genuine interest in your business and you. They should be passionate, committed and help you fully understand the range of products available to you.
2. Interest rates and repayments
There is no legal limit on the interest rate a lender can charge. Hence, the boom of short-term loan companies. But, the interest rate should always be competitive. The best lenders offer rates from as little as 3.6% per year. Some offer rates even lower. The lower the rate, the better for your finances because you will pay back closer to the amount you borrow. The interest rate should also be fixed with a promise of no rises during the loan term.