5 Tips for Using Start-Up Loans Wisely

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Getting a start-up off the ground requires money. It goes back to that old concept that says you have to spend money in order to make money. In light of that, the two biggest questions for any entrepreneur are how much money will be necessary to get the company off the ground and where will it come from.

One of the options entrepreneurs look to are start-up loans from banks and private lenders. Loans are a good way to go inasmuch as they help a new company establish credit. They are also capable of providing more cash than would be available through credit cards and personal loans. They can be combined with other forms of business funding to keep a new business afloat until it starts turning a profit.

If you are planning to launch a start-up, good for you. Here are five tips for using start-up loans:

1. Shop Around for Loans

The first tip is to shop around for loans. Just like a homebuyer would shop around to find the best mortgage deal possible, entrepreneurs should take a look at as many loan options as they can. Lenders come in all shapes and sizes, and they offer different rates and terms accordingly.

The danger of not shopping around is ending up with one or two business loans that cost too much. That is the last thing a start-up needs. New businesses are more profitable when they are not throwing money away on costly financing.

2. Use Them for Non-Recurring Expenses

Financial experts the world over warn consumers against using credit cards to pay recurring expenses. In other words, we should not use credit cards to pay for food, fuel for the car, etc. Why? Because it doesn’t make financial sense to pay interest on these kinds of things. The same principle applies to business lending.

The best strategy for start-up loans is to use them to cover non-recurring expenses. In terms of recurring expenses, it is better to cover them with regular receipts. This may not be possible in the first few weeks or months of a company’s life. Still, covering recurring expenses with receipts should be a primary goal that ownership seeks to reach as quickly as possible.

3. Combine Them with Bootstrapping

Start-up loans are definitely a big plus for funding a new business. But do not rely on them exclusively. Instead, combine loans with bootstrapping whenever possible. The idea here is to be less obligated to business lenders so as to maintain maximum control over the new business.

For purposes of comparison, let’s say you combine standard business loans with private equity investment. Those equity investors you convince to come on board are going to demand an interest in your business. They are going to demand some measure of control over how your company operates.

If you combine business loans with bootstrapping instead, you free yourself of the external influence private investors would otherwise exert. You maintain complete control over daily operations.

4. Make All Your Payments on Time

Our next tip should be rather obvious: make all of your loan payments on time. There’s no quicker way to kill a company’s credit score than obtaining start-up loans and then not keep up with payments. Not paying on time is a bad thing in whatever way you look at it.

As a side note, this goes back to using start-up loans to cover non-recurring expenses. If you are using borrowed money to meet recurring expenses in the absence of sufficient receipts, that is a sign of cash flow problems in the future. Failing to increase your receipts could mean you have trouble making loan payments.

5. Service Them with an Eye on the Future

Finally, make an effort to service your start-up loans with an eye on the future. In other words, what you do with the initial funding you receive will influence future funding opportunities. And know this: successful businesses take advantage of business financing on a regular basis. Borrowing is not a one-time thing.

Make a point to not borrow more than necessary to get your business started. Make all of your payments on time. If you can pay off your start-up loans early, do so. In essence, work as hard at maintaining your company’s financial integrity as you do your own. It will pay off in the long run by way of a higher credit rating and less expensive borrowing.

Start-up loans are a great tool for new businesses. If you are planning to obtain start-up financing, use the funding wisely. It will influence your future one way or another.

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