Let’s look at what options exist for getting working capital for your new business.
Business Loan
• One of the most popular and effective means of raising working capital for a new business is availing a business loan from a bank or a financial institution.
• A business loan is a form of a lending agreement made between the lender and the business owner. As per the agreement, the lender agrees to give out a specific amount of money to the business owner as long as the latter repays it, with added interest, according to a predetermined schedule.
• The time period for which the loan is availed is known as its tenure and the regular amounts paid back by the borrower are known as equated monthly installments or EMIs.
• While it is possible to take up a personal loan and utilize it for the purposes of your business, it is often more useful to instead opt for a specialized loan designed to cater to the needs of your specific business. For example, some business loans are geared towards helping you kickstart your small business, others are intended specifically for purchasing new equipment or machinery.
• Unlike traditional business loans, new-age business loans are designed to offer greater flexibility to the borrower, allowing them to make a wider choice of tenure.
• However, these loans typically require a high credit rating for both the company and the individual promoters. Depending on the creditworthiness of the company and the promoters as well as past payment track record, these loans could be secured via collaterals such as personal property, shares or other similar secured collateral.
• Depending on whether these loans are secured or unsecured, in today’s interest regime, rates could range between 8% to 18% per annum.
Business Line of Credit
• A business line of credit is often described as a hybrid of regular loans and business credit cards.
• It is a type of revolving loan offered by banks and financial institutions that provides access to a specific amount of capital to you as a business owner.
• You can utilize this capital as and when required to meet the needs of your new business and then repay either immediately or over a period of time. As soon as the offered capital is borrowed, the interest rate is applied to the amount.
• A business line of credit also requires approval of the borrowers from the lender which is determined by their credit scores similar to how regular business loans and business credit cards work.
• Business line of credit works similarly to a business loan in terms of requirements for credit score, credit history and collateral.
Business Credit Cards
• Business credit cards are ideal for keeping professional and personal expenses apart.
• Also known as corporate credit cards, these forms of credit cards are specifically assigned to a business, not an individual, in order to meet the regular financial needs of that business.
• They offer an opportunity for business owners to easily get access to short-term working capital. These credit cards can be used to make a variety of purchases, payments and bookings that might be necessitated by the requirements of business operations.
• If the working capital required is not substantial, your business credit card can easily help you fulfill any financial gaps you might be experiencing without having to spend time waiting for approval.
• If you have a new small business, having a well-maintained business credit card can also help your company build credit over time and improve your loan approval chances in the future.
Friends and Family
• Taking a loan from close friends and family members can have its obvious upsides.
• If you are receiving a loan from your close loved ones, you are likely to receive it quickly and without hesitation. It also has the advantage of sidestepping the process of credit approval.
• However, involving family members and friends into matters of business can often prove to be tricky and can easily get complicated.
• In the event that you are unable to pay back the loan amount within the promised time frame, relationships can get tense and friction might arise.
• Taking a loan from friends and family should ideally be considered as a last resort option or handled with immense caution by establishing clear terms and maintaining a professional approach towards repayments.
