Individuals who wish to start their own businesses but do not have the required funds to commence operations can approach banks to meet their financial needs. Start-up loans are a great way to acquire funds that can be repaid to the lender at a later date. Here, we will take a look at two of the most popular types of start-up loans, viz. Line of Credit and Equipment Financing.
A business start-up loan in the form of a line of credit works in a similar manner to a credit card. However, the card is tied to the individual’s business instead of their personal credit. One of the best benefits of a small business line of credit is that customers will have no obligation to pay interest on the borrowed sum for the first nine to 15 months, thereby making it easier to cover expenses whilst getting their business to a good start. The interest after the aforementioned period will rise to anywhere between 7.9% and 19.9%, but the customer will only have to pay interest on the sum they use (similar to a credit card).
For instance, if the line of credit availed is Rs. 10,00,000, and the customer draws Rs. 2,00,000 to cover starting expenses. In this case, the customer will only have to pay back the Rs. 2,00,000 along with the applicable interest rate. The interest will only apply to the Rs. 2,00,000 and not the entire sum of Rs. 10,00,000.
Customers who seek a line of credit for their new business are required to have a credit score above 700. Moreover, approval from the bank can take almost a month after the customer has furnished a detailed credit report. However, customers need not pledge any asset as collateral for this kind of loan.
In this type of loan for start-ups, the equipment that is bought when starting the business is pledged as collateral, thus enabling the lender to charge a relatively low rate of interest with slightly higher risk. The customer is expected to repay the amount used to purchase the equipment as revenues are generated from their business. Similar to a line of credit, applicants are expected to have a high credit score (680+), and the documents required to avail equipment financing include a vendor quote, a detailed credit report, and a statement showing the manner in which the customer intends to utilise the equipment. The main benefit of equipment financing is that the depreciation of the equipment can be used by the customer as a tax benefit for many years.
The rate of interest with this type of loan will fluctuate. However, the average rate is around 20%, and though the rates can be higher in comparison with lines of credit, they can offer significant help in offsetting the customers’ start-up costs.
Any individual who wishes to start a new business and has a good credit score may apply. Since most individuals who start their own business are young with low or no revenue history, banks only bother about the credit score to ensure that the applicant has a chance to embark on their start-up expedition provided they agree to make repayments on time.