Launching a startup is like sending a rocket into space; getting off the ground takes a lot of fuel. No matter how much capital you start with, you will eventually hit a point where that funding limits your growth. Instead of giving up equity to investors early in your journey or stretching your resources too thin, look for funding that allows you to grow and maintain control of your venture. A working capital term loan can do both, propelling your startup forward.
What Is a Working Capital Term Loan?
A working capital or business term loan is a lump sum of capital you borrow from a lender and repay over a fixed period, typically with regular payments that include interest. It’s not too different from personal loans you may have used to buy a car or house.
Working capital term loans fund a wide range of needs. Depending on your eligibility and financing goals, you could borrow as little as $10,000 or more than $200,000. The term can vary based on your specific funding needs. Lenders offer repayment periods between six months and five years.
Business term loans are predictable financing tools. Right off the bat, you know exactly how much you’re borrowing, how long you have to repay it (the term), how often you’ll make repayments, and how much each payment will be.
How Does a Business Term Loan Propel Startups?
Lack of funding is one of the biggest reasons startups fail. Traditional financing options and investors may be too slow to match your explosive growth or too inflexible to fit your business constraints. Working capital term loans provide fast, flexible financing to keep you moving forward.
Lenders who offer business term loans to startups operate at the same fast pace as you. With some lenders, you could secure funding within days after you apply for working capital. That’s fast enough for you to seize opportunities before competitors, like:
-
- Expanding your team to meet increased demand
- Purchasing equipment or technology to boost efficiency and output
- Investing in marketing campaigns to reach your ideal customers
- Bridging cash flow gaps until clients pay their invoices
- Developing your product to handle a larger customer base
- Leasing space for a new location
Term loans can be flexible. Your lender can tailor terms to your needs. If you operate on tight margins, they can extend your repayment term to lower the monthly cost. Or if you expect your investment to pay off quickly, you can ask for shorter terms to capitalize on your cash flow. A working capital term loan offers enough predictability to plan your finances, balanced with enough flexibility so you can afford the funding.
An immediate capital injection from a business term loan can propel your startup to the next level without being tied to strict investors or expensive payments.
An Example Strategy for Startup Term Loan
When you have a clear strategy, a working capital term loan allows you to control the timing and trajectory of your growth. The key is to tie the financing to a growth initiative that will generate predictable revenue, rather than just plug financial gaps with the funds.
Suppose you’ve recently launched vacation planning software that is rapidly attracting some early users. You’re confident you could double your customer base in less than a year if you had the $80,000 to further develop the product and expand your marketing campaign.
You apply for a hospitality business loan to secure the necessary capital. The lender sets the repayment terms to 12 months with monthly payments. With the increased revenue from your investment, you easily pay off the loan and propel your startup to new heights.
Do Startups Qualify for Business Term Loans?
Whether your startup qualifies for a term loan depends on the lender. Traditional lenders like banks and credit unions usually want to see a few years of financial history and solid credit scores before issuing a loan. But some alternative business lenders specialize in small and midsize businesses, including startups. Note that most lenders want to see at least six months operating history.
Fintech and online lending companies set different approval standards so early-stage businesses can qualify. The key is transparency. You’ll need to show your business and personal credit scores, bank statements, profit and loss sheets, and a clear plan for the funds. If lenders can see that you’re managing your cash flow responsibility, startups with as little as six months in business and credit scores as low as 500 can qualify.
What to Consider Before You Sign
A term loan is generally a great tool for startups, but you must be cautious about the terms and fees involved. You want to make sure financing doesn’t become a burden through expensive fees or restrictive terms.
Watch out for:
-
- Factor vs. Interest Rates: Some lenders advertise factor rates rather than interest rates. Factor rates may appear lower since they are expressed as decimals, like 1.35, rather than percentages, like 13.5%. To understand the actual cost of your loan, convert all loans into Annual Percentage Rate (APR) before signing.
- Prepayment Penalties: When you secure a medium to long-term loan, the lender profits from the interest payment over several years. Some loans have penalties for an early payoff to compensate them for lost interest. Choose a loan without prepayment penalties or one that offers interest-free early payoffs so you can move forward when the time is right for you.
- Origination and Documentation Fees: Lenders and loan underwriters require payment for their services, but reputable financiers will be transparent about fees when they review the loan with you. Always ask for a full breakdown to avoid paying hundreds or thousands of dollars extra. Know what you’re signing up for.
Financing for Your Next Level
Taking your startup to the next level requires a strategic plan and reliable backing. When you get a working capital term loan and use the funds on initiatives that drive growth, you can propel your startup to new heights. That’s where a great lender comes in. Though your company may be young, they can provide the financial resources you need to grow into a thriving industry leader.
