While it is entirely possible to fund a new startup without seeking funding outside of personal assets and contributions from friends and family members, few small businesses get off the ground that way. Expanding beyond the scope of a sole trader almost always requires start-up loans of some sort. That is not necessarily a bad thing.
Startup loans provide entrepreneurs with immediate cash flow. They help entrepreneurs get their businesses off the ground and sustain daily operations as they work toward profitability. Without loans, many start-ups in the UK would never make it.
How do you feel about startup loans for new businesses? According to a study published a few years ago, start-up loans are critical to small business success. Researchers from four US universities – University of Texas, UCLA, MIT, and New York University – looked at long-term business success in relation to start-up financing and discovered four measurable metrics showing how important startup loans are. Their conclusions were based on studying five years of small business funding and the impact it had on borrower success.
1. Funding increases chances of survival
First, the researchers discovered that accessing startup loans increases the chances of short-term survival. That makes sense. Turning a new business venture into a profitable enterprise requires a strong combination of cash and credit. Why? Because you have to spend money to make money. Startup loans are the engine that drives the kind of spending that leads a business to profitability. If you cannot spend, you cannot earn.
2. Funding and education equal success
Next, the researchers took a look at start-up funding and the education entrepreneurs had received. What they discovered in this regard was remarkable: the combination of quality education and startup loans translates into greater success for entrepreneurs.
Simply put, sufficient education and equally sufficient funding increase the chances of success. And by the way, success was measure by revenues earned and jobs created. Researchers did not explain why combining education and funding increases success, but that doesn’t change the fact that it’s true.
3. Future financing needs
Third, accessing start-up loans in the early stages of a new venture increases the opportunities for obtaining future funding down the road. Again, this makes a lot of sense. Imagine being the owner of a new startup hoping to eventually attract the attention of angel or private equity investors.
Obtaining a few startup loans and faithfully paying them off shows investors that you are financially responsible. That means something to them. They will be more willing to invest in your enterprise because you have demonstrated yourself to be trustworthy.
4. The need is there
Last but not least, researchers demonstrated that the need for start-up funding is very real. Starting a business in the 21st century is not cheap. Even enterprises without a lot of overhead still have to invest in technology, marketing, equipping an office, labour, and more. Anyone who is not independently wealthy has to get the funds from somewhere, and startup loans are one of many options.
Shopping around for Startup loans
Research shows the startup loans are critical to the success of new businesses. With that out of the way, let us wrap this up by talking about obtaining startup funding. It is all about shopping around. The same way an entrepreneur is going to shop around for the most cost-effective office supplies, he or she should be shopping around for the best financing deals.
Banks and building societies are one option for financing. Third-party lenders are another. Angel and equity investors are something else entrepreneurs can look at. The common thread in all of the options is cost. How much will it cost the entrepreneur to obtain financing from a given source?
Startup loans from banks are pretty straightforward. You pay interest and a variety of fees. The same is true with third-party lenders. When you are talking angel and private equity investors though, the cost is often translated into surrendering a share of the business. This is something entrepreneurs have to think about.
Startup loans are critical to small business success. New enterprises with adequate funding are more likely to succeed over the long term. That is just reality.