A start-up or new business is usually a new project or venture undertaken by an entrepreneur to seek, explore, and evaluate a scalable business model. This type of business has not yet achieved a profitable revenue stream. It is usually started to provide an opportunity for someone to earn a living by using a computer. However, this type of venture often does not provide enough capital to justify the cost of setting up and launching the business. Therefore, the venture will have to obtain outside financing to fund marketing efforts, product development, equipment and furniture, and more.
Setting-up costs are one such expense that must be anticipated and planned for in any start-up. Many companies start with a fixed budget that covers all start-up costs. In addition to the fixed costs described above, a start-up may also incur fixed costs related to location, equipment, furnishings, staff, taxes, licenses, and more. As such, the expenses must be carefully estimated so that sufficient funds can be committed to them prior to commencing operations.
In terms of fixed business costs, there are two types to consider: capital expenditure and professional fees. Capital expenditures, which are the out-of-pocket expense typically associated with starting a new business, are limited to only a small portion of the total cost. Professional fees, on the other hand, are expenses incurred when a company starts to look for employees, find office space, obtain furniture, and do more extensive marketing. In many start-ups, the amount of professional fees charged are the bulk of the total start-up capital. Additionally, start-up costs related to inventory can vary significantly from company to company, depending upon the products offered and the supply chain established by the company.
In terms of financing, start-up companies frequently receive one of two forms of start-up business loans: start-up business loans or merchant cash advance (or credit card merchant cash advance). Start-up business loans are provided by private finance and commercial banks. Typically, start-up business loans come in two forms: commercial mortgage start-up loans (or commercial bridge loans) and merchant cash advances. Commercial mortgage start-up loans are provided by commercial lenders to businesses that demonstrate an excellent credit history and stable cash flow while launching their business.
On the other hand, merchant cash advances are provided by lenders to start-ups that have a history of losing money or that have few customers. Because start-ups may not have significant credit lines and because they may lack the experience and expertise to navigate the complex financing procedures required by traditional financing, merchant cash advances carry a higher risk for lenders than start-up loans. Nonetheless, start-ups may still qualify for a commercial mortgage start-up loans. Most commercial lenders have flexible lending programs that allow them to provide start-up loans to businesses that meet certain qualifications. Eligibility requirements typically include a low start-up equity or credit ratio, a strong operating cash flow and a signed vendor contract.
The commercial lender typically provides start-up business loans or merchant cash advances to start-up entrepreneurs that can repay the financing within a reasonably short period after the borrower receives its final payment. The terms and conditions of the start-up business loans and merchant cash advances vary significantly by lender. Some lenders require business owners to commit to a one or two-year repayment plan. Other start-up business loans and merchant cash advances have shorter repayment terms of up to five years. In addition, start-up business loans and sba loans may be collateralized by real property. If the start-up business is unable to repay the financing, the property may be seized by the lender.
The majority of small businesses seek start-up business loans and merchant cash advances from private lenders. Lenders also commonly finance start-ups through federal programs such as the Small Business Administration’s Office of Federal Financial Assistance. The SBA is authorized by the United States government to provide advice on improving financial strategies for small business operators that are experiencing financial hardships. Because federal debt financing is not generally available to start-ups, most lenders focus their debt financing programs on established small businesses.
Businesses usually establish their own credit history when they file for start-up business loans or when they request venture capital from private lenders. In order to obtain start-up business loans and merchant cash advances, business owners should have good credit scores. Most start-up lenders assess a business’s credit score based on its borrowing and lending history to other companies. If the start-up business does not have a long history of credit financing, it will have a tougher time obtaining start-up business loans and merchant cash advances from traditional lenders.