Business Financing: How Startups Avoid the Debt Trap

February 21, 2019 by CNH Finance, LP in category “Financing”

Like all businesses, startups need a sound strategy for financing their operations. Many startups so not have the high credit scores and financial history to access loans, and if they do, they are not too keen on taking on debt. In some cases, startups owners finance operations our of pocket, which is limiting and potentially dangerous. However, there is a business financing solution for startups that avoids both debt and the need to put personal funds on the line.

Financing Your Startup with Loans

Many businesses rely on loans to sustain and grow operations. Unfortunately, traditional lending channels do not favor startups. They see startups as risky, and have raised requirements to make it harder for startups to access the business financing they need. Prohibitively high credit score minimums, high interest rates, and long processing times keep business financing out of reach for many entrepreneurs. Besides, debt is not conducive for startups. The whole point of launching a startup is to maximize revenue with a lean structure, whether the business is in the tech sector, manufacturing, retail, or any other industry. Debt eats into revenue, limits growth potential, and can place a strain on cash flow, which causes many startups to go under within the first few years after launch.

Financing Startups out of Pocket

When traditional loans are out of reach, funding your startup out of pocket seems like a logical choice. After all, placing expenses on your own credit card or drawing from savings gives you more control, sidesteps the collateral, waiting times, and debt, and expedites everything. But there’s a big downside to using personal funds on your startup. First, you are preventing your startup from building any sort of positive business credit rating. If your startup is a success, you will be unable to get those nice business lines of credit or seek larger financing, because all of your financial history will show up as personal purchases. Second, if your startup hits a rough patch, you will find yourself dipping into personal savings and depleting your own financial buffer. Always keep personal and business finances separate.

A Better Solutions for Business Financing

All startups have assets. Depending on the type of business, assets can include equipment, vehicles, receivables, inventory, and more. Startups can use the hidden value of these assets to create a revolving line of credit. An asset based line of credit does not place any debt on the books, and allows startups to build their credit ratings. Additionally, as the startup grows, the amount of financing available will also increase.

CNH Finance specializes in asset based lines of credit for businesses of all sizes. If you have recently launched a startup and are looking for flexible and affordable financing without taking on debt, contact the experts at CNH Finance today.

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