By Fernando Berrocal

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It requires a significant amount of time, money, and effort from business founders to launch a startup. After it has successfully launched, there are also several other factors to consider throughout the startup's eventual expanding period.  The vast majority of entrepreneurs don’t have the funding necessary to immediately commence operations.  If you consider yourself a part of this group, the most important aspect is financing your startup.

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How you're going to finance the startup is the most crucial factor to take into account when it is first starting to operate. Small business loans are frequently used by startups as a strategy to maintain operations. Nevertheless, taking on extra debt could be harmful to the business if you don't have excellent financial management. Remember that debts can either benefit or harm small businesses; therefore, you must choose your best course of action in these particular situations.

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Debt, like business loans, is an excellent way for businesses to immediately acquire the capital they require to start without having previous funds. However, it's crucial to comprehend how a business loan may affect your organization before applying for one. As mentioned before, business debt may be risky for your business, but it may also be a vital instrument for its expansion. However, how can you tell if taking on more debt is necessary to run your startup? What inquiries must you make before submitting a loan application? We will go over some questions to consider before borrowing money for your startup in the upcoming paragraphs.

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There might be the impression that having debt will harm your startup in the long run. However, be aware that debt can be a crucial tool to expand beyond their expectations. Nevertheless, if this kind of debt is not properly handled, it could also be a financial burden. Be realistic with yourself when taking on debt since it may be devastating if the owner takes on more obligations than they can afford to pay back. Owners that do not manage their funds well risk losing their collateral or being in lawsuits. Also, their reputation can suffer as a result of this. Otherwise, there are circumstances in which debt might be advantageous. Startups can use debt to finance from operations expansion, staff hiring to even equipment purchases that they otherwise wouldn't be able to make. By giving them access to sufficient working capital, debt can also assist them in managing their overall cash flow. However, before taking on debt, it is important to consider the risks that these advantages imply.

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What makes a business loan necessary? These loans are often granted by financial entities and are used to finance the needs of the business. The loan is often repaid with interest over time and they are necessary for a range of reasons. While some could require the loan to buy inventory, others to buy equipment, expand their facilities, or even pay their staff. There is also the case that consolidating other loans with high-interest rates into loans might also be advantageous. Whatever their objective, new entrepreneurs may use extra working capital to cover costs until they can raise enough funds to pay for their expansion on their own.

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A business loan can give your business the funding it requires to expand, as well as assist you to control cash flow and navigate challenging financial times. Yet, borrowing money is a significant choice that should not be made carelessly by any business owner. Before taking on debt, we recommend that you consider the following business questions.

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• What will I accomplish with the money? This is the initial–and most important–question to ask yourself. Startups take out loans for a variety of business reasons. Perhaps you need to raise money for an expansion, purchase new machinery, or look for ways to pay for unforeseen costs or seasonal variations in cash flow. It's crucial to understand exactly why you're taking out the loan–and how it will help your organization, whatever the reason might be.

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• What exactly do I need the loan for? Once you are about the goal, estimate how much money you will require to support it. You must first consider the approximate sum you will require, in light of the predicted revenue and operating costs. Following that, take the interest rate into account. The cost of the loan will increase with their rating. You also must know whether you can afford the monthly payments. Finally, you need to factor in the fees associated with taking out a loan.

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• Which finance option will best meet my needs?  It might be difficult to choose the loan that is best for you due to the numerous different kinds of loans available. It all boils down to knowing why you need the loan: if you know how you'll spend the money, you'll be able to choose the loan that best suits your needs. For instance, it makes more sense to obtain an SBA 7(a) loan if you want to move to a new office, buy furnishings, and pay for overhead. Consult a financial counselor if you're unsure about the kind of financing that would be best for you. They can assist you in determining your needs and connect you with the most suitable financing possibilities.

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• How does my credit profile look?  A summary of your credit history is included in your credit profile. It contains details regarding your credit accounts (such as credit cards, loans, and mortgages). It also contains details about your credit utilization and payment history. A credit score is a statistic that reflects a firm's creditworthiness. The higher that number, the more creditworthy is thought to be the business. The importance of a firm's credit score can be seen in how much interest it will pay on loans and whether it will be granted loans at all. Your credit score (ranging from 0 to 100) serves as a representation of your "credit profile". Borrowers with a credit score of at least 75 are generally approved for loans; if your score is lower, you might want to raise it before applying for credit. Your chances of getting finance approved will increase as a consequence.

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For startups, it’s crucial to reflect on whether taking on debt is the best course of action. In some circumstances, modest, debt-free growth may be preferable. In other cases, borrowing money could be required to achieve the level of expansion that the startup needs to be successful. Consult a financial advisor if you're thinking about taking on debt to expand your startup.  Consider as many sources of advice as possible, and make sure your choice is the best option.

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Ready to bring your startup to the next level? Apply to MassLight’s next batch. MassLight supplies capital and a dedicated tech team. We take equity in return. Have questions? Refer to our FAQ page.

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