Payday loans are fantastic for getting quick cash to solve impending issues, and you can easily get these loans via physical stores or online. However, they might not be the best idea for starting your business.
What are Payday Loans?
Most people take payday loans because they are easy to access and the rules are simple. All you need to do is repay the loan by your next payday. You can take small amounts from $100 and above, but you must repay the loan in one payment.
Repayment is just as easy as taking a loan. You can either write a check or allow the loan company to withdraw the funds automatically, including fees and interest. That said, If you do not repay the loan in one go, you might have to pay extra fees for late payments.
Things to Consider When Taking a Payday Loan for Your Startup
When running a new business, anything can happen, and you might need quick cash; this is where a payday loan comes in. Payday loans are also optimal in these situations because new businesses do not have a credit history, which could make it challenging to receive a business loan.
In addition, you can apply for a payday loan regardless of your credit history or reason. All you need to do is apply. Thanks to payday loans, even those with bad credit can take loans. Therefore, the chances of you getting a loan are relatively high.
Drawbacks of Payday Loans for Businesses
Reduced Credit Score
Payday loans are not designed to reduce your credit score. However, it might happen if you do not abide by the regulations of the loan terms.
For example, most loans require you to pay your loan off within two weeks or by the next payday. If you cannot keep up with this deadline, it could damage your credit score.
Issues with Taking Business Loans
Taking a payday loan is fine, but you must consider your credit score. While payday loans do not negatively affect your business’s credit rating, consolidating a loan will.
Payday loans stay on credit report when you try to consolidate them, and this registers as a hard inquiry, which can lower your score. With a lower credit score, it might be hard to get a business loan should you need one.
Furthermore, some business loan companies do not trust people or businesses who take payday loans because they might seem unreliable.
Increases the Odds of Falling into a Debt Cycle
One major concern when taking a payday loan is falling into a debt cycle. Granted, you might need a quick loan, which is why you take a payday loan. However, you might not have the right amount for repayment when the time comes. Sadly, this could lead to higher interest, late fees, and more.
Alternatively, you could take a loan from another platform to pay off your current debt, which could lead to a cycle of debt. Hence, if you do not have a steady influx of cash or a surefire way of repaying a loan, do not take out a payday loan.
Alternatives to Payday Loans
Ultimately, payday loans are not great for your startup business. Thus, if you want to be a successful entrepreneur, it would be best to consider getting funds from other sources. Some of these sources include:
Friends and Family
You can consider getting a loan from friends or family if they have the resources. One of the best things about this method is that these people might offer you low-interest rates or none at all.
However, ensure that all terms and agreements of the loan are written down and signed by the appropriate parties.
Furthermore, you should take a loan from a friend or family member if you are certain this endeavor will not cause a rift in your relationship.
Short-term loans are a much better loan option than payday loans. You can get this type of loan from online vendors, and they have similar turnaround times to certain cash advances. These business loans typically allow you to collect between $5,000 and $500,000.
Remember that you typically have to repay these loans between 3 to 18 months. Furthermore, you may be asked to make payments daily or weekly, depending on the loan company.
The interest rates for short-term loans are high but not as high as payday loans. Additionally, they are just as easy to qualify for payday loans. In most cases, you do not even need collateral.
Invoice factoring is an excellent idea for receiving quick cash. The method involves you leveraging your receivable amount to collect money.
Essentially, a factoring company purchases your unpaid invoices and gives you a certain percentage, which usually ranges between 75% to 90%. So, when your customers eventually pay, the company collects a fee and sends you the balance.
Invoice factoring is not considered a loan, and you can receive the funds in as little as a few minutes or days. Also, you do not need a good credit score; the only collateral you need is your invoices.
There are various ways to get funding for your startup business, and payday loans should not be one of them. While it is possible to use this method to collect funds for your business, you might regret it.
Hence, it would be best to look for other options, such as borrowing from close friends, taking short-term loans, etc.