If you’ve been planning on launching your own digital agency and you’re worried about the financial aspect of starting a business, getting a loan could be the natural first step for you. It all depends on your starting capital, the starting size of your team, and the nature of your business. However, in general, if you’re starting a business you’ll likely have to get a loan - according to the current state of your personal finances, of course.
The reality is a loan is quite difficult to secure for entrepreneurs across all sectors. It’s useful to keep in mind that banks will generally be reluctant to give you a loan, simply because an entirely new business venture is considered too risky for them. However, there are always other options to explore.
When should I consider getting a loan for my new digital agency?
Just like with any other new business venture, you will probably need to look for some sort of financing for your new agency. Your search begins once you’ve created and established your business identity.
The two most common choices for structuring your business are
- Limited liability partnership (LLP): An LLP is formed by two or more members. It’s considered a hybrid between a corporation and a partnership. The managing partner is typically liable for the actions of the company, while the other partners receive what’s called liability protection as long as they don’t step into a managerial role.
- Limited liability company (LLC): Most commonly favoured by small businesses, an LLC can have one or more members. It combines the protection of limited liability with the tax advantages of a partnership.
Once you’ve established the structure of your business entity, the next step is to consider your financing options.
What types of loans can you get as an entrepreneur?
There are different types of loans you can get when you’re just starting out with your agency. Here are some of the most common.
Personal business loans
A viable financing option for entrepreneurs is acquiring what’s referred to as personal business loans. As the name indicates, these are loans that are provided by personal entities such as online lenders for example. However, it’s not always the best choice given their high APR or annual percentage rate, the yearly cost of borrowing money.
In general, these should be considered as a last resort - unless you already have a strong income and an excellent credit score (in the UK, this would be in the range of 961-999; source: https://www.experian.co.uk/consumer/guides/good-credit-score.html).
Much like personal business loans, credit cards can have a high APR and thus should not be your first or only choice. Entrepreneurs will generally be fine if they use a credit card for a short-term business purchase that they’re sure they’ll be able to pay off quickly.
Of course, your credit score matters quite a bit here. The lower your credit score, the higher your interest rate will be. Keep credit cards as an option, but only for select situations. Whatever you do, don’t let your interest charges pile up as this can turn into bankruptcy very quickly.
Friends and family
This is perhaps the most obvious loan option, but it’s worth mentioning nonetheless. If you happen to have access to such support from your close ones and if they’re willing to invest in your idea, you could consider partially or even fully financing your startup with their help.
Just keep in mind that they are loaning you money, which means that you’ll have to convince them that your business will be able to turn a profit and that you’ll be able to pay them back. Otherwise, this process can be quite simple in terms of legality as you can set the terms of the loan between all concerned parties without having to deal with third parties.
Unfortunately, it’s not necessarily all that easy all the time, and it remains a reality that getting a loan from friends or family can lead to personal disagreements or difficulties. As David Nilssen (CEO of Guidant Financial, a financing company for small businesses) says, “Business is personal, regardless of what people say. For some people, it’d be difficult to separate the two” (Source: Nerdwallet).
Be careful when getting into financial agreements of this size and significance with your close ones, and make sure everyone involved is informed about and comfortable with the potential risk of failure.
There are always grants available for small businesses, especially if there is a clear ecological, social, or an otherwise innovative and communally beneficial motivation behind the new business. Depending on the nature of your brand and on your personal characteristics (for example, some grants are exclusively dedicated to female entrepreneurs), you could consider applying for a small-business grant.
Grants are funded by either government agencies or private foundations. They are not exactly easy to come by nor are they easy to get, but it’s worth it to keep them in the picture as a viable financial option.
Also called rewards-based crowdfunding, this system relies on online campaigning to solicit funds. It’s based on a reciprocal exchange of money for gifts, where entrepreneurs will offer their investors goods or services instead of paying them back traditionally.
For this kind of funding, your credit score is not necessary. This is a great way to get your idea financed when you’re not entirely sure of what the response will be when your product or service actually hits the market.
Think of it as a “trial”, but keep in mind that this doesn’t make it any less of a loan. Investors expect you to deliver on your business idea if they’re willing to financially contribute to its success.
When you’re preparing to launch your new digital agency, it’s normal to feel lost when it comes to financing your idea. Beyond the risks of entrepreneurship, getting funding for a new idea is typically a difficult endeavour. However, nowadays, especially in the world of tech and digital solutions, new opportunities are opening up every day. Keep an eye out for grants, give crowdfunding a chance, or ask your friends and family to give you a boost. In any case, make sure your idea is clear, unique and innovative, that you’re willing to take the required steps to achieve your vision, and that you understand the risks that come with creating an agency from the ground up.