How to get startup business loans (and where to look)
UPDATE: This startup business loans post was originally published on 14 May 2019 and updated on 14 January 2021.
You’ve got a brilliant business idea with great market potential … but how do you get your startup off the ground? Starting capital is often an insurmountable hurdle for many aspiring entrepreneurs. But don’t worry, we’ve done all the hard work for you. In this article we’ll let you in on a couple of secrets about startup business loans, including government funded business loans.
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Applying for startup business loans
Regardless of the lender, there are a number of things you’ll need to do to submit a loan application. Following this four-step process will help you prepare a startup business loan application with all the details banks and lenders need.
Loans come in all shapes and sizes, so it’s best to shop around to find the best deal for your startup in terms of:
- Interest rate
- Repayment terms
We’ll take you through the four basic steps of applying for a startup business loan. Understanding how the process works will maximise your chances of getting the funding you need to launch your business.
1. Prepare a detailed business plan
A business plan is a written document that describes your product or service, details about the consumers you expect to buy it and your plan to bring the two together. Most lenders won’t consider a startup business loan without a business plan.
One of the most important parts of your business plan is a financial forecast. This section should include:
- Anticipated startup costs (rent, inventory, salaries, insurance, etc.)
- A balance sheet forecast
- Expected cash flow
- Break even analysis
Not sure how to do this? You might consider hiring an accountant to help you create the financial parts of the plan.
Related: Looking for government assistance for your small business?
2. Make a few key decisions
There are many factors to consider before you apply for a startup business loan. At a minimum, you’ll need to decide:
- How much you need
- Whether or not you have something to offer as security
- Desired length of the loan
Working capital loans fund everyday operations (salaries, rent, etc), while equipment loans are used to buy machinery that’s too expensive for most business owners to buy outright. Overdraft facilities that are loans (not just fund transfer services) will charge interest.
Check out this small business loan tool to see the fees for different startup business loans.
Related: Angel investors can give your business wings
3. Assess your risk
Banks and other financial institutions will consider your business’s risk profile before approving your loan. A credit analysis looks at five factors that predict the probability of a borrower defaulting on a debt:
- Capacity (the maximum product/service output a company can sustain)
- Capital (the cash, inventory, facilities and equipment it owns)
- Collateral (physical assets the lender can seize if the borrower defaults)
You also have a vested interest in knowing how much you can reasonably afford in monthly repayments, which is directly tied to how much you borrow. Your business will be over before it begins if you take out a startup business loan you can’t repay.
4. Seek advice
There’s lots of information available online regarding startup business loans but it’s always wise to seek professional advice from your accountant or business adviser before applying for a loan.
Learn more about choosing a financial advisor here. And of course always read the product disclosure information before making a decision.
Other small business funding options
It’s surprising to discover the number of options available to startups and entrepreneurs looking for funding. Check out these 10 financial products.
This popular option enables your startup to have access to working capital before any income is received. Security is provided by means of a credit assessment of business viability.
Line of credit
Funds can be accessed up to a predetermined limit. As you pay down the balance month by month, more funds become available (up to the set credit limit).
Fully drawn advance
This type of advance is suitable for long-term investments that expand your business capacity — equipment for example. One of the benefits is a fixed interest rate, which means a predictable repayment amount.
Also referred to as a bill of exchange, this type of loan is more suitable for short-term funding and includes a fixed sum advance and a regular interest payment.
Rent to buy
You pay a deposit to give you immediate access to a product. A lease agreement is in place until you make the final payment. Then it’s yours.
Commercial hire purchase
After an initial deposit you lease the item then pay it off through regular instalments plus interest. A ‘balloon’ or larger final payment is optional with the purpose of reducing instalments.
Almost identical to the commercial hire purchase with the main difference that ownership is established at the start of the agreement.
Factoring is a quick way to get cash but is likely to be more expensive than traditional financing options. A factor company buys a business’ outstanding invoices at a discount then chases the debtors. For this reason it is also referred to as debtor’s finance and accounts receivable finance.
Almost identical to factoring, but with the key difference that the invoices remain the property of the business.
The Australian government has always recognised the importance of small businesses due to the pivotal role they play in the Australian economy. It should therefore come as no surprise that grants, loans and support programs are available from across government to help your business grow and succeed.
Keep the following things in mind when going down this road:
- You’ll need to meet certain eligibility criteria
- Funding differs from state to state
- Funding options vary per industry
To give you an idea of the range of support available, the government provides financial assistance to businesses that:
- Are just getting started
- Need to upgrade, restore or fit out a building
- Research and develop innovative products or services
- Need to purchase or upgrade equipment, vehicles or tools
- Import or export products or services
- Recycle waste or reduce energy use
- Invest money in other businesses
- Are looking to improve or grow a business
- Employ people
Use this website to find relevant grants and support programs by typing in your postcode, choosing an industry and selecting one or more objectives.
The lowdown on startup business loans
As an Australian startup, you have many options to kick-start your dream with a business loan. In addition to those offered by banks and private lenders, the Australian government has multiple grants, funding and support programs available for startups. Follow our top tips for applying for a startup business loan to get your business on its feet in no time.
Image by: Sharon McCutcheon on Unsplash