Getting a startup business off the ground is no easy feat, so many business owners will want to look for a helping hand. Is it possible to get a small business loan to help get your startup running, though? What can you do to help get your application approved and are there choices to compare? Learn about loan options for starting up a business in this handy guide.
How do I get a loan for a small startup business?
The good news is that, in Australia, we have a wide variety of lenders available, with many different loans suitable for small businesses that are still getting started. So, although starting a new business can be a difficult process, it’s not impossible to get finance to help the process along.
Many lenders offer specialised startup loans, which can be a great option for a brand-new business without any financial track record to speak of. These often involve using your personal assets as either a deposit or security for the loan and the applications focus more on your business plan than on your business’ past financial history.
Startup loans aren’t the only business finance option to compare of course, but they’re an important one. More conventional business loans can be a possibility for a startup, but they often have minimum criteria in terms of how long you must have been in business and minimum cash turnover – they might require around six months for minimum time in business and a minimum revenue of $10,000 per month, for example. As such, they’re better suited to a business that has been trading for a year or two than one in the process of setting up. Security isn't a necessity for these loans: you can get approved for a startup loan with no collateral.
What's the advantage of getting a loan for a startup business, compared to other forms of finance?
The main advantage of financing your business through an unsecured loan is equity, which is the ownership and control you have over the business. The idea of equity funding – getting an investor or group to provide the finances for your startup business – is obviously appealing, but it’s worth remembering that if someone else invests in your business, that generally gives them a share in it. This means they’re likely to receive a portion of the profits and potentially have some say in how the business runs. By contrast, funding your startup with a business loan in Australia means you retain ownership – you keep control of the business and you get the profits.
It’s not uncommon for startup owners to use a mix of methods to finance their business – so someone might provide 70% of the funds from personal funds and a business loan, and get an investor to contribute the remaining 30% (giving them a share of the company). The more of your business you finance yourself, the more you stand to benefit.
It is also possible to use credit for short-term business funding, and there are business credit cards that offer interest free terms for the first 12-18 months. These aren’t always a great solution, though. Firstly, if you don’t settle the debt within that initial time frame, you’ll be charged very high interest. Also, making heavy use of your available credit isn’t great for your business’ credit rating. Finally, not every expense is covered by the initial 0% interest rate (cash advances are generally excluded) and it’s easy to find yourself in significant debt if you’re not watching your card statements closely. That's why a small cash advance loan for your business might still be the best option.
Types of business loan
The most common type of business finance, unsecured loans enable businesses to access the funds they need without attaching an asset to the loan as security. Some lenders may allow you to borrow up to $500,000 and, because there's no collateral, offer same-day approval.
If your business already owns valuable assets, such as property or expensive equipment, you may choose a secured business loan instead. These loans may increase your borrowing power beyond what an unsecured loan can offer and, crucially, typically come with lower interest rates.
Business loans don't always have to be worth hundreds of thousands. If you're operating a small business and need a boost to help you keep on top of your expenses or expand your company, you may be able to take out a loan starting from as little as $5,000 and unlock further capital.
Just because you don't have all the required documents for a standard business loan doesn't mean you're out of options. Low doc finance enables you to use alternative documentation, such as other business financials, in the application process to access the funds you need.
A commercial line of credit allows you to draw from your loan account whenever your business needs access to their funds, instead of managing a lump sum and repaying it like a regular loan. This can add flexibility to your finance arrangement, providing money when you need it.
Invoice finance presents another option to business operators looking to free up cash through outstanding invoices yet to be paid by their customers. Your invoice finance can either be invoice discounting or factoring, which present different options when it comes to your invoices.
A common reason for seeking out a loan is to purchase commercial equipment. You can do this either with an unsecured arrangement or one with the equipment itself as collateral, with the latter potentially increasing your borrowing power and lowering your interest rate.
With this finance, when your business purchases product, your supplier provides an invoice which you send to your financier and pledge to repay by a set date. From there, your supplier sells the invoice to your financier at a discounted rate, while you repay the full amount to your financier.
Under an inventory finance agreement, your lender pays your supplier directly for inventory, which allows it to be signed off and sent to you. From there, you can pay off your debt within a pre-determined period to your lender, which may be longer than the regular debtor period.
An overdraft facility is attached to an existing financial account belonging to your business, such as a transaction or savings account, and enables you to borrow up to a set limit after the account’s balance reaches zero. These overdrafts are repaid with interest, but only on what you use.
You may simply be in a position where your business needs a boost to its cash flow. If this is the case, there’s a range of stop-gap solutions which may be suitable for your situation, from standard unsecured loans to specialist cash flow loans, invoice finance or even an overdraft.
Why compare business loans through Savvy?
How to maximise your approval chances for a start-up business loan?
Having done your homework on the kind of business you’re moving into as a must. For preference, having a few years' experience working in that industry – especially in a similar type of business – will strengthen your application.
You need to show your lender that you’ve thought through the process of setting this business up, which is where the business plan comes in. The more comprehensive and thorough, the better. This is a good place to show how well you know the industry, as well.
Having assets or finances of your own to contribute is always going to strengthen your position; some lenders will regard it as essential.
If you have a supportive friend or family member in a strong financial position but don’t want them as an investor, you could consider asking them to go guarantor on a loan. This involves them vouching for you and committing to picking up the bill if your business fails, which increases your chances of approval, increases your borrowing power and lowers your interest rate too.
Frequently asked questions about small business startup loans
Helpful business loan guides
Still looking for the right finance for your business?
Explore a range of business loan options suitable to your financing needs and apply online through Savvy today.