Last Updated on November 19, 2019

Small business loans for start-ups and small businesses

You’ve hit the jackpot. Your new product is going to be the next big thing—people need it and are willing to pay for it. But turning your idea into a business venture requires capital.

This may be more apparent with large ventures that need physical space, inventory or equipment. But even small service-based or home businesses will have upfront costs.

Being approved for a business loan can seem unlikely if your business is just starting up and you haven’t built up a financial history yet, but it’s not impossible.

Put yourself in the best position to get approved for a business loan by reading through this short guide. And don’t worry if you don’t qualify yet—we’ll give you some alternative options to look into.

Are you a small business starting out or a start-up?

Start-ups are slightly different from conventional businesses as they are designed to grow fast. They are newly-formed, fast-growing businesses, in the process of developing their product or service.

This typically means they’re offering something that will likely appeal to a large market and have a model that can be rapidly scaled.

Many start-ups are technology-oriented because online businesses have a much larger reach and higher growth potential compared to brick and mortar businesses. If you own a start-up, people can buy from you or use your product at any time of the day anywhere in the world. Startups can be sole traders, partnerships or organisations.

Smaller niche businesses (as opposed to start-ups) usually see slow and steady growth rather than a rapid rise. But you don’t need a massive market to operate a business. You just need to identify a reachable market, and offer something new or sought after to those in that market.

Small business owners who are just starting out typically use loans in the following ways:

  • Operational expenses like leasing a physical space where they can work from.
  • Developing their product, idea or service from an initial idea into something market-ready.
  • Purchasing any necessary equipment.
  • Marketing the product or service to acquire customers. This can be online, through print media, or offering a ‘new customer deal.’
  • Expanding the business by hiring an extra employee or investing in more stock.
What types of finance are available?

With little to no profit, or proof of profit, it can be hard to acquire finance. The two main finance options available are debt and equity.

Debt financing involves borrowing money from a financial institution. The business takes on the debt and it must be repaid (typically with interest added) in a specific period.

Equity financing is normally used by non established businesses that may have trouble securing business loans through debt financing. This may be due to insufficient cash flow, lack of assets, or less experience in the business sector.

In equity financing the business receives funds in return for a share of the company.

Examples of debt financing

1. Traditional loans from large financial institutions

This includes traditional lenders like banks or credit unions that offer loans to people starting small businesses. A detailed business plan is usually required in order to get approval for a traditional loan, and you may need to offer an asset for security of the loan.

2. Loans from online and alternative business lenders

The amount of business or investors offering loans has increased in the last few years. You can now apply for a business loan and receive the funds quickly, sometimes within 24 hours.

They may not give loans as large as traditional financial institutions, but it is something to look into. Always read all the terms and conditions to ensure you know the exact interest rate and any fees that apply.

3. Credit cards

If you need access to an ongoing, smaller line of credit, you may want to consider a credit card. Having a good credit score and credit history will allow you to get the best possible deals on interest rates and fees.

Examples of equity financing

1. Angel investors

These are also known as a private investor or seed investor and are individuals with a high net worth willing to provide capital for small businesses or startups. They typically ask for ownership equity in the company.

Angel investors can be found through investment groups, startup forums or friends and family.

2. Venture capitalists

A venture capitalist can be a person or a company. They provide capital for startups in the early stages to expand and grow their business. They are more likely to invest in businesses that show great potential for very high rates of return, even though they may be a significant risk.

To reach out to venture capitalists, you will need a solid business plan detailing how much, and the steps for, potential revenue you will generate. They will supply funding in exchange for an equity position in the company.

A company may also reach out to venture capitalists over traditional banks to receive additional business expertise.

Should I secure a loan with an asset?

A small business loan can either be secured or unsecured.

The former type of loan is secured against an asset that you already own—like equipment, inventory or real estate.

If you default on repayments and don’t make suitable arrangements with the lender, they have the legal right to take your asset and sell it to recover their money.

Due to this asset being on the line, secured personal loans often offer more substantial loans and lower interest rates as the financial risk for the lender is smaller. So you may be offered a larger loan.

An unsecured business loan, on the other hand, isn’t secured against anything, so the interest rate is usually higher, and they are harder to be approved for.

The lender is taking on a higher level of risk with an unsecured loan. However, they still have the power to take legal action to recover their money if you default.

With both types of loan, the interest rate and amount that you repay will depend on how much you borrow, and for how long.

Will I be approved for a loan?

Financial institutions are taking a risk when lending to you, especially with unsecured loans. In order to assess how significant the risk is, they typically require several years worth of financial history from the business during the application process.

Some common business loan requirements include evidence of positive cash flow, profitability, a long credit history, and good personal and business credit scores.

If you are a new business or an early stage business, you won’t have this information. Always check the eligibility criteria of a particular lender before applying, as if you don’t meet the minimum requirements you are likely to be declined for a loan.

With thorough research, you can find lenders with no minimum business requirements, but ensure you read through the terms and conditions carefully to know the full cost of the loan.

The full cost of the loan includes:

The loan amount. A larger loan will mean larger repayments.

The interest rate. The higher the interest rate means the more you will pay back in the end. Decide whether you want the stability of a fixed interest rate or the possible savings that could come with a variable interest rate.

Any applicable fees or charges. Read the terms and conditions of the loan to be aware of any upfront or ongoing costs.

Being a first-time business owner can make it challenging to be approved for finance. It’s common for banks to prefer established businesses or individuals with three-plus years of experience.

Lenders need to be confident that you are able to repay the loan; this is where personal credit scores and history, and assets, come into consideration.

Why would banks need to know my personal credit history?

When applying for a loan to start a new business, your personal credit score and history is likely to be one of the main deciding factors on whether or not banks lend to you. This is because they have little other information about you if you have no previous experience with owning a business.

Your personal credit history, along with your business credit history, is also likely to be evaluated if your business is less than three years old.

Your credit report should accurately reflect your credit history. Any information that is incorrect, out-of-date, incomplete, irrelevant, or misleading should be removed.

Before you make any applications, review your credit report and score to make sure everything is in order.

A few extra things for businesses starting out

If you don’t have 12 months of trading history, you may need to provide a few extra things with the application, including:

  • Cash flow projections
  • A well-researched business plan
  • Proof of individual income
  • Bank statements to show personal savings

Still have questions? Let’s talk

Confused? Not sure if this applies to your situation? Phone us on 1300 190 429 for some free, no obligation advice.

Or want to compare business loans now?

About the Author

Eleanor Baxter
Eleanor Baxter

Eleanor Baxter has extensive experience writing for the Australian financial and healthcare sectors. Her portfolio includes guides that cover all aspects of both physical and financial health and wellbeing. Coming from a background in communications, fitness, and psychology, she has found a passion for demystifying personal and business finance for the everyday reader. When not at her writing desk, you’ll find Ellie walking her two dogs or practising an asana.

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