Expert overview: The 3 most important things to know about startup loans
It's hard to get a business loan for a startup. Generally, your business will already need to be making money to qualify.
You don't need residential or commercial property to be approved with an alternative business lender, but you usually will with a bank.
If you don't qualify for a business loan yet, you can consider a credit card, angel investor or even crowdfunding.
What is a "startup" business?
Before taking out a startup business loan it's important to understand the formal definition of a "startup" first. Startups are newly-formed, fast-growing businesses that are in the process of developing their product or service. These companies can be sole traders, partnerships or organisations with a model that can be rapidly scaled. Startups are often marked by change in terms of product, model or staffing, and they face high uncertainty.
Despite some similarities, a startup is different to a small business and is designed for rapid growth, as opposed to the steady growth targeted by small businesses.
Common funding needs for startups
Startups often have rapid early growth, but they also have the same financing needs as other businesses. This includes funding:
To develop the product/service. This is one of the most common funding needs for startups. Developing the initial business idea into a market-ready product or service is expensive, and generally happens at a time when the business has no revenue.
For operational expenses. Startups often need to hire staff, lease business space such as coworking space and pay the salaries of staff and founders. This requires funds, and the larger the business and the more staff that are hired, the more funds the startup will need.
To market the product. Acquiring customers is a common startup hurdle, and marketing is generally your best option. Whether it's online, through social media or using an old-school letter drop, these activities need time and money.
To expand the business. This is a positive step forward for any startup – expanding the business. Due to the uncertain cash flow in startups, it's common to use external funds to expand.
What types of funding options are available to startups?
Startups have little to no internal funds – that is, profit. Because of this, these companies have a choice between two types of finance: debt or equity. Debt finance involves borrowing money, so the business takes on debt, whereas equity finance involves the business acquiring funds from investors or a public float in return for a share of the company.
Here are some options startups have when it comes to debt and equity finance:
Debt finance
Equity finance
Loans from traditional lenders
Banks and credit unions offer loans to people looking to start small businesses. The application process usually requires detailed business plans and you may need to put up security.
Angel investors
These are individual investors who help to finance your startup, usually in exchange for a partnership stake. You can find these individuals yourself or through startup hubs, meetups or investment groups.
Loans from online and alternative business lenders
The number of online and alternative business lenders has increased in the last few years. You can apply for business loans online and receive funding quickly, sometimes within 24 hours.
Venture capitalists
This is a specific type of equity capital that involves individuals or venture capital firms providing funds for startups and early-stage businesses. Your business needs to demonstrate potential revenue and a solid business strategy.
Business credit cards
If you only need a small loan or require access to an ongoing line of credit, a credit card may be an option to consider. You can opt for a card that gives you 0% interest p.a. on purchases for up to 12 months.
Public float
This involves you listing your company on the stock exchange so that people can purchase shares. Keep in mind that doing this will involve a higher degree of transparency with your business than if you remain a private company.
Picture: Shutterstock
How to compare startup loans
Finding the right finance for your new company is important, and it all starts with comparing your options. Here are a few points to keep in mind:
How much do you need to borrow? You will be offered a loan that is based on the details that you provide in your application. However, you may be able to see the minimum and maximum amounts on offer, depending on the lender. This is more likely with online and alternative lenders and also with credit cards.
How long do you need to repay the loan? It may be difficult to determine how much you'll be able to repay if your business isn't off the ground yet, which is where having a sound business plan comes into play. Work out an approximate budget and don't apply for a loan you can't afford.
Do you need access to ongoing credit or a lump sum amount? Will you need continued access to finance? Consider whether an ongoing line of credit or a loan that offers a redraw may be a better option for you. Remember to take your repayments into account when budgeting your startup financials if you opt for a lump sum loan.
An early stage business is generally one in its first year of operation, but has progressed past the initial startup phase.
However, early stage business owners face similar issues to startups when it comes to getting finance. If you don't meet the minimum turnover and trading history requirements of a particular lender you are unlikely to be approved for a loan, regardless of how promising your business is.
You should instead consider finance from lenders with no minimum business requirements, or look into alternative finance options, such as invoice finance or a business line of credit.
The startup sector is becoming more regulated as time goes on, making it easier for people to turn ideas into companies and for startup founders to access finance. The largest regulatory changes were announced in the Federal Government's innovation agenda, which detailed various changes to be rolled out in 2016 and beyond. Notable funding-related regulations include:
From 1 July 2016 investors who support innovative startups will receive a 20% non-refundable tax offset on investments capped at $200,000 per year, per investor.
From 1 July 2016 investors who support innovative startups will receive a 10-year capital gains tax exemption for investments held for three years.
Already in place are changes to crowdsourced equity funding (CSEF) schemes to allow entrepreneurs to raise up to $5 million per year in funds from a large number of individuals in return for equity in their company.
Companies that went public to access CSEF have a five-year exemption from normal reporting and exemption requirements.
From 1 July 2016 partners in a new Early Stage Venture Capital Limited Partnership (ESVCLP) will receive a 10% non-refundable tax offset on capital invested during the year. Funding size will also be increased from $100 million to $200 million.
Frequently asked questions
This depends on the lender you apply with, but generally, it's up to you whether or not you want to offer a guarantee. Doing so can help lower your repayments but it also puts the asset at risk should you default on the loan.
If you apply with a bank you will need a detailed business plan as well as your own personal information. Online business lenders usually list the application requirements on their website, and you can also find details on Finder's individual review pages.
You'll be offered a rate based on the details you provide in your loan application. Some lenders may offer you a rate estimate before you submit a full application.
Is your startup making more than $75,000 a year? Check out these business charge cards
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Elizabeth Barry is the lead editor for Finder. She has over 10 years' experience writing about a range of topics with a focus on personal finance. You’ll find her writing and commentary in a range of publications and media including Seven News, the ABC, MSN, the Irish Times and Singapore Business Review.
In your opinion who is the most accommodating lender for people with fair credit, minimal security, no co-borrower and approved business plan that doesn’t want to go through a seed incubator? In other words not just wish washy words they type in their product descriptions to attract leads but actually look at your business plan and financials and treat you as a person not just another automatic quote coming through?
Well, different lenders have their own loan application processes and requirements. Basically, they outline what they require in their product review or application page. It’s also common for lenders to check your creditworthiness, so this may also be critical in considering your application. For business loans, yes, they will also check your business financials and plan.
If you’re in the market for a lender that offers business loans, you can use our comparison table to help you find the lender that suits you. You can compare the brands based on the loan term, fees, loan amount, etc. In case you’ve chosen a lender, best to contact the lender first and confirm your eligibility and options before submitting your final application. When you are ready, press the “Go to Site” button to apply. Practical as well to check their T&Cs and PDS before you consider it’s the right product for you.
The page we are on provides an extensive review on getting a business loan. While we do not provide specific product recommendations, we can help guide you through the process of comparing options. Kindly review and compare your options on the table displaying the available providers. Once you have chosen a particular provider, you may then click on the “Go to site” or “Enquire now” button and you will be redirected to the provider’s website where you can proceed with the application or get in touch with their representatives for further inquiries you may have.
Before applying, please ensure that you meet all the eligibility criteria and read through the details of the needed requirements as well as the relevant Product Disclosure Statements/Terms and Conditions when comparing your options before making a decision on whether it is right for you. Hope this helps!
Hi, I am looking for a loan but want to know what contribution would be expected from me. Assuming the loan company won’t give me 100%, what percentage should I expect to put in myself?
Not really sure what you meant by “contribution” coming from you. If you are looking to apply for a business loan with a bank, you may need to present your business plan to them. As for security or guarantee, that must depend on the lender you apply with, although you have to option to present a security/guarantee. It is always best that you check the overall requirements and eligibility criteria before applying for any loans so you might know what you need to provide and you’re able to gauge your chances of approval.
We are a start-up looking for a company that will provide finance to our customers rather than us. Any recommendations. We are happy to cover the purchase and have finance go through on delivery of product for security to customer and financier.
As we are a comparison website, I’m afraid we can’t recommend a specific lender to you. Nevertheless, you may directly get in touch with any of the business loan companies we’ve listed above, which may be keen to talk partnerships with you. You may also like to read our article, “How partnerships are driving this fintech lender forward.” This should give you an overview of the financial trend affecting businesses.
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In your opinion who is the most accommodating lender for people with fair credit, minimal security, no co-borrower and approved business plan that doesn’t want to go through a seed incubator? In other words not just wish washy words they type in their product descriptions to attract leads but actually look at your business plan and financials and treat you as a person not just another automatic quote coming through?
Hi Startitup,
Thanks for reaching out.
Well, different lenders have their own loan application processes and requirements. Basically, they outline what they require in their product review or application page. It’s also common for lenders to check your creditworthiness, so this may also be critical in considering your application. For business loans, yes, they will also check your business financials and plan.
If you’re in the market for a lender that offers business loans, you can use our comparison table to help you find the lender that suits you. You can compare the brands based on the loan term, fees, loan amount, etc. In case you’ve chosen a lender, best to contact the lender first and confirm your eligibility and options before submitting your final application. When you are ready, press the “Go to Site” button to apply. Practical as well to check their T&Cs and PDS before you consider it’s the right product for you.
I hope this somehow helped.
Cheers,
May
Which lender would be good to buy an existing business? $40’000
Hi Ric,
Thank you for leaving a question.
The page we are on provides an extensive review on getting a business loan. While we do not provide specific product recommendations, we can help guide you through the process of comparing options. Kindly review and compare your options on the table displaying the available providers. Once you have chosen a particular provider, you may then click on the “Go to site” or “Enquire now” button and you will be redirected to the provider’s website where you can proceed with the application or get in touch with their representatives for further inquiries you may have.
Before applying, please ensure that you meet all the eligibility criteria and read through the details of the needed requirements as well as the relevant Product Disclosure Statements/Terms and Conditions when comparing your options before making a decision on whether it is right for you. Hope this helps!
Cheers,
Reggie
Hi, I am looking for a loan but want to know what contribution would be expected from me. Assuming the loan company won’t give me 100%, what percentage should I expect to put in myself?
Hi Matt,
Thanks for your question.
Not really sure what you meant by “contribution” coming from you. If you are looking to apply for a business loan with a bank, you may need to present your business plan to them. As for security or guarantee, that must depend on the lender you apply with, although you have to option to present a security/guarantee. It is always best that you check the overall requirements and eligibility criteria before applying for any loans so you might know what you need to provide and you’re able to gauge your chances of approval.
Cheers,
May
Hi,
We are a start-up looking for a company that will provide finance to our customers rather than us. Any recommendations. We are happy to cover the purchase and have finance go through on delivery of product for security to customer and financier.
Any insight would be great.
Thanks.
Hi Anne,
Thanks for reaching out.
As we are a comparison website, I’m afraid we can’t recommend a specific lender to you. Nevertheless, you may directly get in touch with any of the business loan companies we’ve listed above, which may be keen to talk partnerships with you. You may also like to read our article, “How partnerships are driving this fintech lender forward.” This should give you an overview of the financial trend affecting businesses.
Hope this helps.
Cheers,
May
Hi,
I am looking to be put in touch with lenders that can help me with finance to purchase an existing business.
Any details will be very helpful thank you.
Hi Bernard,
Thanks for your question.
If you are looking to purchase an existing business, please check the list of loans to buy small businesses featured on our website.
Cheers,
Anndy