What you need to know about finding finance in the initial stages of your business.
The early stages of a business are crucial to its success. Whether you're experimenting with business branding, pushing campaigns to increase customers or still working on your product, your cash flow is likely to be uncertain and you're probably in the market for business funding.
In this guide...
Business Guide 2:
When is a business in its early stages?
This varies for each business, but it's usually constrained to the first year of operation. You may be expanding quickly or you might be experiencing problems that have made your growth stagnate. Either way, your product or service is a fully formed idea and you are trying to make it work.
Funding needs that are common in an early stage business
Businesses in early stages have financing needs that are different to businesses in later stages and even different from startups. They tend to need finance that has:
- Flexibility. There is a lot of change in early stage businesses and you want the financing you have to keep up with those changes. Loans that are flexible with repayments, loan amounts and provide easy account management are ideal for businesses in early stages.
- A range of loan amounts. Each business will have specific needs, so a range of funding amounts will be beneficial to early stage businesses so they can borrow as much as they need.
- The option to be ongoing. While early stage businesses may only see the funding needs immediately in front of them, business needs change quickly. The option to increase or extend funding is important.
What types of finance are available?
There are three main types of funding: debt, equity or internal funds. Debt involves borrowing money from a business lender, equity finance is provided by an owner or investor, and internal funds are derived from cash flow or profits.
In a business's early stages, internal funds are harder to come by. This leaves you with a choice between debt and equity finance.
|Features||Debt finance||Equity finance|
|Where to find it||
|How much you can borrow||Business loans usually range from $1,000 to $1,000,000||It could be hundreds or millions of dollars, depending on the source|
|How it's repaid||You make regular repayments to repay the debt. Terms differ depending on the lender||It isn't repaid, but the financiers may then own a part of the business or take part in decision-making|
Useful guides for early stage businesses
How to compare early stage business loans
Once you start looking through the financing options that are available to you, you'll realise just how much choice you have. Here is how to compare your options to find the right finance:
- How much can you borrow? Lenders usually offer loan amounts for between $1,000 and $1,000,000 (only a few outlying lenders offer the latter). However, each lender will come with a minimum and maximum borrowing amount and you need to ensure the amount you need falls within that range.
- What will your repayments be? While it's easy to compare rates, the competitiveness of a business loan comes down to how much you pay each month. Work out your ongoing repayments to see if the loan is competitive and whether your business can manage the repayments.
- How flexible is the loan? Can you top up the loan? Can you make extra repayments? Are you able to repay early if you can? Find out just how flexible this loan will be.
- Are you eligible for the loan? This is an important question and one that, if considered before you compare your options, will help narrow that comparison down. As you can see from the table below, minimum eligibility criteria varies greatly between lenders. Make sure you find out what the criteria is before applying.
How long does my business need to have been operating?
|Business lender||Time required to be in operation||Minimum revenue required||Other criteria?||Find out more|
|Banjo Loans||2 years||$500,000 per year||
|Bigstone||9 months||$250,000 per year||
|Business Fuel||1 year||$10,000 per month||
|Capify||3 months||$10,000 per month||
|GetCapital||9 months||$10,000 per month||
|Kikka||1 year||$10,000 per month||
|NAB||12 months||No minimum||
|Max Funding||No minimum||No minimum||
|Merchant Cash||12 months||$5,000 per month||
|MiFanance||No minimum||$400 per week (personal income)||
|Moula||12 months||$5,000 per month||
|OnDeck||12 months||$100,000 per year||
|Prospa||No minimum||No minimum||
|Spotcap||12 months||$100,000 per year||
|ThinCats||No minimum||No minimum||
What will the loan cost?
Business lenders charge a variety of different rates and fees for their loans. Here are some costs to expect.
- Interest rate. This rate may be fixed or variable, and if you're applying with a short-term business lender you may be charged a factor rate. Find out more about business loan interest rates here.
- Upfront costs. Lenders may charge an establishment fee or application fee for the loan. This will be added onto your loan amount when you're approved.
- Ongoing costs. You may have to pay daily, monthly or annual fees to service the loan. Other costs include direct debit fees, transaction fees or line fees.
- One-off costs. These can include an early repayment fee, a direct debit change fee, document fees, amendment fees and other costs associated with managing the business loan.
Questions to ask yourself before deciding on finance
What do you need the funds for?
Are the funds to buy a fixed-price item such as equipment, a vehicle or floor space? Or will the cost be variable, such as production supplies or to assist with cash flow? The intended purpose for the funds will help dictate which loan is right for you. For instance, variable costs may require a flexible funding source such as an overdraft or line of credit.
How will the loan be repaid?
Will you use current business profits or projected profits based on your use of the loan? Have a plan for repaying the loan and make sure it doesn't affect your cash flow too much.
Is taking out a loan the right decision for your business?
Extra money is always useful, but is your business in a position to be borrowing right now? Will the loan help your business expand or hinder it by having the repayments eat into your profits?