Business borrowing guide Stage 2: Loans for early stage businesses

Business borrowing guide stage 2

What you need to know about finding finance in your business's initial stages.

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.

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
Pros
  • You stay in control of your business
  • Some business lenders have flexible eligibility criteria
  • There's a range of loan types available
  • Funding can be in as little as one day
  • No security is required
  • You're not required to repay the funds
  • Investors can provide strategic benefits for the business
  • No exposure to interest rate changes
Cons
  • You may be required to have security
  • There may be restrictions on the fund use
  • Your profits need to be used to repay the debt
  • Finding equity finance is usually a slow process
  • You usually give up some control of your business or the business decision-making power
  • The funds can come with restrictions
  • There may be conflicts with investors

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
  • Be a registered Australian business or Australian citizen/permanent resident
  • Director's credit scores need to be over 510
More
Bigstone 9 months $250,000 per year
  • Be an Australian company/trustee
  • Have more than 1 employee
More
Business Fuel 1 year $10,000 per month
  • Have 12 months left on your lease and up-to-date rent
  • Have been residing in the same location for one year
More
Capify 3 months $10,000 per month
  • Be an Australian registered business, sole trader, contractor, company, trust or partnership
  • Have fair credit
More
GetCapital 9 months $10,000 per month
  • The loan needs to be 100% for business purposes
More
Kikka 1 year $10,000 per month
  • Have an ABN/ACN
More
NAB 12 months No minimum
  • Have a valid ABN
  • Be a sole trader, part of a partnership with up to two partners or part of a company with up to two directors
  • Be an Australian citizen/permanent resident
More
Max Funding No minimum No minimum
  • Own vehicle or real estate for security
  • If you don't have security, you need to earn $6,000 per month and have relatively good credit
More
Merchant Cash 12 months $5,000 per month
  • Have a property or vehicle as security if you want to borrow for longer than 12 months
More
MiFanance No minimum $400 per week (personal income)
  • Have an ABN
  • Not receive over 50% of your income from Centrelink
More
Moula 12 months $5,000 per month
  • Have an ABN or ACN
  • Have a fair or better credit history
More
OnDeck 12 months $100,000 per year
  • Be operating in one of OnDeck's approved industries
More
Prospa No minimum No minimum
  • Have three months of business bank statements
More
Spotcap 12 months $100,000 per year
  • Have an Australian online bank account
  • Have an Australian registered business
  • Have financials for the last two years
More
ThinCats No minimum No minimum
  • Have industry-experienced directors with a strong net tangible asset position
More

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?

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