There are so many different start-up funding models you can take advantage of, but it’s hard to know which option is the most realistic one for your business.
This is why it is important that you have the proper knowledge of how a start-up company works, and this includes all the different ways a startup can access capital.
This guide is written with the sole purpose to help start-up businesses get the funding they need in Australia.
What is a Startup Business Loan?
A startup business loan is a form of financing that is meant to assist with the financial needs of a new business trying to get off its feet. The business startup loan process can be put towards things like the purchase of machinery, equipment, furniture, supplies, and inventory as well as working capital.
Types of Start-up Loans in Australia
Here is a list with all types of Start-up loans:
1. Equity Financing
This is the most popular type of start-up funding in Australia and the way it works is simple. Long story short, for a specific percentage of your company shares, you will get a capital investment.
With equity financing, you’re not going to have a loan to repay, which means you won’t have to make a monthly loan payment or anything like that. In return, this gives you the freedom to channel even more money into your new business.
Of course, there’s always bootstrapping. Technically, this isn’t a start-up funding model because it refers to taking your own money and investing it in your business when it’s in the early stages.
Not every business should find funding, but this doesn’t mean you can’t give your business a chance to exist. If it is possible for you to keep those overheads to a minimum while focusing on expanding, then bootstrapping can be a suitable option for you. With bootstrapping, you won’t be required to give up any percentage of ownership in your company.
3. Government Grants
Government grants are another potential option when trying to fund a start-up business. Regardless of the niche you’re in, you can take advantage of government grants.
The Australian government offers selected grants to start-up businesses. They are available for expanding a business, setting up a new business or for other activities, like research. What’s good about these grants is that they can offer you investment capital, without giving away any equity.
4. Venture Capital
Another form of funding for start-ups in Australia is venture capital. This is a type of private investment and is great for start-ups with a potential for high growth.
However, there is a disadvantage with venture capital and that is the fact that oftentimes, businesses lose a good portion of their equity, and sometimes they may have to give up part of their ownership. Most of the time, when venture capital firms are involved in the company, they look forward to seeing it succeed.
5. Bank Loans
In Australia, one of the most traditional options for funding a start-up business would be a bank loan. In order to get the bank loan, you will be required to offer some type of collateral, unless you go for an unsecured commercial loan.
Those unsecured commercial loans have some high interest rates, so putting collateral upfront would be the better option. In order to secure a bank loan, you will need to present a business plan that is airtight, along with accounting records from the business.
Crowdfunding is becoming more and more popular with the rise of sites like Indiegogo, Patreon, and Kickstarter, so you will find many start-up businesses that are turning to crowdfunding to get their business off the ground.
Crowdfunding can be a great option for start-up funding, but you may find it hard to raise a large amount of investment capital on these platforms. With that thought in mind, crowdfunding can be used as part of your start-up funding, which would include other forms of investment such as government grants, equity financing, or something along those lines.
7. Accelerator Funding
Last, we have Accelerator funding. This is a less traditional type of funding, but it is still an effective option for start-up funding.
Seed money is usually offered by accelerators in exchange for equity in the company.
This is a short-term growth program that shoves two years of growth into a span of a couple of months. With this type of funding, you should be able to reach your key milestones sooner.
How Can a Startup Business Loan Help Grow Your Small Business?
When looking for financing in Australia during the early stage of your business, it is important that you think outside the box. A startup business loan can help grow your small business by helping you get the equipment you need in order to start that business. Financing equipment will give you the opportunity to free up cash for those things you’re not able to finance.
Pros and Cons of a Startup Business Loan
Naturally, there are pros and cons of getting a startup business loan, which we are going to discuss with you.
- You can use the startup business loan to help you get inventory, equipment, or whatever you need in order to get started.
- A startup business loan may help you grow your business at a faster rate.
- Startup business loans can help your dreams come true.
The business may fail, and depending on the loan you took out, you may still be liable for the loan.
A startup business loan can be expensive (it can have a high interest rate).
Determining How Much Funding You Need for Your Startup Business
What do you need the money for? The answer to this is what we refer to as your “loan purpose.”
Now, take out your calculator and figure out how much it’s going to cost you to meet your loan purpose and that is the amount of funding you need. If you’re able to clearly articulate your loan purpose to your crowdfunding campaign, lender, or even your family member, your chances of getting the loan will be much higher than they would be if you walk into a facility looking for “as much money as I can get.”
What’s even better is that you will avoid the repercussions and stress of borrowing more money than you really need.
What is Required for a Startup Loan?
The requirement in Australia is going to vary significantly by lender, but you should prepare the following:
- An up-to-date business plan that is complete with details of your marketing strategies as well as your growth strategies.
- A business forecast that is complete with details on future cash costs and flow.
- Any applicable registration and licenses for doing business in the area.
- All relevant financial documents. This may include bank statements, unpaid invoices, and credit card sales.
- Any relevant legal contracts such as incorporation, franchise, and leasing contract.
A startup business, chances are, you’re not going to have business credit reports or proof of business tax returns. If this is your case, then the lender you go to may rely on your personal tax returns, personal credit and/or your personal financial statement. However, if you plan on purchasing an existing business, then the lender will more than likely require information about the business.
Once you have submitted your application for a startup business loan in Australia, you will need to be patient. There are some financing options that can be approved within minutes, while others could take weeks, maybe even months. Before you begin your application process, check to see what the wait time is. If you have an urgent business plan, you don’t want it to be on hold or miss out on an obligation while you’re waiting months for a loan to be approved.
Can I get a Startup Business Loan with Bad Credit?
Most of the time, lenders will rely on your personal credit score in order to determine their level of risk. If you have a bad credit score, you probably already know just how tough it’s going to be to qualify for any loan. However, many with bad credit scores have relied on crowdfunding and microloan options (these are worth looking into as they help business owners with poor to no credit).
How to Get a Startup Business Loan
By taking the following steps, you can help improve your chances of getting a startup loan:
- Get your business plan and financial requirements together – Determine how much money you require in order to build your business and keep it running during the early days (before money starts to flow in). Show the financial institution your business plan that demonstrates how your business is going to succeed. Don’t forget to acknowledge the possible risks along the way.
- Show the financial institution how you plan on repaying the loan – In your plan, you should include a budget that shows the institution how you’re going to afford to pay them back and when. Really, this is the most important thing they would like to see because they’re going to want their money back (with interest).
- If you have any security, let them know – You could use your vehicle, your home, or other personal assets as security. If you’re only wanting to borrow a small amount of money, you may be able to qualify for an unsecured business loan, but a secured business loan will increase your chances.
Long-term Vs Short-term Business Loan
Trying to figure out whether you should go for a long-term business loan or a short-term business loan? Take a look at the differences between the two, maybe this will help you with your decision.
Long-Term Business Loan
When you get a long-term business loan, it will work similar to a personal installment loan, such as a mortgage on a home. Naturally, the long-term business loan is going to have a long repayment period, so this would be suitable for you if you would like some extra time to pay the startup business loan back. Some reasons you may choose a long-term loan include investing in commercial real estate space, building a new office building or undergoing a major renovation. These types of projects have a high cost and long-term loan payments may be easier for you to handle due to the fact that the length of the loan can help lower the monthly repayment cost.
When you choose a long-term business loan, you’re going to get a lump sum of money that you can use to startup your business and for the life of the loan, you will make scheduled payments with interest.
Short-Term Business Loan
A short-term business loan is suitable if you need cash right away in order to cover urgent expenses. Out of the different types of business loans, this type of loan is the most popular. With a short-term business loan, you will be able to pay for things, even if you don’t have enough money on hand.
A short-term business loan is going to give you a lump sum of cash right away but you will be required to pay the loan back in scheduled payments (like you would with a long-term business loan). Usually, you will either need to make daily, weekly, or monthly payments until the loan has been repaid.
Budgeting for Your Business Loan
When you take out a startup business loan, of course you’re going to be required to pay it back.
Repaying your startup business loan will be easier if you take some steps before applying and during the repayment period of the loan. In order to stay on top of your payments, learning the budget for your loan payments can help. Here are some additional tips for budgeting your business loan:
- Have Your Payment Ready – Set up a savings that is equal to the amount of one or two loan payments. This way, you would have the payment ready if something popped up that prevents you from making the payment and will never have to worry about missing a payment.
- Plan Your Payments Ahead of Time – When you learn what your payments will be, creating a plan for how you’re going to make those payments. With a plan in mind, the stress of worrying about that loan payment will be eliminated. This will also give you the ability to see in advance how the payments are going to affect your finances.
- Pick the Best Due Date for You – There are some lends that will give you the opportunity to pick your due date and this is something that you should put some thought into. Obviously, you will want to pick the best date that is suitable for you. We recommend scheduling your payment for the time of month when you usually have more cash reserves available. This way, you won’t be scrambling around for money when your due date has arrived.
- Payment Options – Speak to your lends about how you can pay for your loan. Some lenders may require you to send a check to them each month, while others may require you to set up an automatic withdrawal from your bank account. There are some lenders that offer discounts for automatic payments.
Once you are aware of what you need out of the startup business loan and you have all of your ducks in a row, you can move forward to finding a lender in Australia who matches your needs.
Make sure you take time to speak with different lenders and ask questions pertaining to their loan products.
Most of the time, the best loan for your startup business will come from a lender who is capable of creating a customized solution that is just right for your business needs.