Key Takeaways
- It's hard for startups to get unsecured business loans because they don't have a credit history, cash flow, or financial records.
- Most of the time, only businesses that have been around for at least three months can get unsecured business loans with reasonable terms.
- There are a lot of good options besides unsecured business loans. You can do bootstrapping, go after secured loans, government grants, or loans from family and friends.
- Startups can also get money through crowdfunding and equity financing, which don't require them to take on debt but may require them to give up some ownership or profits.
- There’s lots of ways to fund your startup, so look at the pros and cons first before deciding.
- Keeping accurate records and proving that your income is going up will make it easier to get loans in the future.
The first step to getting your business off the ground is to secure capital. Unsecured business loans can be an excellent way for established SMEs to secure funding, but are they accessible to startups as well?
The answer is unfortunately no. With limited credit history, cash flow, and trading history, startups cannot show the ability to service an unsecured loan. As a result, getting an unsecured business loan as a startup is generally not possible until you’ve been trading for at least three months.
After three months of trading, a startup can access some unsecured loans, but the terms will be short and the rates high. After a year of trading, businesses can get longer rates and terms. The best rates are for businesses that have been trading for at least two years.
But there are other ways to get financing that can help new businesses grow and do well. Let’s find out why startups can’t get unsecured loans and look into other ways to get funding.
Why Startups Don’t Qualify for Unsecured Business Loans
It’s hard for new businesses to show lenders that they are capable of paying off a loan, that’s why they are usually considered riskier than established businesses. Here are the main reasons why most startups don’t qualify:
- No Trading History: Lenders use a business’s trading history to judge how likely it is to pay back loans. Startups usually don’t have much of a trading history, which makes it hard for lenders to figure out how risky they are.
- Cash Flow That Isn’t Steady: Most startups don’t have the steady stream of income they need to get an unsecured loan. Lenders want to know that a business has enough cash flow and liquidity to make its monthly payments. This can be hard for new businesses to show.
Alternative Financing Options for Startups
Startups have a number of other good ways to get funding, even if they can’t get unsecured loans. Let’s look at some good alternatives and the pros and cons of each.
1. Bootstrapping, or using your own money or resources
A lot of new businesses start out by using their own savings or the money they make from the business. If you want to run your business without having to deal with lenders or investors, this is a great way to get money for your startup. But if you use your own funds, you won’t have as much, and if your business is having financial issues, it can also affect your personal finances.
2. Getting funds from family or friends
A lot of new businesses also get their start by taking loans from family and friends of the directors. This choice doesn’t need a credit history or a lot of paperwork, and the terms can be more flexible because you know the lender personally.
But if the business doesn’t do well, borrowing funds from family or friends can hurt those relationships. To lower the risks, make sure the terms are clear and professional. Write down the repayment plan, terms, and expectations for everyone involved in a written agreement.
3. Loans and grants from the government
The Australian government has grants and loan programmes to help new businesses get started. You don’t have to pay back grants, and loans from the government often have less strict terms than regular loans. But these programmes are limited and competitive, and the application process may be hard.
Here are just a few of the many grants that are open to new businesses:
- Industry Growth Program – Supports early-stage businesses through the development stage
- CSIRO Kick-Start – Provides matched funding for startups to SMEs to help access CSIRO research expertise and capabilities
- MVP Ventures NSW – Supports NSW startups and SMEs during early-stage research through commercialisation of innovative new products
- Small Business Grants QLD – Supports QLD small businesses
- Business Innovation Program NT – Provides grant funding, advisory services, and other expenses for startups and entrepreneurs in NT to commercialise their innovations
- Seed-Start Grant SA – Supports early-stage startups in SA
4. Equity Financing (Angel Investors and Venture Capital)
Many startups choose equity financing, especially those in the tech or innovation sectors that have a lot of room to grow. Investors, like angel investors or venture capital firms, give startups money in exchange for a share of the company’s ownership (equity).
Equity investors often bring more than just money to the table. They can also provide mentorship, industry contacts, and help with business growth. But founders give up some of their ownership in the company and might have to share the power to make decisions with their investors. Equity financing is great for startups that want to grow, but it might not be right for business owners who want to keep full control of their companies.
5. Crowdfunding
Crowdfunding sites let startups get money directly from the public, which is great for businesses that sell unique, consumer-friendly products. Startups use platforms like Kickstarter and GoFundMe to run campaigns that get money from a lot of small donors. Crowdfunding is also a way to market a product and get people interested in it.
But a strong marketing push is needed for success, and campaigns can take time and work to get off the ground. Crowdfunding is great for new businesses that have unique products and a strong online presence.
6. Loan for starting a business
Business loans are one of the most common ways that new businesses get money. A business takes out a loan from a lender or a bank and then pays it back with interest over time. Businesses can get a lot of different kinds of loans, but most of them are secured.
Business Loan for Startups
Business loans are a great choice for businesses that are just starting out. There are plenty of secured options for businesses with less than a year of trading history. With business loans, directors can maintain ownership of their company without having to relinquish control to investors. Repayment is also predictable, allowing businesses to focus on operating and growing their business. More importantly, business owners don’t have to dip into their personal finances to fund their business.
Types of Business Loans for Startups
There are different types of business loans for new businesses, and each one is designed to meet a different need or financial situation. Here are the main types of business loans that new businesses might want to look into:
- Secured loans are loans that need security, like property, equipment, or vehicles. This makes them less risky for lenders. To get a loan, a startup can promise to give up assets. This gives lenders peace of mind that they will get their money back if the loan defaults. These loans can have lower interest rates and higher loan amounts.
- Secured Overdrafts: A secured business overdraft gives you access to more money through a revolving line of credit. This is a flexible way to get money that helps new businesses make up for short-term cash flow problems.
- Invoice Finance: Invoice finance can be a good way for startups that already have clients and unpaid invoices to get money quickly. The lender gives you a part of the value of unpaid invoices, which gives you cash flow right away. This kind of financing is useful for businesses that have trouble getting paid on time.
- Trade and Import Finance: Startups that buy physical goods can benefit from trade and import finance with property security. This helps pay for buying stock or raw materials, and it’s especially helpful for businesses that work with suppliers in other countries because it helps them pay suppliers and get paid by customers.
- Equipment and Asset-Based Finance: This kind of loan is backed by business assets, like equipment or machinery. It lets new businesses buy the tools they need without having to pay for them all at once. The lender uses the asset as collateral, which lowers their risk and gives the startup the tools it needs to grow.
Where Can I Get a Business Loan for a Startup Business?
Finding the right lender can make all the difference when seeking a loan for a business startup. Startups, especially those with less than 3 months of trading can find funding solutions outside of banks, such as the government and non-bank lending institutions. Many non-bank lenders specialise in providing small business startup loans and can provide faster approvals and more flexible terms.
What Do I Need to Get a Startup Business Loan?
Getting a loan for a startup business can be hard, but you can make it easier by knowing what lenders want. Here are the most important things that can help you get a loan for a new business:
- Security: If you’re applying for a secured loan, offering property, equipment, or vehicles as security can reduce the lender’s risk. The loan amount and interest can also be based on the value of the security.
- Financial Records: Keeping detailed and accurate records is essential. Lenders want to see proof that your business is generating revenue, and organised financial statements can demonstrate growth and stability.
- Revenue Projections: Startups need to provide realistic revenue projections to convince lenders of their future profitability. Even if you don’t have significant revenue yet, demonstrating financial planning is crucial.
Exploring the Right Funding Path for Your Startup
Unsecured business loans may not be available to new businesses, but there are still many ways for them to get the funding they need. It’s important to think about the pros and cons of each option carefully if you’re just starting out. Choose a path that fits with your goals and the way you want to grow.
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