Key Takeaway Table
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Common Startup Costs
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New business owners need significant capital to launch their businesses. Initial costs can include purchasing or leasing commercial property, legal and licensing fees, renovation, equipment purchase, initial inventory, and marketing. Once the business is up and running, business owners will also need funds to cover any cash flow gaps, pay employees, and invest in staff training.
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Types of Loans for New Businesses
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There are a number of loans available to new businesses. You can obtain term loans, overdrafts, invoice finance, trade and import finance, and specialised loans like equipment and fitout finance.
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Preparation for Applying for a Business Startup Loan
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To prepare for a business loan application, you should understand your capacity to make repayments. Understand your credit score and history. If you're aiming for a secured loan, you should prepare proof of ownership for any significant personal or business asset. Finally, you should research lenders to see which one can give you the loan you need.
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What to Look for in Lenders
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When comparing lenders, take note of the credit policy and requirements, as well as available loan amounts, terms, interest rates, and any additional fees. You should check whether your lender offers secured and unsecured loans and how fast they process applications. Banks will typically have higher credit standards but will charge lower interest rates. Meanwhile, non-bank lenders may allow low or no documentation applications and applicants with bad credit, but they may charge higher interest rates.
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Australians are very interested in entrepreneurship, with over 2.5 million small and medium businesses operating in the country. Many dream of being business owners, but funding often can be their biggest challenge. Getting a business off the ground requires significant capital, and startups often turn to different sources to get the funding they need. One way to fund a startup is through business loans, which can help pay for the many costs associated with starting a business and keeping its momentum.
Common Startup Costs
Here are some of the most common expenses that you can encounter while launching a business and running it:
Location Purchase or Lease
Businesses that need premises to operate from will need to purchase, build, or lease commercial spaces. The cost associated with a business premise is one of the largest initial expenses for a startup.
Outfitting or Renovation
Once you acquire a commercial space either through purchase or lease, you will need to customise it to fit your needs with a commercial fitout.
Legal and Licensing Fees
Businesses often need to pay various fees before starting operations. Fees include business registration fees, licensing fees, potentially legal fees, and permits, along with insurance and perhaps membership fees.
Equipment Purchase
New businesses often need significant capital for the purchase or lease of business equipment. Equipment can be anything from vehicles and point-of-sale equipment to large machinery.
Inventory
Businesses will need funds for the initial purchase of inventory, raw materials, and other supplies needed for operations.
Working Capital
Once a business is launched, there will be day-to-day expenses that need to be paid to keep operations running. These expenses include utility bills, inventory purchases, payroll, and debt payments. Sudden cash flow gaps can impact a new business’s ability to pay for these essential costs.
Hiring and Training
Startups need funds to pay for the initial hiring and training of staff. They will also need sufficient funds for PAYG, Super and Workcover contributions.
Marketing and Advertising
A startup will need to get the word out about its products and services to attract customers. To do that, business owners should invest in marketing and advertising efforts, both online and offline.
Types of Startup Business Loans Available
Term Loans
Startups can apply for traditional term loans. Lenders will provide a lump sum, and the borrower will repay this loan with interest and perhaps other fees over the course of the loan term. It’s common to use term loans for property, to purchase a business and provide working capital.
Overdrafts
An overdraft is a revolving line of credit. Once you repay what you borrow, the limit is restored, and you can borrow funds again up to your pre-approved limit. Interest is generally charged on the drawn funds. Overdrafts can be used to bridge cash flow gaps, provide working capital, and cover any short-term expenses for businesses.
Invoice Finance
Invoice finance is usually for B2B industries that provide products and services to other businesses. Even if payments get delayed, invoice finance can allow you to access capital against the value of your invoices so you can have funds to keep running your business, accept new contracts and grow.
Trade and Import Finance
Trade and import finance is essential to businesses that regularly purchase and import material supplies or products. This line of credit allows businesses to pay for supplies and other expenses related to trade and importation upfront and preserve cash on hand and working capital.
Equipment and Asset Finance
Equipment finance is a loan specific to purchasing business equipment and other important assets. This type of loan will allow you to get equipment of any age upfront so you can start operations immediately. The equipment typically serves as the security for the loan.
Fitout Finance
Fitout finance is a specialised loan for any interior improvements to a commercial space. Improvements can include interior design, plumbing, wiring, flooring, and more. Fitout finance is important to startups since outfitting or renovating a commercial space is a significant expense.
Preparation for a Startup Loan
Here are some steps new business owners have to take before applying for business loans:
- Review Eligibility: Before you apply for a loan, check your financial capacity to pay back a loan. Based on your business plan and earnings projection, will your business create enough revenue to service the loan amount you’re seeking?
- Check Credit Score: Creditworthiness is one of the major criteria for approval of startup loans. Since your business is new, your credit score gives lenders a good idea of your credit history. A good credit score and history can help you get more favourable loan terms.
- Prepare Documents: Document requirements vary across lenders. Since your business is new, you most likely will not have financials. Still, forecasts are important, and other lenders will take into account the value of security offered and personal statement of position.
- Security: Although not always required by lenders, providing property security is a good way to get a loan approved for startups. Security can be in the form of personal and business assets or a combination of both. The value of your security may impact the loan amount, terms, and rates available.
- Research Lenders: Before applying for a loan, research different lenders and their respective loan offerings. Comparing lenders is a great way to determine which will give you the best terms and rates for your needs.
What to Look for in Lenders
Business loans are available from both bank and non-bank lenders. However, there will be differences between their offered terms, rates, fees, and more. Here are some key factors you need to compare between lenders to find the best ones for you:
- Requirements: Banks may require full financial documentation to approve loans. If you don’t have bank statements or other documents, you can obtain a loan from non-bank lenders, which offer low or no document applications. Non-bank lenders can also provide loans for those with existing tax debt.
- Credit Requirements: Banks typically require a good credit score as part of their criteria. Meanwhile, non-bank lenders can accept some applications despite a low credit score.
- Loan Amount: If you need a large amount of funds, banks can typically provide larger loan amounts or limits. Non-bank lenders may provide limited loan amounts, but you can get approval quickly and with fewer requirements.
- Interest Rates: The interest rate is the cost of borrowing money. Interest is calculated as a percentage of the principal. Interest rates are generally lower at banks due to the intensive approval process. For non-bank lenders, interest rates may be higher due to risk mitigation.
- Additional Fees: Both bank and non-bank lenders will have additional fees, which can include application, legal, and service fees. You will need to carefully examine each lender to see which ones have lower rates.
- Loan Term: The loan term describes the time you have to repay the amount you borrow, plus interest and any other fees added to your loan balance.. Depending on the repayment schedule (weekly, fortnightly, monthly), the term will determine how much you need to pay with each instalment. Longer terms are normally available from banks compared to non-bank lenders.
- Security: Property security is any significant asset (real estate, vehicles, equipment, etc.) that can be used to secure the loan. Many lenders offer secured and unsecured loans but will differ when it comes to rates, terms, and requirements.
- Loan Processing Speed: The approval processing speed is a crucial factor to consider when choosing lenders, especially when you’re in a rush to get funds. Banks may take longer due to more thorough processes, while non-bank lenders can offer quick approvals due to simpler processes.
Launch Your Startup with The Right Business Loans
If you want to start a business, loans can give you the funds you need to make your dreams a reality. Startup business loans can help you pay for large initial costs and provide you with cash flow as you operate your business daily.
Loan experts can help guide you to the right lenders so you can get the best terms and rates tailored to your needs. Talk to us today to learn more.
