Key Takeaways
- Startups often struggle to qualify for unsecured business loans due to a lack of credit history, cash flow, and financial records.
- Unsecured business loans with reasonable terms are generally for established businesses with at least three months of trade behind them.
- Some great alternatives to unsecured business loans are bootstrapping, secured loans, government grants, or loans from family and friends.
- Startups can also opt for crowdfunding and equity financing to obtain capital without incurring debt, though they may require sharing ownership or profits.
- It's important to consider both the pros and cons of each financing option to determine what best suits your startup's needs.
- Maintaining accurate records, and showing revenue growth will improve future loan eligibility.
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. Longer rates and terms are after 12 months of trading and the best rates are available to businesses who have successfully traded for at least 2 years.
However, there are other funding options available that can help startups grow and succeed. Let’s explore why startups don’t qualify for unsecured loans and learn more about viable financing alternatives.
Why Startups Don’t Qualify for Unsecured Business Loans
Lenders consider Unsecured business loans unable to demonstrate serviceability, and startups tend to carry higher risk than established businesses. Here are the key reasons why startups don’t typically qualify:
- Lack of Trading History: Lenders rely on trading history as an indicator of a business’s reliability in repaying loans. Startups generally have little to no trading history, making it difficult for lenders to assess their risk.
- Inconsistent Cash Flow: Most startups lack the consistent revenue stream required to qualify for an unsecured loan. Lenders want assurance that a business has a sufficient cash flow and liquidity to meet monthly repayments, which startups may struggle to demonstrate.
Alternative Financing Options for Startups
Although unsecured loans may be out of reach, startups have several other viable financing options. Let’s examine some effective alternatives and their potential benefits and drawbacks.
1. Bootstrapping (Personal Savings or Internal Resources)
Many startups begin with funding from personal savings or using whatever revenue they get from the business. This is a great way to finance your startup if you want complete freedom to run your business without interference from lenders or investors. However, if you use your own savings, your cash is limited, and your business experiencing financial trouble can also impact your personal finances.
2. Borrowing from Family or Friends
Many startups also begin their journey through loans from the directors’ family and friends. This option requires no credit history or complicated applications, and the terms can be more flexible since you know the lender personally.
However, borrowing from family or friends can put personal relationships at risk if the business doesn’t perform as expected. To mitigate risks, keep the terms clear and professional. Draft a written agreement that outlines the repayment plan, terms, and expectations for everyone involved.
3. Government-Backed Loans and Grants
Australia’s government offers grants and loan programs designed to support startups. Grants don’t need to be repaid, and government-backed loans often come with more lenient terms than traditional loans. However, these programs are limited and competitive, and the application process may be rigorous.
Here are just some of the many grants available to startups:
- 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 & Venture Capital)
Equity financing is a common choice for startups, particularly those with high growth potential in technology or innovation sectors. Startups exchange a portion of ownership (equity) in the company for capital from investors, such as angel investors or venture capital firms.
Besides capital, equity investors often bring mentorship, industry connections, and support for scaling the business. However, founders dilute their ownership in the company and may have to share decision-making authority with their investors. While equity financing is ideal for growth-driven startups, it may not suit business owners who want to maintain full control of their companies.
5. Crowdfunding
Crowdfunding platforms allow startups to raise money directly from the public, making it ideal for businesses with unique, consumer-friendly products. Startups create a campaigns on platforms like Kickstarter or GoFundMe to attract funds from a large number of small contributors. Crowdfunding also doubles as a marketing strategy to build an audience for the product.
However, success depends on a strong marketing push, and campaigns can take time and effort to gain traction. Crowdfunding is ideal for startups with unique products and a strong online presence.
6. Business Startup Loan
One of the most common ways startups get their financing is through business loans. A business borrows funds from a lender or a financial institution and then repays it over time with interest. There are many types of business loans available for businesses, but they are mostly secured options.
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 several types of business loans available to startups, each catering to different needs and financial situations. Below are the main types of business loans that startups may consider:
- Secured Loans: These loans require security, such as property, equipment, or vehicles, which reduces the risk for lenders. Startups can pledge assets to secure a loan, giving lenders the confidence that they will recover their money if the loan defaults. These loans can offer lower interest rates and higher loan amounts.
- Secured Overdrafts: Secured business overdrafts provide access to extra funds through a revolving line of credit. This is a flexible funding option that allows startups to cover short-term cash flow gaps.
- Invoice Finance: For startups that already have clients and outstanding invoices, invoice finance can be an effective way to access funds quickly. The lender advances a portion of the value of unpaid invoices, providing immediate cash flow. This type of financing is helpful for businesses that face delays in client payments.
- Trade and Import Finance: Startups involved in purchasing material goods can benefit from trade and import finance with property security. This helps cover the costs of purchasing stock or raw materials and is particularly useful for businesses dealing with overseas suppliers, as it bridges the gap between paying suppliers and receiving payments from customers.
- Equipment and Asset-Based Finance: This type of loan is secured against business assets, such as equipment or machinery. It allows startups to purchase essential equipment without needing to pay the full cost upfront. The lender uses the asset as security, reducing their risk while providing the startup with the equipment necessary for growth.
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?
Qualifying for a startup business loan can be challenging, but by understanding what lenders are looking for, you can improve your chances. Here are the key factors that can help you qualify for 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
Although unsecured business loans may not be accessible to early-stage startups, there are still numerous funding options that can meet startups’ financial needs. If you’re just starting out, it’s important to carefully consider each option’s pros and cons, choosing a path that aligns with your growth trajectory and goals.
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