Startup Business Loans Australia: Funding A New Business
It’s possible to get a business loan as a startup, but whether or not you can get funding from a lender will depend on where you are on your business journey.
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If your business has been trading for six months or more and is generating sufficient revenue, some lenders will consider offering finance. If you have less than six months of trading history, the reality is getting a business loan will be difficult with most lenders.
Key points about startup business loans
- Virtually no Australian lenders offer business loans to startups who are genuinely just getting started and have yet to record a sale.
- However, new businesses that have established themselves to the point where they are generating sales and revenue, may qualify for a small business loan.
- Most startup business loans have a short term (1-36 months) as lenders are generally reluctant to offer longer-term funding.
- Secured asset finance lenders may be available to new businesses who are purchasing a vehicle or other equipment, with the asset being purchased serving as collateral for the loan.
- Non-bank lenders tend to be more flexible in terms of their willingness to lend to early-stage businesses. Most major banks won’t consider startups.
- Interest rates on business loans for startups are generally higher as lenders calculate rates based on risk and trading history (or lack of it) is a big factor here.
- Considered riskier than getting a loan to finance an existing business as there is no business history for the lender to base its decision on.
How to get a startup business loan
Business loans for startups are more difficult to secure than standard business finance. Below we round up the requirements, lender options and time trames involved.
What you'll need
- Between six and 12 months' trading history & annualised revenue of $50k
- Business owner with a good credit score
- Proof your business will be able to repay the loan based on revenue projection
- A detailed business plan outlining how the funds will deliver growth
- Apersonal guarantee from the business owner may be required
What are the interest rates on startup business loans?
Interest rates on startup business loans can start from as low as 10-15% p.a. for the lowest-risk borrowers, but can be significantly higher in some cases.
With virtually all business lending, rates are risk-based. This means that lenders will calculate their pricing based on how likely it is that your business will be able to repay the loan, or recoup its money in some other way.
The main considerations typically are trading history, revenue, the loan purpose, whether the borrower is asset backed (e.g. owns a residential property) and what industry the borrower operates in.
How much can you borrow with a startup loan?
Startups who already have a proven track record and sufficient revenue may be able to borrow up to $500,000, but for most businesses their borrowing capacity will be less than that.
Loans of up to $100,000 are more common for newer businesses. Similarly to the risk-based pricing lenders use to calculate rates, borrowing capacity is determined by factors such as the borrower’s trading history, revenue, assets and liabilities.
How to get a startup business loan
Why are banks reluctant to lend to startup businesses?
Banks generally have stricter lending criteria and don’t have the risk appetite to lend to businesses that do not have an established trading history and strong revenue. The main reasons for this typically come down to:
- Insufficient capital/collateral: New businesses tend to have limited assets and cash reverses to use as security for a traditional loan structure. This means banks have limited options for recoup costs if the business capsizes. You may be able to use personal assets such as your home as security, but that comes with risk.
- No business credit rating: It can take three years or more to build business credit and be eligible for a traditional small business loan.
- No business history: By definition most new ventures do not have the capacity to demonstrate creditworthiness based on their past revenue and trading success. Major banks typically place greater emphasis on trading history than non-bank lenders do.
Alternative lending options for startups
Chief Operating Officer at Lend, Phil Druce, explains some of the alternative finance options available from business lenders.
Funding options
s you start to invoice customers, invoice finance allows you to ‘sell’ these invoices to a lender who in turn will give you a large percentage as an advance until the full amount of the invoice is paid. Invoice factoring can help improve your cashflow when starting out.
Lenders may be reluctant to lend a new business money, but this doesn’t mean they won’t lend to you as an individual. If the amount of money you’d like to borrow is small and you have a good credit score, you’ll; be in a particularly strong position
Personal loans don’t require collateral and the lender will look at your personal credit history and finances (income, expenses, other debts) when assessing how much you can borrow.
Why might it be suitable?
Unsecured personal loans can be used for more or less any purpose. If you have yet to start your business and need a relatively small amount to get it up and running, a personal loan is likely to be easier to get approved for than a business loan.
What are the drawbacks?
The lender will assess your eligibility based on your current personal income. If you have quit your job to start the business and have no regular income, getting approved may be difficult.
If you own a property and have built up equity, you may be able to release that equity and use the funds to finance your business. What that means in real terms is that you’ll be taking out a mortgage or extending an existing mortgage over your property – using your equity as collateral. You won’t be able to release equity from your home unless your lender believes you can service the repayments, so you’ll need proof of a steady, ongoing income to qualify.
It’s basically the same as taking out a secured, long-term personal loan. Mortgage rates are generally lower than most other types of finance, so it can be a cost-effective way to access funds, albeit with a long repayment period which will mean high interest costs overall.
Be aware though that you’re putting your home at risk if you use it to secure a loan – if your business fails and you can’t repay it, you could lose the house.
Why might it be suitable?
If you have a high level of equity in your own property and your business is not yet at a stage where it can access finance from a lender.
What are the drawbacks?
Having your business’s success tied to your home introduces the risk that if things don’t work out as planned, you may be forced to sell your home.
Professional investors may operate as part of a venture capital fund (a pool of investors) or individually (also known as ‘angel investors’) to invest in startups with high growth potential in exchange for an equity share. There are various venture capital funds and angel investors in Australia and overseas who provide upfront capital to emerging businesses in the hope of getting a piece of the pie. This will almost always involve some negotiation on the value of the equity. It could range from 10-50% of your company.
Some investors will make a direct capital injection while others will offer convertible debt, which acts like a normal interest-bearing loan, but gives the investor the right to exchange it for stock at a later stage. They will expect you to have done extensive market research and detailed financial and strategic planning, and to present a compelling (and passionate) business case before they consider investing in your startup.
Why might it be suitable?
Investors have much higher risk tolerance than banks. Particularly if the venture has high growth potential, a private investor may be willing to provide funding in the hope of a future return, with less emphasis on past performance.
What are the drawbacks?
You’ll lose some ownership of your business in exchange for the capital and there will be high expectations from the investors that the business will deliver strong returns. Not every business owner will relish that added pressure.
An increasingly popular alternative to standard bank finance is peer-to-peer lending. These platforms connect borrowers who need startup funds with investors looking for a good return on their investment. The peer-to-peer platform acts as an intermediary and charges fees to both parties.
To borrow from a peer-to-peer lending platform, you’ll need to apply for a loan and pass a credit check – just as you would with any other finance provider – to prove that you can afford the repayments.
You can expect the application process to be much faster than it would be through a traditional lender. But if you decide to explore this route, make sure you check out the terms and conditions and understand any fees or hidden charges that may apply.
Why might it be suitable?
You want finance with a similar structure to a traditional business loan, but a more flexible application process and less stringent lending criteria.
What are the drawbacks?
While you are leaning on investors who may have extensive business expertise for their funding, there is no direct relationship with these investors or access to their advice.
‘Bootstrapping’ means covering all your startup costs yourself — using only your personal finances (savings, borrowing from family etc.) or operating revenue (the money the business makes gets reinvested). This option requires no external funding or investment. The majority of business founders fund their startups with their own money.
Why might it be suitable?
This is the most logical solution if you are not in a position to access funding from a lender and want to maintain full ownership and control over your business.
What are the drawbacks?
Your ability to grow your business will be limited to what you can afford to fund yourself. There’s also the not-insignificant risk that you lose the money you put into the business (e.g. your personal savings or other assets you leverage for funding).
You can also apply for government business grants to fund your growth. Federal, state and local governments offer hundreds (yes hundreds) of grants each year to support new and existing businesses across most industries. You can use the Business.gov.au site to search for grants available in your state, and program dates, and to check your eligibility.
If you decide to apply for grant funding, expect to invest a lot of time and effort into the process. There’s no guarantee of success, which puts many busy entrepreneurs off this pathway. But if you do manage to secure a grant, the reward of ‘free’ money, plus the advice and support that usually comes with it, is well worth the hard work.
If you don’t qualify for a government grant, you can try applying for private grants from known institutions like banks, universities and private companies.
Why might it be suitable?
If your business is operating in an industry that government departments want to prioritise (e.g. green energy) you may be well-placed to receive funding. It is also a relatively low-cost and low risk way to access funds.
What are the drawbacks?
You’re likely to face a lengthy and tedious application process with no guarantee of receiving a cent in return.
It may be possible to harness the goodwill of members of the public who support the goals of your business. ‘Crowdfunding’ means asking people to make contributions, however small, to help you get started. You can use various online crowdfunding platforms to promote your business idea and raise money.
If you can convince enough people to contribute, it can be a great way to raise a decent sum without asking any one person to risk a lot of money.
Each crowdfunding platform has a slightly different focus – and a range of fees, terms and conditions. Both the platform and payment processors make their money by taking commissions from the funds you raise. This can mean fees charged to your donors on top of their contribution and/or a percentage fee based on each donation committed to you.
Why might it be suitable?
If your business idea has a strong social aspect to it, crowdfunding can enable you to raise money and build a devoted customer base at the same time.
What are the drawbacks?
Platforms and payment systems both charge fees that chip away at the funds raised. If the venture is purely commercial (i.e. no obvious social benefit) it’s unlikely to get much traction.