There’s a lot to consider when starting a business. Any good business plan should include finance options to get the business up and running. But which is the right one?
What’s the best way to fund a new business? If your answer is to get a small business loan, think again.
Unfortunately, most new businesses will need to seek funding to cover initial costs. The good news is that there are many types of loans that fit the bill.
There are a variety of funding options available for new businesses, including traditional business loans, government programs, and alternative lenders.
Before you can pick the right kind of financing, you have to look at why you need the money. For one, unpacking your expenses will give you a good idea of how much money you need. Understanding your specific business needs and financial goals is essential before choosing a loan, as it ensures the financing aligns with your operational requirements. It will also help you look for the right loan.
Below you’ll learn about your most likely expenses and what your best options are to fulfil them.
Common Expenses for New Businesses
There’s a lot of variance in the amount of money you might need. But most small businesses share similar expense patterns at startup. These are some of the most common.
You’ll probably need money to develop your product or service. This is a big consideration for tech startups. For many, their existence is contingent on developing a product.
There will also be operational expenses. These cover everything from leasing space to meeting payroll requirements. Also, remember that you will have to pay yourself a wage. If you rely on your new business for a livelihood, you’ll need to work that into the expenses. Small businesses often need to raise funds to cover these operational costs, especially when traditional financing is not available.
Another big drain on your resources will be marketing. As soon as or before you’re ready to start selling, you’ll need to market your company and your product. There are many good options, but few of them are free. Entrepreneurs may need to raise money through various means, such as crowdfunding, to support marketing efforts or address unexpected expenses.
Finally, there are always unexpected expenses. It’s inevitable, even for experienced business owners. It’s almost impossible to make a perfect estimate of your financial needs. So, you’ll have to mitigate that uncertainty.
How to Pick a Loan
These are the criteria for choosing startup business loans. Part of your loan application process will be deciding on the most favourable one.
The first and most important thing to consider is how much money you’ll need. That’s where all those previous points come in handy.
Not every lender will have options available to cover your needs. Conversely, some may have higher minimums than what you can reasonably borrow. When choosing, be sure to evaluate different loan options to find the best fit for your business needs.
The other factor is how you structure the loan term. To repay the loan, you need to work it into your budget and decide how long you can bear that expense. Make sure you understand the repayment terms, including the duration, payment schedule, and any associated fees.
Lastly, you’ll need to decide whether you need a lump sum or a line of credit. They will have different long term implications.
To get reliable cash flow, a line of credit is better but a lump sum could give you better terms on the loan.
Once you have a rough idea of these three things, you can move on to the details. Interest rate, credit history, and other eligibility criteria will come into play when you begin the application.
As you budget for repayments, it’s important to monitor your loan balance regularly to manage your finances effectively and make informed decisions about early repayments or refinancing.
It’s time to explore the financing options.
Understanding Credit and Financing
When it comes to securing a business loan, understanding your credit and financing options is essential—especially for startups. Lenders look closely at your credit history and credit score to determine your eligibility and the interest rates you’ll be offered. A good credit score can open the door to more favorable business loans, while a poor score may limit your options or result in higher borrowing costs.
Before you apply for a business loan, take the time to review your credit history and address any issues that could impact your application. Lenders will also want to see a detailed business plan, financial statements, and evidence of healthy cash flow. These documents help demonstrate your business’s financial situation and your ability to manage repayments.
Unsecured business loans are a popular choice for startups because they don’t require collateral, but keep in mind that they often come with higher interest rates. If you have valuable assets, secured loans might be a better fit, offering lower interest rates in exchange for collateral. Whichever route you choose, make sure your business plan and financial projections are thorough—showing lenders that you’re prepared and capable of repaying the loan.
Types of Financing for New Businesses
These fall into two broad categories, debt finance and equity finance. Debt financing is a more independent approach, while equity financing involves outside stakeholders. However, it’s important to consider how debt finance may impact your personal finances, especially if personal guarantees are required.
Traditional Lending
Business owners have relied on banks and credit unions for start up business funding for centuries. Small business loans and traditional loans remain good options for both new and existing businesses, provided you’re eligible. Financial institutions, such as banks and credit unions, are the primary sources of traditional loans for small businesses.
The process is almost always long and you’ll have to provide extensive business plans. Most lenders require detailed financial documentation, including bank statements, business revenue, and business income, to assess the business’s financial health. A start up business loan, startup business loan, startup loan, or business startup loan may have stricter requirements for new businesses compared to loans for an existing business.
If the business owns assets or commercial property, this can improve eligibility and lead to better loan terms, as these can be used as collateral.
To speed up the process considerably, you can opt for an unsecured business loan. This type of unsecured loan requires no collateral but may have less favourable interest rates.
Angel Investing
This involves convincing individual investors to finance your business. In return, you’ll likely have to give up a stake in the business. Many people find great success with the right angel investor.
There is any number of big success stories from angel investors.
Back in 1998, a technology company was looking for investments. They were developing a new search engine and had big plans for the future.
They managed to secure an angel investment of $250,000. The investor paid six cents a share for the company stock.
That company was Google, and one of their angel investors was Jeff Bezos, of Amazon fame.
Would Google be as successful today without that investment? We’ll never know.
Credit Card
It’s not very fancy, but it gets the job done. If you’re starting a small business, a credit card could be your best option.
Business credit cards are specifically designed for businesses to help manage expenses, track purchases, and improve cash flow. They often come with features like pay-in-full options and cashback rewards, making them a practical choice for new businesses.
There are almost always introductory offers on credit cards. If you can get a line of credit with 0% interest for 12 months, there’s no reason not to take it. You’ll just need to make sure the credit card can cover your needs.
Venture Capital
This equity financing option usually comes from institutions that specialize in risky investing. It’s similar to angel investing but there is a clear obligation to show returns.
The venture capital investor receives shares in exchange for the investment. Most venture capital firms will require you to show solid business planning and future revenue projections.
You won’t have to provide any other collateral so this type of investment is much harder to get.
Alternative Lenders
These days, it’s easy to apply for a business loan online. There are many alternative lenders that can provide a variety of loan options, including personal loans, credit lines, and business lines of credit. Alternative lenders often offer unsecured loan products specifically designed for small businesses that may not have collateral or established credit. As a result, small businesses frequently turn to these lenders when traditional financing is not accessible.
That’s what we do at Unsecured Finance Australia. We understand how important access to cash is for a new business. That’s why we work closely with clients to find a solution that fits their needs.
Public Float
You can list your company on a stock exchange to try to secure funding. However, it will need to be a public company.
Doing this entails a complicated series of measures to ensure transparency. It’s the right choice for some businesses, but not too many that are just starting out.
The Loan Application and Management Process
Applying for a business loan involves more than just filling out a form. You’ll need to prepare a detailed business plan, up-to-date financial statements, and other supporting documents to show lenders that your business is a solid investment. During the application process, lenders will assess your financial situation, cash flow, and creditworthiness to determine the loan amount, interest rate, and loan terms that best fit your needs.
Once your loan is approved, it’s important to stay on top of your repayments. Depending on the loan type, you may have fixed monthly payments or variable payments that adjust with your business’s cash flow. Make sure you fully understand the loan terms, including the interest rate, loan term, and repayment schedule, to avoid any surprises down the line.
Regularly reviewing your financial situation and updating your cash flow projections can help you stay ahead of any potential issues. If you’re unsure about any part of the process, seeking professional advice can ensure you’re making the best decision for your business. Staying proactive with your loan management will help you maintain a healthy financial position and keep your business on track for growth.
Financing Options for Equipment and Growth
As your business grows, you may need to invest in new equipment or expand your operations. Fortunately, there are several financing options designed to support these needs. Equipment finance, such as leasing or equipment loans, allows you to acquire the tools and machinery you need without tying up your working capital. This can be a smart way to keep your business running smoothly while preserving cash flow.
Invoice financing is another useful option, enabling you to access funds by leveraging outstanding invoices. This can help bridge cash flow gaps caused by delayed payments from customers. For ongoing flexibility, a line of credit provides access to funds whenever you need them, making it easier to handle unexpected expenses or seize new growth opportunities.
When considering these financing options, take a close look at your financial situation, cash flow, and credit history. Online lenders and alternative lenders often offer more flexible terms, but be aware that interest rates and fees may be higher. If you’re looking for significant growth capital, angel investors and venture capitalists can provide substantial funding, though you’ll need to be prepared to share equity in your business.
By carefully comparing your financing options and understanding the implications of each, you can choose the best way to access funds for equipment purchases and business expansion—setting your business up for long-term success.
The Right Financing Makes All the Difference
It would be a shame if your idea didn’t get off the ground for lack of funding. To give yourself the best chance, be methodical.
Put together the information you need. How much capital, when can you pay it back, and if you want a lump sum. Then, look at your options, and go with the one that makes the most sense.
When you’re ready to take the next step, we’ll be there to guide you. Visit our website to go over your options. Or, fill out our online form right now. It will take less than five minutes to start moving toward your future.
