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. Clearly defining your business purpose is critical, as lenders evaluate this when assessing loan applications. 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.
What is a Business Loan?
A business loan is a financial product designed to help business owners access the funds they need to support and grow their operations. Whether you’re looking to manage cash flow, invest in new property, or expand your business, a business loan can provide the capital required to achieve your goals. Business loans come in various forms, including secured and unsecured options, and can feature either variable or fixed interest rates depending on your preference and financial situation.
To get a business loan, lenders typically require business owners to submit detailed financial statements, a strong credit history, and a comprehensive business plan. These documents help demonstrate your ability to manage repayments and ensure the lender that your business is a sound investment. The interest rates offered will often depend on your creditworthiness and the type of loan you choose, so it’s important to prepare thoroughly before applying. By understanding the different loan structures and what’s required, you can select the right business loan to support your business’s unique needs.
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 business premises 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.
Business Plan and Financing
A well-prepared business plan is a crucial part of securing a business loan. Lenders want to see that business owners have a clear understanding of their financial situation, defined goals, and a solid strategy for growth. Your business plan should include detailed financial projections, a thorough market analysis, and a breakdown of exactly how you intend to use the loan funds. This level of detail not only demonstrates your creditworthiness but also reassures lenders that you have a realistic plan for repaying the loan.
When seeking financing, it’s wise to compare business loans from multiple lenders. This allows you to evaluate different interest rates, loan terms, and repayment options, ensuring you find the most competitive offer for your business. Taking the time to research and compare business loans can make a significant difference in your borrowing costs and overall financial health. Remember, a strong business plan paired with the right loan can set your business up for long-term success.
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. Available loan amounts vary by lender and loan product, so be sure to consider whether the loan amounts offered will meet your funding requirements.
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. It is important to review each loan offer carefully to understand the specific terms and conditions before making a decision.
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. Seeking a competitive interest rate can help reduce your borrowing costs.
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—including profit and loss statements and recent business bank statements—and evidence of healthy cash flow. These documents help demonstrate your business’s financial situation and your ability to manage repayments. Lenders closely assess your business’s financial health when making lending decisions.
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. You can learn more about the key differences between secured and unsecured business loans to help determine which is right for you. 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. A personal guarantee makes the borrower personally liable if the business defaults, and can help qualify for better loan terms.
Business term loans provide lump sum funding with flexible amounts and interest options, making them suitable for covering large expenses. Flexible business loans and flexible loan options offer adaptable repayment features, such as early repayment and redraw capabilities, to meet various business needs.
Secured business loans are backed by assets like property or equipment, which can lower interest rates and reduce lender risk. In contrast, an unsecured business loan does not require collateral and typically comes with higher interest rates due to increased risk for lenders. Which business loan depends on factors such as your business history, financial health, and available collateral.
Lenders often prefer businesses with a longer business history, as this can improve access to larger loan amounts and better terms.
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. However, lenders often prefer an established business with a proven track record and steady revenue when approving traditional loans, as this increases the likelihood of loan approval and favorable terms. 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 . This type of unsecured loan requires no collateral but may have less favourable interest rates.
Line of Credit
A line of credit is a flexible type of business loan that gives business owners access to funds up to a set credit limit, allowing them to borrow and repay as needed. This option is particularly useful for managing cash flow fluctuations, as you can draw on the line of credit during slower periods and repay it when your cash flow improves. Unlike traditional loans, you only pay interest on the amount you use, making it a cost-effective solution for short-term financing needs.
Lines of credit often come with variable interest rates, so it’s important to review the terms carefully before applying. Pay close attention to the interest rate, any associated fees, and the repayment schedule to ensure it aligns with your business’s financial situation. By understanding how a line of credit works and how it can support your cash flow, business owners can make informed decisions and maintain greater control over their finances.
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 also a practical solution for sole traders seeking to manage expenses and improve cash flow.
Business credit cards are specifically designed for businesses to help manage expenses, track purchases, and improve cash flow. Sole traders, small businesses, and trusted staff can all use business credit cards to cover expenses upfront and repay over time. 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 and Unsecured Business Loans**
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. Unsecured business loans tend to have higher interest rates due to the lack of collateral, but they offer flexibility and are suitable for urgent funding needs. Existing customers of alternative lenders may receive exclusive offers or interest rate discounts, making it beneficial to maintain a good relationship with your lender. Additionally, maintaining a strong business banking relationship can lead to further benefits, such as interest rate discounts or tailored loan products. As a result, small businesses frequently turn to these lenders when traditional financing is not accessible. Consulting a finance broker can also help businesses evaluate loan options and secure the best terms for their specific needs.
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, and provide additional insights and resources in our blog.
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
Preparing a thorough business loan application 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, loan fees, and loan terms that best fit your needs.
Once your loan is approved, it’s important to stay on top of your loan repayments, which are often structured as monthly 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, repayment schedule, and all loan fees, as these, along with interest payments, determine the true cost of borrowing. Some lenders allow you to repay your loan early, which can save on interest payments, but be aware that early repayment may involve additional fees.
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.
Equipment Finance and Other Options for 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 finance is another useful option, enabling you to access cash tied up in unpaid invoices. By leveraging outstanding invoices, you can bridge cash flow gaps caused by delayed payments from customers. For ongoing flexibility, a credit line provides a revolving credit facility that allows you to access funds up to a predetermined limit, making it easier to manage short-term cash flow needs, handle unexpected expenses, or seize new growth opportunities.
Funds obtained through these financing options should be used strictly for business purposes to ensure compliance and maintain tax deductibility. Any business owner seeking to manage cash flow or invest in growth can utilize these products.
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.
