How to Get a Loan for a Startup Business
Do you have an ambitious business idea that needs funding to turn into a reality? Are you operating a fledgling business that aims to go big in a short time but is currently having trouble paying bills and payroll? A startup business loan may be the answer to all of your problems.
What Is a Startup Business Loan?
A startup business loan works just like a small business loan. However, while a traditional small business aims for steady, long-term growth in an existing market, a startup targets rapid growth. It aims to disrupt markets and challenge established businesses and industries by making big revenues at a fast pace and becoming a huge company in a short time.
The difference in the nature of a startup and a small company leads to different consequences when taking out a small business loan.
- Length of Operation. Although fast-growing and ambitious, a startup may still be in the process of developing its products or services and facing high uncertainty. Meanwhile, a small business that seeks financing is not necessarily new and may have been operating for a year or two during the time of application. The latter has better chances of securing a loan because most lenders usually require businesses to be in operation for at least one year to prove its ability to adapt to the continuously changing market.
- Desired Loan Amount. An ambitious startup may also need bigger funding to take off the ground than a small-time company. Considering that most banks and large lending institutions are reluctant to grant a large sum of money to new businesses, this is particularly challenging.
Benefits of a Startup Business Loan
When running a new business, there are a lot of expenses that you have to make to support your business operations—from the office utility bills to the workers’ salary to the equipment or machinery you need to the marketing expenses.
Being a startup and not just a traditional small business, you assume a lot of risks by launching new products and services or adapting new techniques and innovations that are yet to be proven for effectiveness.
Struggling not just to get a foothold in the industry you hope to revolutionise but also to grow and become profitable in a short time, you have to take care of a lot of business expenses. Most of the time, the only way to pay for all these expenses is to take out a loan.
A startup business loan can support your...
- Operational Expenses. These include all the money you need to pay for labour (hiring and paying the salaries of staff), utilities, rent and inventory costs. The more staff and a bigger office you need, the more funds you have to borrow.
- Development Costs. Also referred to as research and development costs, these are the expenses for marketing analysis, developmental engineering, customer surveying and all other processes to make your products or services market-ready. Research and development are done before officially launching your brand or business into the marketplace, often at a time when your business is not making revenue yet.
- Marketing. Any startup needs to invest in digital marketing to reach out to as many customers and potential clients as possible. Digital marketing expenses include the hiring of knowledgeable staff to conceptualise and execute various digital marketing strategies to get leads, creation and management of the company’s website, including the development and maintenance of the site’s content; and the creation and implementation of various online marketing campaigns including social media and Google ads. Aside from online marketing tactics, there may also be a need to execute offline marketing activities, like promotional booths and out-of-home advertising, which also requires funding.
- Expansion. Expanding your business shortly after launch provides an opportunity to offer a diverse range of products and services that generate the maximum amount of profit. Expansion is usually costly. Typically, it means renting out a new office, hiring additional staff, developing new products or services and paying for more utility bills.
Tips on Applying for a Startup Business Loan
It is important to be prepared when taking out a startup business loan or any other types of financing. Aside from making it easier for lenders to sort out your financial information when you have all the required documents in place, you also have the time to fix or improve any areas in your finances.
1. Improve Your Credit Score First
One of the most important requirements when taking out a loan is a good credit score. This can only be obtained if you have an established history of responsible credit management. If you’ve paid your previous debts and utility bills on time and have stuck to the recommended 30% of credit limit when using your credit cards, you likely have an impressive credit profile, which translates into a good credit score. The more impressive your credit history, the higher your credit score.
- Business Credit Score. Ideally, you must have a good business credit score to qualify for a business loan. This is earned through the efficient management of business debts and responsible use of your business credit card. A business credit score includes a lot of commercial information, including loan inquiries, payment records, registered defaults and any external administration that may be registered against the business.
- Personal Credit Score. If it’s your first time to establish a business, you probably don’t have a business credit score. However, you can still qualify for a startup business loan if you have a good personal credit score, which is built on your personal credit history.
2. Shop Around for Loan Deals
Look at the commercial banks available to you. Don't just go to the large, national commercial banks. You may have a better chance for a loan at the smaller regional commercial banks. Other non-bank institutions might be options for you, such as credit unions. If you are a member of a local credit union, talk to the loan officer there about your need for a small business loan. If they make such loans, pick up a loan application there as well. There are other options, such as microfinance loans that make loans to startups. If one lender turns you down, another may say yes to the same loan application, so keep trying.
3. Prepare the Essential Documents
One of the common reasons why startups get denied for a business loan from the banks is their inability to present a lot of documents as proof of their stability and financial capacity for repayment.
The most common documents include:
- Cash flow projection prepared by an accountant or business consultant. It shows your estimated income and expenses for over 1 year. It helps lenders determine whether your projected income will be enough to meet the loan repayments.
- Business Activity Statement (BAS). A form submitted to the Australian Taxation Office (ATO) if your business is registered for Goods and Services Tax (GST), this document reports your GST and pay as you go (PAYG) instalments and withholding tax. It reflects your cash flow and how you're managing it.
- Interim financial statements. These are your balance sheet and other records of your business activities.
- Contracts. Agreements with your customers that show your business income.
- Sale of Business Agreement, if you've bought your business from another party
- Lease Agreement, if you're leasing your business facility
- Income Tax Return
4. Present Your Business Plan
A business plan is a written document that describes in detail how your business will operate to achieve its goals. It lays out your company’s vision, structure, products and services; and the strategies for realizing business goals. It includes a description of the various aspects of your business, including marketing, operations, and accounting.
Business loan applications further demonstrate the importance of a business plan. If you seek financing from lenders, you need to present a detailed business plan to convince them that your business is capable of earning profits to satisfy the repayment within its agreed term.
The ideal business plan doesn’t have to be too lengthy and excessively detailed but should be comprehensive enough to prove that you truly understand your niche and you know how to achieve your business goals. It should also be sensible and engaging to convince your investors and lenders to believe in your projects.
This essential section of your business plan discusses every aspect of your business finances and offers an honest picture of the current status of your business and what it can become if you have the needed funding.
Your financial plan should include:
- Business Expenses
- Income Statement
- Cash Flow Projection
- Balance Sheet
- Break-even analysis