GUIDES & RESOURCES

Loans for Startup businesses.

If you’re starting a business there’s a lot of things to organise. You might want property, staff, equipment, stock, and the list goes on. Unless you have funds saved, or a generous benefactor, you may be considering business financing.
*iSelect does not arrange business loans products, but can refer you to Valiant who does provide such services and can help you compare business loan products. Valiant Finance Pty Ltd (ABN 95 606 560 150) holds Australian Credit Licence 500 888. iSelect and Valiant do not compare all providers in the market, or all products offered by all providers. If you click through to the Valiant website and acquire a business loan through Valiant, iSelect earns a commission from Valiant. Learn more

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What qualifies as a ‘startup’ business?

A startup business is a new business that’s just launching, and can refer to businesses which have ambitious plans for growth. It can refer to businesses of any size, from sole traders through to larger organisations.

Why a startup business might need a loan?

Like any business, a startup needs funding for various aspects of running the business. Because a new business may not have a revenue stream yet, a startup business loan could be a good option. Here are some of the typical reasons that your startup business may decide to take out a loan:

  • To develop your business offering. Whether it’s a product or a service, any business needs a well-developed offering for its clients. Going from an idea to a fully developed product or service takes time and money, typically before a business has started earning any money. That’s why, this is a common reason for startup businesses take out a loan.
  • Business Premises. Some businesses won’t need to invest in office or factory space early on, but many could. Again, this is often an expense that comes up before there’s any revenue coming in.
  • Equipment. Whether it’s computers, printers and copiers, or highly specialised machinery, it’s going to cost moneyto purchase any required equipment.
  • Pay staff (and your own!) wages. Even though you’ll be busy starting up your business, you may need some form of income. If you need to staff up early on, it may be worth considering how you will pay your new staff.
  • Stocking up. Depending on your type of business, you may need to purchase stock, before you sell it.
  • Advertising. You will probably want to let people know your startup exists, It could certainly help sales. So, a marketing budget of some sort may come in handy.

What sort of loan options are available to startups?

As well as loans for specific business related expenses, such as commercial property loans, business loans come in two familiar forms:

1. Secured Business Loan

To qualify for a secured business loan, you need an asset to act as collateral, to ‘secure’ the loan.

Assets used to secure a business loan can include property, both residential and commercial, as well as vehicles, business equipment, machinery and the like.

Benefits of a secured business loan:

  • Lower interest rates. As the loan provider has the security of an asset that has been used as collateral, and are likely to recover their losses by selling the asset should you default on your loan, they may be able to provide lower interest rates on the loan
  • Borrow more money. Because a secured loan is generally lower risk to the lender, they are more likely to offer higher loan amounts.
  • Easier to qualify. Because of the lower risk involved to the lender, it is often easier to get approved for a secured business loan than an unsecured one.

Disadvantages of secured business loans:

  • You need an asset, and you could lose it. Bear in mind, that while the security on the loan offers you a cost benefit, it also comes with that risk of losing the asset, should you find yourself unable to pay the loan. By ensuring that you will be able to stick to your repayment schedule, you should be able to keep your asset safe. After all, if the asset you put up is integral to the functioning of your business, then losing it could be detrimental to your business.

2. Unsecured Business Loan

An unsecured business loan does not require you to provide an asset with which to secure the loan. Instead, an unsecured business loan can be approved subject to your credit history, business projections, and cash flow.

Unsecured loans tend to be shorter term, and can vary from around 3 months to 3 years. That said, longer terms are available through certain specialist lenders.

An unsecured loan can be used for any business related cost, and offers a business the opportunity to access funds quickly to help smooth out cash flow fluctuations.

Benefits of an unsecured business loan:

  • No asset required as collateral. Just a good credit score, so your assets are protected.
  • Easy application process. You just need proof of your credit history and current financial situation. No lengthy valuation or itemisation of collateral is necessary.
  • A way to get money quickly. Thanks to less paperwork and no collateral evaluation process, many unsecured business loans can be funded within 48 or even 24 hours.
  • Build trust with a lender and improve your credit history. Building trust with your lender can make it easier to access more funds at a later date, if and when required.

Disadvantages of unsecured business loans:

  • Higher interest and fees. Compared to a secured loan, lenders are taking a bigger risk when they fund an unsecured loan, and therefore the costs of the loan tend to be higher.
  • Can be difficult to get approved. If you don’t have a good credit history or reliable business revenue already, it may be hard to get an unsecured business loan.
  • Smaller amounts / shorter terms. This isn’t a disadvantage if you only want to borrow a small amount over a short period. Otherwise you may want to consider other options.
  • Penalties. If you don’t meet the repayment schedule, you may be liable for some hefty charges. You may also incur penalties if you want to repay your loan earlier.
  • Personal Liability. As the owner of the business, you could be liable for the outstanding amount should your business default on the loan.

Other things to consider when you are talking out a business loan?

The things to consider when taking out a business loan are similar to a personal loan.

  • Borrow within your limits: Before you start looking, you might want to work out how much you can afford to borrow and pay back. Defaulting on a loan could have seriously negative consequences for your business and ability to secure credit in the future.
  • Compare interest rates: Using a service like Valiant may help you compare a range of interest rates an option. Be e aware that interest rates can fluctuate between lenders.
  • Fixed or Variable interest rate: It’s up to you whether you choose the certainty of a fixed rate or the flexibility that a variable rate can offer you. Check with your lender, many fixed rate loans can charge penalties should you want to pay out your loan early.
  • Fees and charges: These charges can vary between lenders and can make a difference to the affordability of the loan. Check for establishment fees, ongoing service fees and any penalty fees which may apply for additional repayments you make into your loan.
  • Loan value: Different lenders have different minimum and maximum amounts that they are prepared to lend. This can also vary according to the financial situation of you and your business.
  • Loan terms: As we’ve said earlier, a secured loan generally has a longer term, and there is still a lot of difference in available loan terms. It’s wise to choose a loan term that fits in with your business cash flow, so your repayments won’t cause financial stress.
  • Repayment schedule: Some lenders will offer flexibility on your repayment schedule, so you can change it to suit your business cash flow.
  • Redraw facility: A redraw facility can give you access to any additional repayments you’ve made into your loan. This can help cut overall interest paid, reduce the life of the loan and still leave you with a back-up fund which you can access if needed.

How do I find a startup business loan that is suitable for my business?

iSelect has partnered with Valiant to help you find a startup business loan that’s suitable for you. Click here to start comparing business loans today!

Last updated: 15/03/2022

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