Should You Get a Startup Business Loan? Here’s Your Startup Financing Guide

By: Aaron Robbins0 comments

Starting your own business is an exciting venture — yet one that unquestionably requires financing. Getting the finance to turn your plans into practice is often one of the biggest hurdles that new business owners face.

Understanding your financing options to get your business successfully off the ground can empower you as a new business owner, and help launch your business onto the right trajectory. We are happy to provide your startup financing guide, and discuss whether you should get a start-up business loan.

Financing your business idea

Small business owners and successful company directors all have one thing in common — they all had to start somewhere. For most, they ponder over where the money is going to come from to propel their business forward.

The most common ways that Australian businesses are financed in the beginning are:

Bootstrapping (self-funding)

A quirky name that simply means using your own money or personal assets in order to finance the start of your business. Whether it’s your own personal savings, taking any surplus money sitting in an existing mortgage, or using money that family and friends have contributed towards your ventures, bootstrapping is incredibly common amongst Aussie businesses.

Bootstrapping benefits

Some of the benefits of bootstrapping can be that you retain full ownership of your business and don’t need to let go of a percentage of your business ownership in exchange for finance. Similarly, there are no fees, interest charges, or loan applications to navigate when using your own funds to start your business.

Downsides to self-funding

Naturally, using your own funds means that you are limited to however much money you’ve squirrelled away — which could leave your personal finances dry, or leave you unable to cover any further unexpected expenses until your business cash flow starts flowing in.

Crowdfunding

You may be familiar with online crowdfunding platforms. Commonly used to raise money for people in need, many budding business owners use crowdfunding as a way to raise funds from strangers to get the business idea off the ground.

There are different types of crowdfunding. Startups sometimes use equity crowdfunding to attract buy-in for their business, but exchange a portion of their business for the funding. Rewards-based campaigns, on the other hand, offer something in return for an initial contribution — the “reward” often being the product or service they are raising money to create.

Business credit cards

Start-up businesses often have ongoing start-up costs, which is why some owners seek out business credit cards. While a credit card can be an effective backup for unplanned costs, often, to obtain a business credit card, business owners need to pass a credit check, and have at least 6 months of business trading history before they can apply.

This makes business credit cards an inaccessible financing option for businesses that are yet to commence trading.

Business credit cards

Professional investors

Some innovative startups seek out a professional investor to invest in their business idea in exchange for something in return (such as a portion of your profit, or a share of business ownership). Professional investors can be individuals or organisations. Bear in mind that, similar to crowdfunding, if your idea turns into a successful business, then a percentage of your business may be owned by another organisation or individual. On the flip side, if your business fails (which, unfortunately, many startups do), you could potentially owe money to the private investor.

Asset-based financing

Secured loans use collateral to provide security to the lender to offer finance against. If you have existing business assets (such as equipment that you own outright or your customers unpaid invoices), you may be able to use them as a base to offer financial institutions.

The largest risk with asset-based financing is that whatever asset you offer as security, can be repossessed by the lender in the event that you default on the loan — which could put your business at risk of being unable to trade!

Asset-based financing

Start-up business loans

Traditional business loans are offered by traditional lenders, who have a convoluted application process and very strict lending criteria. They’re also only offered to established businesses.

Start-up business finance though, when accessed through Diverse Funding Solutions, can provide a flexible, fast and straightforward way to access funding for your start-up. Start-up loans can also take the burden off your personal finances, and keep the business ownership in your hands.

Unsecured start-up business loan

It may be more tricky to access an unsecured loan as a business loan, as the lender will often rely on your personal credit rating and existing income (similar to an unsecured personal loan).

Secured start-up business loans

The term ‘start-up business loans’ actually refers to a range of business loans that can be used to fund a start-up business. A secured start-up business loan uses an asset (or other collateral) to secure the loan.

For business owners with an existing mortgage, a common secured start-up loan is a caveat loan (where you use the available equity in your home to finance your business idea).

Secured startup loans also come with lower interest rates than unsecured counterparts.

Startup business loans FAQs

Wanting to get all the information possible before deciding on your financing method for your new business makes prudent business sense.

We answer some of the most frequently asked questions about startup business loans:

Can I still get a business loan with a poor credit history?

Without a business history, it can leave your application reliant on your personal credit rating. If you have a bad credit history, this can present a major roadblock for new businesses to access finance.

At Diverse Funding Solutions, we specialise in private lending, and often don’t need to run a credit check as part of our application process.

Should I go through a bank to get a business loan?

There are a range of alternative lenders, such as Diverse Funding Solutions, who provide more flexible eligibility criteria and loan terms than traditional banks. Small businesses often find difficulty in new business loans through traditional banks.

What interest rate is charged on a startup loan?

Your final interest rate will come down to the loan product and your own circumstances. With some of the most competitive interest rates amongst private lenders in Australia, why not get a free quote?

What information do I need for my loan application?

Unlike personal loans, the DFS application process is renowned for needing minimal paperwork. Initially, your identification and a detailed business plan are a great start. We can work with you to decide if it will be beneficial to assess other financial statements.

To discuss your start-up business loan options with one of Australia’s leading private lenders, contact the team at Diverse Funding Solutions.

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