Many Australians dream of becoming their own boss and startup business loans are crucial to getting their ideas off the ground.
Read on to find out everything you need to know about startup business loans, including:
Even if you have a great business idea, getting the finance you need can be tough if you apply with a traditional, mainstream lender like a bank.
Banks are risk-averse and they have very strict lending criteria.
They get spooked by statistics showing that 35% of startup businesses don’t survive for more than four years. The word ‘entrepreneur’ translates to ‘high risk’ for conservative bank lenders.
Banks will also usually require you to have been operating for up to a year and to be making some money on your idea before you qualify for a business loan. Ironically, that’s not the stage when you usually need finance the most.
As even the most successful startup entrepreneurs know, it isn’t always possible to make money straight away, even with a great idea.
You may not even be able to start your business without any funding in the first place!
And turning to family or friends for financial help can be very awkward for you and for them. But the good news is that there’s an alternative to bank financing – the private lending market.
Where banks see risk, private lenders often see opportunity.
If statistics show that 35% of Australian startups fail, it obviously means that 65% don’t!
And there have even been some billion dollar Australian startup success stories in recent years, like Canva and Airwallex. In startup terminology, these billion-dollar ventures are known as ‘unicorns’.
If you have a good business idea, private lenders will be more willing to listen to it.
Private lenders also aren’t hamstrung by strict lending policies like banks are.
We are private lending specialists at DFS. Arranging startup business loans is one of our specialist services.
Here are the most common questions we get from our entrepreneurial clients at DFS.
Starting any business costs money.
Even with a good idea, it usually takes time for you to start generating revenue and to become profitable.
Depending on the type of business idea you have, you may need finance to:
For example, the cost of marketing your product or service and the cost of any staff you need to pay to help you run your business.
A business startup loan can give you the finance you need to get up and running. It can help turn your startup dream into a reality.
It can also help to prevent you running out money before your business gains traction in your market. Running out of money is one of the most common reasons that startups fail.
There are two basic options with startup loans – secured and unsecured.
You need to put up assets that you own as security (called collateral) to the lender for a secured loan.
One of the most common ways to do that is via a caveat loan. You can’t sell the asset you put up as security while the caveat for the loan is in place.
Property is the preferred form of collateral security for most lenders.
An unsecured business loan on the other hand doesn’t require you to put up any security for the lender. This type of finance is harder to get.
It’s also important to understand that secured business startup loans have lower interest rates than unsecured loans.
So if you do have assets you can put up as security, you’ll pay less interest.
Interest is obviously the major cost of any finance, including startup business loans.
The good news is that interest rates in Australia are currently at record lows, so it’s a good time to borrow.
With the economy still recovering from the effects of the COVID-19 restrictions, interest rates should stay low for at least the next few years.
But it’s still important to get the lowest interest rate you can for your startup business loan.
The less you pay in interest, the more money you’ll have to invest in your business to help it to grow.
When you take out your loan, if you can afford to pay it off earlier than your scheduled term, you’ll also pay less interest.
However, interest on a startup business loan is fully tax-deductible, so there’s a tax incentive to borrow.
Another cost factor to consider is loan fees. Banks typically charge ongoing loan fees that private lenders don’t.
This depends on three main factors:
1) how much you can afford to repay.
If you can afford to repay more, you’ll be able to borrow more (and vice versa).
And you’re more likely to get a flexible repayment schedule that takes your cash flow into account with a private lender than a bank.
Cash flow in the early days can be an issue for startup businesses, so having a flexible repayment schedule can be crucial.
For example, you may need to have a combination of regular and lump sum payments in your loan contact. Or you may want the flexibility to extend your loan term to suit your cash flow.
2) whether you can provide property as security for the loan.
If you can provide property as security to your lender, you’ll also be able to borrow more (and vice versa).
You may be able to borrow up to the current value of the security you provide.
3) whether you get your finance from a bank or private lender
Private lenders will usually be prepared to lend more than a bank would for a startup loan.
At DFS, we can have secured startup business loans approved and the funds to be provided in as little as 24 hours.
On the other hand, if you apply with a bank, you’ll wait a lot longer. And your application will more likely to be declined anyway, so it’s a double whammy.
At DFS, we understand that good business opportunities don’t wait. We won’t leave you hanging around waiting for a finance decision.
Yes, if you use a private lender and you’re taking out a secured loan.
At DFS, we usually don’t even do credit checks for clients wanting secured loans.
On the other hand, banks will check your credit score as part of their standard loan application process.
They will also be even more likely to decline your startup loan application if you have bad credit.
And your credit score will go down further if they decline your application, so again, it’s a double whammy.
Startup business loans works like any other type of loan or credit arrangement:
1) you enter into a legal contract to borrow and repay the amount you need.
2) you make regular repayments over the loan term. The repayments cover the amount you borrow plus interest and any other fees.
All of the terms and conditions of the loan contracts that we arrange for our DFS clients are provided upfront before signing. We are fully transparent. We ensure that both our borrowers and private lenders are happy with the arrangement.
We arrange startup business loans for Australian entrepreneurs at DFS. We have:
Make sure that you:
If the bank says NO, DFS can get you a YES!
