Getting finance when you’re new in business can be a challenge. New business loans are not easily accessible if you don’t have a track record or don’t have assets to use as collateral. Here we’ll look at some of the types of new business loans you might consider after starting a business.
Challenges of getting new business loans
Whether you’ve been in business for one month or one year, getting new business loans is not easy for several reasons. First, many new businesses struggle and don’t survive beyond a few years. Second, a new business does not have a track record that proves its ability to repay a loan. In many cases, banks and non-bank lenders will want to see financial statements for a few years before approving a loan request. There still options available for new businesses but often the loan amounts are lower and interest rates higher than available to larger, established businesses.
Business loan from family and friends
This is often the first step for many new businesses, especially if they need a startup loan. If you get a loan from family members or friends, keep it professional. This means creating an agreement with all terms in writing. Include when and how much you will pay. You might consider making your repayments based on your cash flow so you will gain flexibility when cash flow is not strong. Learn more about getting new business loans from family members and friends.
Bank term loan
This is what often comes to mind when business owners think of business loans. A bank term loan has a fixed duration (term) and a regular payment schedule. A few shortcomings of this type of loan are that the loan applications can take a lot of time and effort to complete and you might not receive an answer for up to two months. You might need to provide a business plan as part of your application, especially if you have a new business. Bank term loans are secured. For new businesses that don’t have commercial assets, residential property is used as security. If you don’t have a residential property with equity in it, a bank term loan won’t be an option funding your new business. In addition, research has shown that around 75% of small businesses get rejected when applying for traditional bank loans.
Business credit cards
Credit card cards come with a variety of features and rates. Some new businesses get their initial funding from personal credit cards. For business purposes, a business credit card is recommended as it will help you separate your personal and business finances, and enable your business to build its own credit history. If your new business has no credit history, the bank issuing the card will want to check your personal credit score. Get tips for choosing the right business credit card.
Business overdraft
Business overdrafts are designed to help businesses manage short-term cash flow fluctuations. With a business overdraft, you are able to ‘overdraw’ your account to an agreed limit. You only pay interest on the funds you use, plus an establishment fee and a monthly line fee. Business overdrafts can be secured or unsecured with collateral. If your business is very new and you have no track record, you might need to secure your business overdraft with residential property. Learn more about business overdrafts.
Business line of credit
A line of credit is a popular form of finance among small businesses – around half the small businesses that use business finance have a line of credit. A line is similar to a business overdraft but it’s not automatically connected to a transaction account like a business overdraft. Unlike a business overdraft, business lines of credit are used for long-term financing needs. Learn about business lines of credit.
Unsecured business loans
Short-term unsecured business loans are growing in popularity among small businesses. Using leading-edge technology, online lenders are able to analyse a company’s finances safely and securely to determine whether to approve the loan. In addition, applications can be completed online in a few minutes. Since there is no collateral required there’s more risk for the lender, so unsecured business loans have higher interest rates than other financing options.
The length of time in business to be eligible for a loan will depend on the lender. With Moula, for example, requirements to be considered for new business finance include:
- A minimum of six months in business
- An active ABN or ACN
- More than $5,000 in monthly sales.
Find out more about unsecured business loans from Moula.
Do your homework when considering new business loans
When looking for a small business loan for a new business, you will want to read the fine print. This includes understanding the interest rates, loan term and the associated terms and conditions.
For in an in-depth look at small business finance, see our Complete Guide to Business Loans in Australia.
Also, check out our business loan calculator to get an estimate of business loan principal and interest repayments.