Business finance

Start-up loans for businesses

When starting your own business, costs can mount up quickly. From hiring staff to purchasing equipment and fitting out premises, financial constraints have stopped many a great idea from taking flight.

Whilst it can be difficult for early-stage companies to qualify for traditional business loans that are available to more established businesses, there are various ways of obtaining funding to get your project off the ground.

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Why finance is essential for early-stage companies?

One of the biggest hurdles a small company can face is getting access to the capital needed to turn a business idea into reality. A startup loan means that business owners don’t need to gamble their own funds and assets on a venture - but getting approval comes with challenges that can be difficult to overcome.

Costs add up quickly for start-ups. Before doing any business at all, some or all of the following costs may need to be covered:

  • Staff costs - not just wages, but also costs associated with hiring and training
  • Rent & fit-out of business premises
  • Stock and equipment, such as machinery or vehicles
  • Phone, electricity, internet
  • Marketing and website
  • Insurance, licenses and permits

What is a startup business loan?

This may surprise you, but no product on the market is specifically designed as a 'startup business loan'. The term refers to the different types of business finance that can be used to help you establish a new business or new company.

Startup loans can come in many forms — deciding on the best startup loan for your new business depends on your personal situation, preferences and business needs.

Start-up business loan funding options

Secured business loan

A secured business loan is a term loan that's secured against fixed assets. Generally, this is business collateral, however, when a business is first starting out, the chances of having any collateral is low. This is why many secured business loans are secured by personal assets (which, depending on the success of your venture, can prove to be a risky move)!

It's essential to consider what impact this has on you if your business fails in its infancy.

Professional investors

Angel investors and venture capital funds make their money by investing in early-stage businesses in exchange for equity. An angel investor is an individual, whilst venture capital is a firm specialising in making investments.

Bootstrapping (and sweat equity)

Usually, the first option for early-stage companies. Bootstrapping often means holding down a 9-5 day job and working on your business in your spare time, until it becomes financially viable to do it full-time. Funds come from the pockets of the founders.

Sweat equity is related — as a start-up business, you'll often need to hire people with skills that you don't have, but you have no way to pay them (or not what they're worth in the real world). You offer them a stake in the business to take a lower (or no) salary in return for their expertise.

Friends and family

A common practice for start-up businesses (especially for business owners with a bad credit history) is to access financial assistance from friends or family. Lower interest rates, flexibility and leniency and little or no eligibility criteria, but fraught with risk.

Personal loans

If you can't get a business loan, you could always consider a personal loan. If you have a decent personal credit history, an unsecured loan is relatively easy to obtain. Although the amount will be small, it could be enough to tide the business over.

Crowdfunding

A modern way of funding new businesses is to pitch your idea to the general public on a crowdfunding platform and ask for small donations to help you achieve your goal. In return, you give them early access to your product or service or even exclusive 'money can't buy' offers. Or equity crowdfunding, where you sell shares in your start-up to the general public in return for funds upfront.

P2P (or peer-to-peer lending)

Investors or groups of investors are matched with businesses (or individuals) looking for a loan. P2P funding is facilitated by platform operators, who act as intermediaries. It's a quicker and easier way to obtain funding, although credit checks are still required, as is a convincing pitch to get investors to believe in your business, especially if you don't have a detailed business plan.

Business credit cards

A business credit card (or personal credit card) could cover short-term expenses. It is possible to take advantage of interest-free periods, however, credit cards generally attract very high interest rates on purchases. Also, you may be unable to use a credit card for all the required expenses. 

Savings

Another option is to use your savings account to fund a business venture. This strategy can come with considerable risks, as start-up costs can quickly mount up. Despite this, if you can afford to fund the business yourself, it would mean no business loan repayments, freedom in how you spend the money, and built-in prudence since you're dealing with your own money.

If you're considering using your savings, it's important to factor in the opportunity cost of the funds. Is the investment in your business going to generate a larger return than using the money elsewhere? If not, it might pay to seek business finance. Keep in mind that any interest payments may come with taxation benefits too.

Grants

Depending on your industry, you may be eligible for some help from the government in the form of a grant [Would be good to link this to business grant article]. It's a long and complicated application process with no guarantee of success. Still, it can include matched funds of up to $1m, as well as expert advice, mentoring and event placement in a start-up incubator.

Invoice financing

If your business has kicked off the ground, but you need help keeping your cash flow momentum up, invoice financing could be the start-up booster you've been looking for! Accessing fast funds from your unpaid invoices can be a game changer for start-ups!

Startup business loans FAQ

We answer some of the most frequently asked start-up business loan questions.

Is it okay to start a business with a loan?

Choosing to start a business with a loan is neither 'right' nor 'wrong'; it simply depends on your financial situation and circumstances. What is important is to consider the pros and cons of taking out a loan and make sure that you're aware of the consequences and commitments that it brings.

Do you have to start paying back business loans straight away?

There are very few (if any) start-up business loans where you can delay repayments or interest charges. Those who use a loan from family or friends may access a grace period, however, most startup business loans require their repayments to start within the first month of being funded, per the loan contract.

How much deposit do I need to put down for start-up business loans?

Not all lenders will require a deposit on a small business loan. As a general rule of thumb, anywhere from 10-30% may be asked as an initial deposit amount. Alternatively, depending on the loan structure, you could offer up collateral to secure the loan, such as working capital, savings, or, in the case of an invoice financing solution, your unpaid invoices.

Disclaimer: always refer to professional advice. The information presented here is purely indicative and not intended as advice. Always consult a legal or finance professional.

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