Startup loan or loan to start up?
The bad news is there’s really no such thing as a startup loan. The good news is that almost anything can be a startup loan. Confused? Don’t be. "Startup loan" is just a name. It’s bank marketing. You could use any type of loan to start a business.
Bank loans for business
In reality, a startup loan will probably be a term loan or, in rare cases, a line of credit.
- A term loan is a lump sum that you pay back over a set period of time. You’ll pay interest on the money borrowed, at a fixed or variable rate. If you’re able to provide collateral you’ll probably be offered a lower interest rate.
- A line of credit is a set amount that you can draw on when needed. It works like a credit card but has a lower interest rate. These are more commonly given to existing businesses with a track record of earning money.
If you’re a startup business, getting a term loan or line of credit can be difficult. You generally won’t have any track record to show the bank you’re profitable and can make repayments.
Banks and financial institutions are more likely to lend to a startup if they can see you have:
- some previous experience with a successful business
- invested a large chunk of your own money
- good credit history
Without at least one of those, you might find it hard to get much money through a traditional bank loan.
How to get a startup business loan
You can help your chances of getting a loan by following these steps:
1. Get your financial requirements and business plan together.
Figure out how much you need to build the business and run it in the early days (before revenue starts to flow). Show the bank a business plan that demonstrates how your business will succeed. Be sure to acknowledge the risks along the way.
2. Show them how you intend to repay the loan.
Include a budget showing how you’ll afford repayments and when. That’s really the most important thing they want to see. They want their money back – with interest.
3. Let them know if you have any collateral.
Your home, vehicle or other personal assets could be used as collateral. You might be able to get an unsecured loan if you’re only looking to borrow a small amount.
Alternative startup financing
If the banks aren’t interested in your brilliant plan, there are other options for finance:
- Investors might be a useful source of finance. You’ll have to give up a share of your business but in exchange you may get a business partner and mentor with valuable experience and knowledge. And further down the track, you could buy back their share. Learn how to find investors.
- Friends and family can be a source of funds – either as investors or lenders. If you choose this route, get things in writing to protect your relationships. Explore the pros and cons of approaching friends and family.
- Crowdfunding is another finance option. It can take a lot of work to put together your pitch and your idea really needs to stand out to get traction. Find out how crowdfunding works.
- Peer-to-peer (P2P) lending lets you borrow from one or more strangers. You won’t get as large an amount without collateral. Get an intro to P2P lending.
- Bootstrapping is the do-it-yourself method. You use your savings, personal credit cards, personal loans, or maybe refinance your home. It’s risky – if your business fails you can devastate your personal finances.
- A Small Business Administration (SBA) loan might be the answer if you think the banks won’t lend to you directly. The SBA works with lenders and backs part of the loans they make, therefore reducing their risk. Some SBA loans also come with support to help you get your business running.
Want to know more about startup financing?
Xero does not provide accounting, tax, business or legal advice. This guide has been provided for information purposes only. You should consult your own professional advisors for advice directly relating to your business or before taking action in relation to any of the provided content.
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