Getting a business loan as a startup can be challenging. Most Australian startup founders rely on friends and family, equity investors, or maybe even take out risky personal loans to finance the growth of their business. These options are popular, but that doesn’t mean they are risk-free or available to every entrepreneur. Giving up equity early on typically means heavy dilution and a low price per share. Luckily, selling equity is not the be all end all, there are a lot of options for debt finance you may not be aware of.

What are Startup Loans?

Start up business loans are a category of debt instruments aimed at entrepreneurs starting a business or young small businesses just starting to grow. There is no specific type of loan that is called a “startup loan”, but a whole array of different products that may or may not fit your company at this point in your journey. Typically, a startup loan is a term loan – this means the company gets a lump sum of money and repays it with interest once the term is over. More rarely, a startup can arrange for a line of credit. This means the new business can draw down as much as is needed up to a certain amount and only pay interest on the funds they needed to use.


Types of Startup Loans

Bank Loans

Companies at the earliest stage of their journey usually find it hard to convince a bank to step up and provide needed cash flow. Banks usually like to see a stable track record, at least some revenue, or a sufficient amount of collateral to make sure the potential borrower can repay. Once the company starts to make some revenue, even if profitability isn’t yet in reach, banks do become interested. The main funding challenge for a new business is showing steady revenue growth and a well thought out business plan.

Business banking can offer early access to business loans for start up companies, but the amounts are typically limited to a few thousand for companies without collateral or revenue. If your product or service is just getting off the ground, accessing these low interest, but small loans could be the way towards the growth you need. The limiting factor is, unfortunately, the size of the potential funding.

Though banks are entering the market for earlier and earlier start up business loans, entrepreneurs often end up using their personal credit cards or personal loans to help add cash flow at the beginning of the startup journey. The risks associated with this are higher than borrowing against the revenue or assets of a limited company, so it’s important to weigh all the options before taking the plunge. A company credit card is a different asset, though it is often hard for young startups to accumulate the credit history needed for the application process, beyond what are potentially high interest rates and other, more restrictive terms and conditions.


Debt Crowdfunding or P2P Loans

One of the most popular alternatives to bank loans for the start up set is debt crowdfunding, or P2P loans, as they are often referred to. This form of debt finance relies on a pool of investors to contribute money to finance a pool of loans. The model varies slightly from provider to provider, but it’s one of the fastest-growing new business loan models in Australia. Depending on the lender, P2P loans can be either secured or unsecured and can apply to any size of company from the one-man band to huge corporations. The interest rate will vary widely according to the risk the P2P lender pool is incurring. Each of the business lenders will have a different approach to risk.

The advantage that P2P lenders have, besides the flexible pool of investors, is the potential to leverage technology. Though banks often use high tech to help facilitate their lending processes, they’re typically slow to adopt efficient and flexible new technologies, usually because of their size and the complexity of rolling out new technology. That’s where debt crowdfunding shines, as a lot of companies in this space also identify as FinTech. For a start up entrepreneur, this is great news, as this means the lending models used by these companies are much more flexible and can account for more individual situations, which can include: a lack of collateral, no current revenue, a schematic business plan, etc.

Another type of crowdfunding that exists for a new business is equity crowdfunding. This isn’t a loan, but the company receives funding against selling its shares to a big “crowd” of investors that were attracted to the idea of owning a piece of the business.


R&D Finance

R&D finance or an R&D loan is a useful new type of debt product that can help startups registered in Australia to access their eligible R&D tax incentive payments early. The lender estimates the size of the future return from the ATO and lends against that sum. Once the ATO pays out the R&D tax incentive refund, the borrower uses those funds to repay the loan.

Of course, not all startups in Australia are eligible for R&D Finance, given that not all are eligible for the R&D tax incentive. Though, many Australian companies are not aware that they would be eligible for the R&D tax incentive. It pays to chat to a specialist to make sure you’re maximising all the tax benefits you are eligible for. We can recommend someone to give you a quick overview if you’re wondering about eligibility.

This funding type is usually best for businesses that invest a large amount of cash into R&D during the year. This can mean anything from salaried employees to contractors and consumables that were used or needed in the process of Research and Development. To find out all about the R&D tax incentive and the conditions that apply, check out our Ultimate Guide to the R&D Tax Incentive for a complete overview.

R&D Finance is different from other startup business loans because it is accessible to small businesses that are pre-profit, and in many cases also pre-revenue. The borrowers also often have no tangible assets, no land, machinery, or equipment outside of the intellectual property they have developed and would typically be limited to getting funding via venture capital, angel investors, or other, more dilutive, finance options. Businesses who are eligible for R&D funding can usually draw down almost a year in advance of their repayment, in monthly or quarterly installments, that reflect their spending to date. The loan, including interest, is simply repaid after the ATO transfers the funds to the business.

The best source to learn about R&D Finance is our Complete Guide to R&D Finance. We wrote it as funding specialists both in the area of the R&D incentive and also as the world leaders in R&D Finance solutions.

If you believe you could be eligible for an R&D loan or our other credit products are just curious about how it works, drop us a line. Our team is happy to chat you through the details.

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Invoice Finance

A lot of companies in Australia have seasonalities or long sales cycles and for these, invoice discounting can offer the best fit for their business needs. Invoice finance can be used as an easy cash advance, help prep the business for investment, or, in a typical use case, help finance more production. Though manufacturing, retail and wholesale companies are the most likely candidates for invoice discounting, this is becoming more common in more technology-intensive fields, like software. The businesses here also have longer sales cycles and can use the contracted revenue as a basis for a loan.

Invoice discounting can be useful for new businesses as well if the business is already selling products or services.  The way it works is simply that a lender will offer a loan against an invoice that is to be paid at a set date. The loan is offered at a discount, which means the business is not getting the full amount on the invoice, but a reduced amount to offset the fees and interest of the lender, additional to the risk of default from the client. If you have a very small business or a startup, invoice finance may not be the best type of business loan until you are making sales and have a proven track record in generating revenue.

Though invoice finance is a business model as old as time there are new entrants in the market that have added speed, easy access through technology, and new data-based security and due diligence systems. This means invoice financing is now a simple way to use your invoices to makes business planning easy.


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Startup Business Loan FAQs

How long does my business need to be in operation for a startup loan?

For a start up business, the need to show a track record can depend a lot on the type of business loan you are looking for.

For bank loans, typically the company needs to have been in operation for at least a year, or potentially multiple years, depending on the bank. This may be reduced for very small loans, but banks tend to be the most restrictive in their terms on company trading history.

For alternative lenders like debt crowdfunding and R&D finance, a track record is less important, and many companies will lend to businesses in their first year if the company fulfills their other eligibility criteria. Other factors may be more relevant, though, like if the company received a prior equity round, like angel investment. Interest rates can reflect this additional flexibility, so it’s best to compare APRs between potential providers. The positive side is that due diligence can be quick due to more technology-powered solutions, leading to some lenders offering approval in 24 hours.

What is required to get a startup business loan?

Typically lenders will require due diligence and this involves presenting information on the company and potentially on the business owners as well. A lender will typically look at financial records and forecasts, like the P&L statement and the balance sheet, and also at cash flow forecasts to understand the direction of the business. Other data may be required, depending on the type of loan. If you’re going for invoice funding or R&D finance, then the lender will focus on your receivables and your R&D tax incentive payment, respectively.

Each company has a different way of doing due diligence on its customers, but luckily, the increase in technology is making these processes smoother every year.

Where do I get a small business startup loan?

Start up loans come in different shapes and sizes. Depending on the stage your business is in, you can either try for a classical bank loan, go for invoice factoring if you are already making sales, or R&D Finance if you are pre-revenue and have spent a lot of time building a technical product or service. Additionally, you can contact some P2P loans businesses, which offer more flexible terms to new businesses, but the added flexibility may be reflected in the interest rate and other things related to terms.

Can you get a business loan with no revenue?

The loan options available for a new business with no revenue are indeed limited, but not zero. A business with significant investment in Research and Development and no revenue can nonetheless get funding from an R&D lender in advance of their repayment of the R&D tax incentive by the ATO. If your company has made sales, but is still waiting for the revenue to materialize due to a long sales cycle, invoice funding can be useful. Bank loans are also available for startup businesses in Australia, but out of all available finance options, these typically have the most stringent conditions and lowest amounts available.

What does a bank look for when giving out a business loan?

Banks are typically some of the more careful lenders. A classical model that banks use to decide who to lend to is called the 5 Cs because it accounts for character, capital, capacity, collateral, and conditions.

Though a young business will not have much of a credit score, the “character” dimension usually accounts for this factor, creditworthiness. Banks will usually check with credit score companies in Australia and abroad to see if the business has had trouble repaying its obligations in the past.

“Capital” measures the entrepreneur’s’ “skin in the game”. The more personal money the founders have invested in the company, the more the bank will be willing to invest as well. In companies where management and founders have no great personal stake, the bank is more reluctant to jump in and offer a business loan.

“Capacity” means the company’s ability to create revenue in the future to repay its debts. Banks usually require you to have a certain proportion of expected cash flow to the debt they are willing to lend.

The next C, “Collateral”, is for some banks, the most important factor. This represents the guarantee that the bank can recover its investment in the loan, by potentially selling off some assets of the business owner, which they extended as security for the business loan. You can see this clearly in home loans or other types of asset finance that require a credit licence from the federal government and represent secured funding.

The final factor, “Conditions”, refers to all the factors that are outside of the start ups control, including the general economic mood, sector-specific trends, or political events that could affect the risk of the business funding.


The Wrap Up

If you’re at the helm of a start up or growing business and want to explore the world of funding beyond equity finance options like venture capital and angel investors, a small business loan could be the answer. With options ranging from classical bank loans to alternative business credit, like R&D finance, the business loans available to startups are becoming incredibly varied and versatile. The application process is now becoming much smoother and tech-focused as well, simplifying access for early-stage business owners who want to give their credit card a break and access lower risk funding. Some lenders focus on credit history, but that’s not the be-all-end-all anymore, other factors like the loan term and interest rates can be adjusted to reflect the risk of earlier business loans.

Debt is quickly becoming one of the most important startup finance options and with a simplified loan application and streamlined repayment terms, new, more online business funding is leading the way to easy access to debt for all business owners. If you think a small business loan could fulfill your funding needs, please chat to a member of our team. We’re one of the world’s leading providers of R&D finance solutions, and our team understands the world of startups and small business finance extremely well, and can advise you in finding the right solution for your needs.

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Alexandra Kepka

Alex is a tech-focused funding expert, helping innovative companies grow through innovative funding through her work at Fundsquire. She also has a background in journalism, having written for outlets like Vice and many others in the past on topics ranging from philosophy to economics.