How to Secure a Business Loan as a New Business

Business loan new business

This article is for informational purposes only and does not constitute legal, accounting, or tax advice. The information contained herein is subject to change and may vary from time to time in your region. For specific advice applicable to your business, please contact a professional.

As a new business, securing finance can be challenging. Banks are notoriously strict about lending to startups, so you’ll need to do some serious pre-work before you lodge a loan application to give yourself the best chance of having your business loan approved.

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Before you apply for a loan for your new business, you should ensure you:

1. Are clear on why you need a business loan and what you can afford. Access to finance can give your startup a real boost – but you need to be able to meet your repayment obligations. Speak with your accountant about why you need business finance, what’s a sensible amount to borrow, and ensure you’re confident that you can service the loan into the future.

2. Understand your finances. Your accountant or a bookkeeper may take care of your accounts, but you should still have a basic understanding of your finances. A cash-flow statement provides a good snapshot of the money moving into and out of your business.

3. Prepare a business plan. Most lenders will want to see a comprehensive business plan before they agree to give your small business a loan. The Australian Business Government website has a helpful guide to developing your business plan.

4. Have your paperwork prepared. Once you’re ready to approach your bank, pull together your proof of identification (passport, driving license, etc.), personal financial information, proof of your business’s financial position, financial forecasts, and your business plan.

Why do you need a small business loan?

As a new business, you may need finance to assist with:

Developing your concept. Startups often need funding to help them take their new business idea from a concept to a market-ready product or service. The product development process can be time-consuming and expensive, and often takes place before your business is making money.
Covering operational expenses. Depending on your size and operating model, you may need to pay for expenses including premises, staff, utilities, technology, insurance and more.
Marketing your product. Finding customers is one of the biggest challenges new businesses face. Your business plan should identify your target market – but how will you reach these potential customers when you launch? Popular channels for marketing your new business include email marketing, social media, online advertising, partnering with influencers and PR outreach. Traditional options like brochures and letterbox drops can also be effective, particularly if your product or service is most suited to a specific local area.

  • Expanding your business. If your launch has been successful and your business is growing, you may need to invest in more inventory, equipment and employees.

Cash flow can often be lumpy for startups, which is why sourcing external funding via a small business loan or another finance facility can be a sensible option.

What are the most common types of business funding?

Two of the main types of finance available to small business owners are:

  • Debt finance: where money is borrowed from an external lender such as a bank or credit union.
  • Equity finance: where you or your family, friends or private investors provide funding in exchange for owning a part of the business.

Both debt and equity finance have advantages and disadvantages. The type of finance you choose for your small business could have a significant impact on your cash flow and tax obligations, so you should seek advice from your accountant before making a decision.

What are the most common finance options for small businesses?

There are a variety of funding options for new businesses:

  • Business loan. A business loan can be used to cover any business-related expenses or to buy an existing business or franchise. The loan term, interest rate, fees and security requirements can vary by product and lender.
  • Overdraft. An overdraft is a flexible finance arrangement where a lender allows your business to smooth its cash flow by withdrawing more than the balance of your account.
  • Line of credit. With a line of credit, you can access funds up to a certain limit to pay for any business expenses at any time.
  • Hire purchase. A hire purchase lets you buy equipment for your business by paying an initial deposit followed by instalments for the remainder of the finance term. The asset is owned by the lender until the final repayment is made, when ownership transfers to you.
  • Credit card. Credit cards are a popular choice for meeting short-term funding needs or financing a large one-off purchase.
  • Invoice finance. Invoice finance allows you to access funding using your accounts receivable ledger as collateral.
  • Personal loan. If you own the business, you could apply for a personal loan and use this money to fund your small business.

Regardless of the business finance option you choose, ensure you check the product disclosure statement and terms and conditions carefully before you apply.

If you’re a new business looking to secure extra working capital, you have plenty of finance options – which can be both helpful and overwhelming! Speak with your accountant or financial advisor about the best finance options for your new business. You might also ask them to help you get your loan application in order before you submit it to give yourself the best chance of being approved.

Square Loans can help your business in your journey of growth. Discover more about how to apply for Square Loans today.