There’s a lot to consider when starting a business. Any good business plan should include finance options to get the business up and running. But which is the right one?
What’s the best way to fund a new business? If your answer is to get a small business loan, think again.
Unfortunately, most new businesses will need some outside funding to get off the ground. The good news is that there are many types of loans that fit the bill. Borrowing for a new business can take many forms, and each borrowing option comes with its own implications for interest rates, collateral, and risk.
But which is the right one? It’s important to research different borrowing options to find the best fit for your needs.
Before you can pick the right kind of financing, you have to look at why you need the money. The business purposes for the loan will influence your choice, as certain loans are better suited for specific business needs and may affect tax deductibility. For one, unpacking your expenses will give you a good idea of how much money you need. It will also help you look for the right loan.
Below you’ll learn about your most likely expenses and what your best options are to fulfil them.
Common Expenses for New Businesses
There’s a lot of variance in the amount of money you might need. But most businesses share similar expense patterns at startup. These are some of the most common.
You’ll probably need money to develop your product or service. This is a big consideration for tech startups. For many, their existence is contingent on developing a product.
There will also be operational expenses. These cover everything from leasing space to meeting payroll requirements. Some of these operational costs may be covered by leveraging business assets, which can also be used as collateral for certain types of loans to help secure funding and potentially reduce borrowing costs. Also, remember that you will have to pay yourself a wage. If you rely on your new business for a livelihood, you’ll need to work that into the expenses.
Another big drain on your resources will be marketing. As soon as or before you’re ready to start selling, you’ll need to market your company and your product. There are many good options, but few of them are free.
Finally, there are always unexpected expenses. It’s inevitable, even for experienced business owners. It’s almost impossible to make a perfect estimate of your financial needs. So, you’ll have to mitigate that uncertainty.
How to Pick a Loan
These are the criteria for choosing startup business loans. Part of your loan application process will be deciding on the most favourable one.
The first and most important thing to consider is how much money you’ll need. That’s where all those previous points come in handy.
Not every lender will have options available to cover your needs. Conversely, some may have higher minimums than what you can reasonably borrow.
The other factor is how you structure the loan term. The repayment period will affect your overall repayment timeline and financial planning. To repay the loan, you need to work it into your budget and decide how long you can bear that expense. It is important to choose a repayment plan that aligns with your business’s cash flow.
Lastly, you’ll need to decide whether you need a lump sum or a line of credit. They will have different long term implications.
To get reliable cash flow, a line of credit is better but a lump sum could give you better terms on the loan.
Once you have a rough idea of these three things, you can move on to the details. Interest rate, credit history, and other eligibility criteria will come into play when you begin the application. Some lenders may charge an application fee, which should be factored into your decision.
It’s time to explore the financing options. When reviewing your options, compare rates and fees across different lenders to ensure you get the best deal. Before signing, carefully review the loan agreement to understand your rights and obligations.
Types of Financing for New Businesses
These fall into two broad categories, debt finance and equity finance. Debt financing is a more independent approach, while equity financing involves outside stakeholders. Debt financing can require various forms of security, such as assets or guarantees, depending on the lender.
Traditional Lending
Business owners have relied on banks and credit unions for start up business funding for centuries. Many banks have strict lending criteria and may deny applications from new businesses. It’s still a good option, provided you’re eligible.
The process is almost always long and you’ll have to provide extensive business plans. Banks and lenders often review your personal credit history, especially for startups, in addition to your business credit rating.
To speed up the process considerably, you can opt for an unsecured business loan. This type of loan requires no collateral but may have less favourable interest rates. Unsecured loans typically come with higher interest rates due to the lack of collateral. In contrast, a secured loan is backed by collateral such as business or personal assets, which can allow for larger borrowing amounts and lower interest rates. Secured loans come in various forms and may require business assets or personal guarantees. Learn more about how to compare business loans to ensure you choose the best option for your company’s needs.
Loan payments are typically structured over a set period, such as up to five years, and with fixed-payment loans, more principal is paid off over time as interest decreases.
Personal loans may be an option for some business owners, but they carry personal liability. Compared to business loans, a personal loan usually involves different risk and documentation requirements.
Angel Investing
This involves convincing individual investors to finance your business. In return, you’ll likely have to give up a stake in the business. Many people find great success with the right angel investor.
There is any number of big success stories from angel investors.
Back in 1998, a technology company was looking for investments. They were developing a new search engine and had big plans for the future.
They managed to secure an angel investment of $250,000. The investor paid six cents a share for the company stock.
That company was Google, and one of their angel investors was Jeff Bezos, of Amazon fame.
Would Google be as successful today without that investment? We’ll never know.
Credit Card
It’s not very fancy, but it gets the job done. If you’re starting a small business, a credit card could be your best option.
There are almost always introductory offers on credit cards. If you can get a line of credit with 0% interest for 12 months, there’s no reason not to take it. Some credit cards or lines of credit may also allow for interest only repayments during an initial period, but remember that the principal will still need to be repaid later. You’ll just need to make sure the credit card can cover your needs.
Venture Capital
This equity financing option usually comes from institutions that specialize in risky investing. It’s similar to angel investing but there is a clear obligation to show returns.
The venture capital investor receives shares in exchange for the investment. Most venture capital firms will require you to show solid business planning and future revenue projections.
You won’t have to provide any other collateral so this type of investment is much harder to get.
Alternative Lenders
These days, it’s easy to apply for a business loan online. There are many alternative lenders that can provide a variety of loan terms. Fees apply to most online loan products, and these can vary between lenders. Some lenders offer special rates or discounts for qualifying businesses, such as reduced facility fees. Alternative lenders often provide small business loans tailored to the needs of startups and entrepreneurs.
That’s what we do at Unsecured Finance New Zealand. We understand how important access to cash is for a new business. That’s why we work closely with clients to find a solution that fits their needs.
Public Float
You can list your company on a stock exchange to try to secure funding. However, it will need to be a public company.
Doing this entails a complicated series of measures to ensure transparency. It’s the right choice for some businesses, but not too many that are just starting out.
Managing Cash Flow
Managing cash flow is one of the most important aspects of running a successful business, especially when it comes to meeting your financial obligations like loan repayments. A healthy cash flow ensures your business can cover day-to-day expenses, invest in new equipment, and seize growth opportunities as they arise. One of the best tools for this is a cash flow forecast, which helps you predict your income and expenses over a set period. By regularly updating your cash flow forecast, you can spot potential shortfalls early and plan accordingly—such as applying for a small business loan to bridge a temporary gap. Effective cash flow management not only helps you stay on top of repayments but also strengthens your overall financial position, making your business more attractive to lenders. This can lead to better loan terms and a more competitive interest rate, giving your business the stability it needs to thrive.
Understanding Fixed Interest Rates
Choosing a business loan with a fixed interest rate can offer your business valuable predictability and peace of mind. With fixed interest rates, your repayments remain the same throughout the entire loan term, making it easier to budget and manage your cash flow. This stability is especially beneficial for businesses that prefer to avoid surprises and want to plan their finances with certainty. However, it’s important to weigh the potential downside: if market interest rates drop, you won’t benefit from lower interest rates and could end up paying more than you would with a variable rate loan. Before committing, consider your business’s financial situation and cash flow patterns. If your income is steady and you value consistent repayments, a fixed interest rate loan may be the right choice. On the other hand, if your business can handle some fluctuation and you want the chance to pay less interest if rates fall, a variable interest rate loan might be more suitable.
The Application Process for Business Loans
Applying for a business loan involves several key steps to demonstrate your business’s creditworthiness and secure the best deal. Lenders typically require detailed business plans, financial projections, and a review of your credit history to assess your ability to repay the loan. To prepare, gather essential documents such as your balance sheet, income statements, and any supporting information that highlights your business’s strengths. It’s also wise to research different lenders—including banks and finance companies—to compare interest rates, repayment terms, and flexible repayment options that suit your business needs. By thoroughly preparing your application and shopping around, you can increase your chances of approval and secure a business loan with a competitive interest rate and terms that support your business’s growth and financial goals.
Applying for Business Loans Online
The rise of online lending has made it easier than ever for businesses to access the funding they need. Applying for business loans online is a fast and convenient process—simply fill out a loan application, upload your documents, and receive a decision, often within 24 hours. Many online lenders offer flexible repayment options, such as daily or weekly payments, which can help you manage your cash flow more effectively. Fast access to funds means you can respond quickly to new opportunities or unexpected expenses. However, it’s important to ensure you’re working with a reputable lender. Take the time to research reviews and verify the lender’s credentials before you apply online. By choosing the right online lender, your business can benefit from quick, hassle-free funding and repayment plans tailored to your needs.
Working with Finance Companies
Finance companies offer a range of business lending options that can be more accessible and flexible than traditional bank loans, especially for small businesses and startups. These companies often provide unsecured business loans, secured business loans, and lines of credit, giving you the flexibility to choose the best fit for your business. Finance companies may also offer lower interest rates and more favourable repayment terms, making it easier to manage your debt and support your business’s growth. Before accepting a loan, carefully review the terms and conditions, including any fees and repayment obligations. Don’t hesitate to negotiate for a lower interest rate or more flexible repayment options to suit your financial situation. By working with finance companies, businesses can access the funding they need to achieve their goals, manage cash flow, and build a strong foundation for future success.
The Right Financing Makes All the Difference
It would be a shame if your idea didn’t get off the ground for lack of funding. To give yourself the best chance, be methodical.
Put together the information you need. How much capital, when can you pay it back, and if you want a lump sum. Then, look at your options, and go with the one that makes the most sense.
When you’re ready to take the next step, we’ll be there to guide you. Visit our website to go over your options. Or, fill out our online form right now. It will take less than five minutes to start moving toward your future.
