Getting a loan to start a business

Getting a loan to start a business  

Starting a business can be a daunting and expensive task that uses up all of your disposable income, savings, credit card and then some. You initially start in a phase where you’re operating at a loss, any money coming in is going straight out to your liabilities and accounts payables. A business loan can help you make your next purchase, fund growth, or manage cash flow for your business, however, there are a number of things you should do before you apply:

1.     Understand your loan purpose

Being clear on why you want to borrow is the first step to choosing the right loan and it’s one of the first questions you’ll be asked by a lender.

2.     Work out the loan amount

Knowing the amount, you need will be reasonably straightforward. However, if you’re borrowing to cover a potential cash shortfall, working this out can be a little more involved.

3.     Calculate what you can afford to repay

The length of the loan will impact your repayment amounts. Your lender can outline the different loan term options in detail. Work out what you can afford to repay each month. You can do this by looking at your business’ past financials and completing cash flow forecasts.

4.     Decide between a secured or unsecured loan

You’ll usually be able to choose to have your loan secured or unsecured. Each has its benefits as well as considerations.

Secured

  • You offer an asset for the loan, such as property.
  • The interest rate will usually be lower than unsecured
  • The lender may sell your asset if you’re unable to repay the loan

Unsecured

  • No asset is offered
  • The interest rate is usually higher
  • It can sometimes be more difficult to be approved for an unsecured loan

5.     Choose a fixed or variable interest rate

As with other types of loans, you’ll often have the choice between a fixed or variable interest rate for your business loan. A variable rate may suit you best if you’re confident you can repay the loan even if rates increase. A fixed interest rate may be more appropriate and help manage your cash flow better by providing certainty with your repayments.

6.     Understand the fees and charges

Make sure you understand the true cost of any loan by comparing all the fees and charges. Some fees you may be charged include:

  • Establishment or application fees
  • Ongoing monthly fees
  • Early repayment fees
  • Exit fees
  • Valuation fees (if you choose to secure your loan)

7.     Get your paperwork ready

Preparing your business documents is an essential step that could help the lender decide sooner.

8.     Speak to an expert

Speaking to an expert, like your local business banker or accountant/book keeper is always an important step as they can check over your calculations and help you determine if you’re on the right track with your application.

What does it take to be eligible for a business loan?

What does it take to be eligible for a business loan?

When applying for business finance, you (and any directors, partners or guarantors) may be asked to provide:

1. Financial statements, preferably prepared by an accountant

Your financial statements will show your asset, liability and net worth positions, as well as your income and expenses that will be used to determine if you can meet your existing and proposed repayments.

Your financial statements will generally consist of a balance sheet and income statement. They may also include a statement of cash flow.

You may also be asked for your latest tax returns, business activity statements (BAS) or printouts of statements from your Australian Taxation Office (ATO) portal. If there are any trusts or self-managed super funds (SMSFs) related to your business, you may also need to provide additional documents.

2. Proof of individual income

Lenders will also want to know your personal income if you are a director and/or shareholder of a company. You’re likely to be asked for your two most recent individual tax returns and an ATO Notice of Assessment.

If you earn other income unrelated to your business, you may want to provide this information as well. For example, you could bring a rental statement if you own an investment property.

3. Bank Statements

So that the lender can obtain a complete picture of your financial position, they often ask that you provide details of your personal and business income, savings and liabilities such as loans and credit cards that you might have with other financial institutions.

You’ll also need to bring your latest bank statements – either paper or electronic copies are fine. If anyone is guaranteeing the loan, they will also need to provide this information.

4. Identification

If you are applying for a loan with a lender where you are an existing customer, you most likely won’t need to complete this step.

If you are a new customer, you’ll need to provide identification such as your driver’s licence or passport. The documents needed will vary depending on your business structure – you may also need to bring in your trust deed or partnership agreement or company registration, if applicable.

5. Extra things if you’re a start-up business

While longer-established businesses might be able to show years of documents to support their application, new businesses often don’t have this history. Here are three possible alternatives that might support your application:

  • other sources of income – income from a rental property or investments, or maintaining an income by working somewhere else until your business takes off
  • any relevant industry experience – this might be employment history in the same field as your new business, for example if you’ve worked elsewhere and decided to go into business for yourself
  • supporting documents – supporting documents can strengthen your application and give confidence in your business growth and outlook

6. Supporting documents

If you are yet to start your business or you have recently started trading and you don’t have 12 months of trading history, there are a few extra things you may need to provide, including:

  • Business Plan – showing your business strategy and goals for both the short and long term.
  • Cash flow projection – Showing your estimated income and expenses over a 12-month period. It will show whether your projected income will be enough to meet any finance requirements. If you submit a cash flow projection, it needs to be prepared by an accountant or business consultant.
  • Business Activity Statement (BAS) – This is a form you submit to the Australian Taxation Office (ATO) if your business is registered for Goods and Services Tax (GST). It helps you report and pay your GST and pay as you go (PAYG) instalments and withholding tax. Not all businesses will have this, but if you do, it can help show your cashflow and how you manage it.
  • Interim financial statements – These are documents that show your business activities, including your balance sheet, income, cash flow, changes in equity and notes of explanation. Your accountant can help you to establish these.
  • Contracts – If you have any current or future agreements from customers, these can help to show your business income.
  • Business ID check

Sources of finance for small business

This topic is explained in more depth in the Post titled, ‘Types of finance in business’ which covers sources including:

  • Self-funding
  • Debt Financing
  • Financial institutions
  • Finance companies
  • Supplier Finance
  • Factor companies
  • Trade Finance
  • Family or friends
  • Equity Financing
  • Family or friends
  • Private investors
  • Venture capitalists
  • Stock market
  • Crowdfunding
  • Grants and assistance programs
  • Lease Financing

Can I apply for a startup business loan from the Australian Government?

Below are listed some of the current grant programs that are available in Australia.

Australian Government Restart Incentive

A financial incentive for businesses from the Australian Government to encourage employment and retention of mature age employees.

Who can apply?

Australian businesses that hold a valid ABN that offer a job to a new employee over the age of 50 and have not previously received a wage subsidy for the same person before and the position is expected to be ongoing for an average of 20 hours per week.

Benefits

Incentive payments totaling up to $10,000 paid to your business over six months.

Where to apply and find out more information

Your business must be registered with an employment services provider. Search for providers on jobsearch.gov.au or call 13 17 15.

R & D Tax Incentive

R & D Tax Incentive

 

A refundable tax offset of 43.5% for costs incurred on eligible research and development initiatives.

Who can apply?

You must be an incorporated company and have incurred eligible research and development costs or deductions of at least $20,000. Eligible core R&D activities are “experiments that are guided by hypotheses and conducted for the purpose of generating new knowledge”.

You can view more information on interpreting this definition here:

https://www.business.gov.au/Assistance/Research-and-Development-Tax-Incentive/Eligibility

The annual turnover of your business must also be less than $20 million.

Benefits

43.5% refundable tax offset against R&D expenditure that amounts to $100 million or less.

Where to apply and find out more information

You can apply online through this link:

https://forms.business.gov.au/smartforms/diisr-sa/registration-of-rd-activities-application/.

Certain Inputs to Manufacture (CIM) programme

A concession allowing Australian manufacturers to import certain types of raw materials duty free.

Who can apply?

Australian manufacturers importing raw materials and intermediate goods to use in manufacturing a specific end product.

You must be able to demonstrate the imported goods will perform better than similar goods already produced domestically.

Two types of raw goods are eligible:

  • Chemical, plastics and paper goods
  • Metal materials and goods used in food packaging

Benefits

A concession allowing you to import eligible goods and materials without paying import duties.

Where to apply and find out more information

You can print out a grant application from this link:

https://www.business.gov.au/assistance/certain-inputs-to-manufacture#key-documents

CSIRO Kick Start Grant

A matched funding grant up to $50,000 for Australian startups and SMEs to undertake research activities with the CSIRO to grow and develop their business.

Who can apply?

You must have an Australian Company Number (ACN), be registered for GST and have annual turnover under $1.5 million.

Eligible activities consist of undertaking research with the CSIRO such as:

  • Researching a new idea with commercial potential
  • Development of a new or improved product or process
  • Testing a new product or material that was developed by your company

The research project must be less than 12 months in duration.

Benefits

The CSIRO will provide dollar-matched funding between $10,000 – $50,000 for your research investment.

Where to apply and find out more information

An expression of interest form can be downloaded using this link:

https://www.csiro.au/en/Do-business/Solutions-for-SMEs/Our-Funding-programs/CSIRO-Kick-Start

Australian Government Entrepreneurs Program

Australian Government Entrepreneurs Program

A Federal Government business scheme to encourage competitiveness, productivity and accelerate commercialisation of new ideas.

The program consists of four sub-program categories to help small to medium businesses grow and compete in new markets:

(i) Accelerating Commercialisation

Access to business advice and matched funding up to $1 million for eligible commercialisation costs to bring new products, processes and services to market.

Register with this online expression of interest form:

https://forms.business.gov.au/smartforms/servlet/SmartForm.html?formCode=ACEOI

(ii) Business Management

Access to professional business advisers who will create a Business Evaluation Action Plan with recommendations for improvement and growth, as well as up to 12 months of mentoring to assist with implementing strategies.

Only businesses operating in specific growth sectors such as medical technology, food, agribusiness, advanced manufacturing and mining technology are eligible to apply. Annual turnover must be between $1.5 million to $100 million per year.

Register with this online expression of interest form:

https://forms.business.gov.au/smartforms/form-expired.htm?formCode=BE

(iii) Incubator Support

New and existing incubators can receive grants up to $500,000 to help Australian startups develop into international markets.

Regional startups can receive a higher grant where at least 80% of project activities are being undertaken in a regional area.

Register with this online expression of interest form:

https://forms.business.gov.au/smartforms/servlet/SmartForm.html?formCode=ISINEI2

(iv) Innovation Connections

Access to a professional facilitator to help Australian businesses connect with experts within the research sector to help define a project scope.

If the business chooses to fund the project, there is up to $50,000 in matched funding support available to the business to implement their ideas.

Register with this online expression of interest form:

https://portal.business.gov.au/?rd=newapplication&programmeid=5380E98B-8BE6-E611-8102-C4346BAD3418

State Government Grants – New South Wales

The NSW Small Business Grant provides a $2,000 grant to encourage businesses that currently do not pay payroll tax to hire new employees. The grant is paid for each new eligible employee hired.

See information about applying for the NSW Small Business Grant here:

https://www.revenue.nsw.gov.au/grants-schemes/small-business-grant

State Government Grants – Victoria

Victorian state government Boost Your Business Vouchers provide a range of assistance programs for Victorian based businesses in eligible industries including:

  • Advanced manufacturing
  • Exporting to markets in Asia
  • Food innovation
  • Social enterprise capability
  • Defence and aerospace

Assistance comes in the form of vouchers which can be used for a range of services including market engagement, innovation and business capability.

Find out more here:

https://www.business.vic.gov.au/support-for-your-business/grants-and-assistance/Boost-Your-Business

State Government Grants – Queensland

The Queensland government’s Business Growth Fund Program provides funding up to $50,000 for eligible businesses to purchase specialised equipment or services.

The program is designed to accelerate the growth of small to medium businesses with turnover that demonstrates high growth and employment aspirations.

Find out more here.

https://www.business.qld.gov.au/starting-business/advice-support/grants/growth-fund

 

Where would be the best places to get a loan for my start up?

There are many financial organisations that advertise having a ‘loans for startups’, however, you need to be careful when selecting a lender and seek professional independent financial and legal advice before proceeding to apply.

Some links to try:

https://www.business.org/finance/loans/best-startup-business-loans/

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