Is a Startup Business Loan Right for You?

Deciding whether to get a loan for your startup business is a tough decision. On one hand, it might be what you need to accelerate growth and survive those rough early stages. On the other hand, what if business doesn’t go well and you struggle to pay it back? 

Can you even get a loan as a startup? Yes, there are bank and non-bank lenders that are willing to lend to startups, despite their limited trading history. But before you send in an application, carefully consider whether a startup business loan is right for you.    

At PCR Accounting & Advisory, we’ve helped startups plan and execute financial strategies that position them for growth. We’ve written this guide for new business owners who are wondering whether to get a startup business loan. 

What Are Startup Business Loans and Who Can Apply?

Startup loans are designed specifically for businesses with limited or no trading history (usually less than 3 years). 

Since there’s no adequate business credit history or past revenue to look at, lenders consider other factors, such as the personal credit score of the business owner, available assets that can be used for security, and revenue projections. 

You can apply for a startup loan from either a bank or a non-bank lender. 

Traditional banks have more stringent loan requirements. You’ll need to demonstrate a solid business plan and provide detailed revenue forecasts. Most also require some kind of security for the loan, as well as a good personal credit score. On the upside, interest rates tend to be lower. 

Private and fintech lenders are more flexible with their requirements and have faster loan approvals (sometimes within 24 hours). But they usually charge higher interest rates. 

Pros and Cons of Loans for New Businesses

With good planning and execution, a new business loan can be exactly what you need to speed up growth. 

• It gives you immediate access to cash that can supplement your working capital. You can use this for marketing expenses, to purchase equipment, hire additional staff, or stock up on inventory.
• For some business owners, it’s a better alternative to equity investment from investors. You get a much-needed cash injection without business dilution. 
• It’s a chance to start building your credit history, which makes it easier to access more financing in the future. 

Business loans for startups also come with risks and downsides. 

• Loan fees and repayments cut into profits, which can be a problem if you’re operating on thin margins or if you’re still in the red. 
• Most startup loans come with a fixed repayment schedule, which can make it harder for seasonal businesses to meet their obligations. If your business has quiet months, consider working with a lender who offers flexible repayment terms. 
• Because startup loans usually require personal guarantees, it exposes you to financial risk if you’re unable to make payments. 
• While a new business loan can help you build credit, it can also ruin it if you have late payments or if you default, making it harder to access affordable credit in the future. 

Startup Loan Tax Considerations

Obtaining a startup loan can reduce your tax burden. That’s because interest payments are tax-deductible, as long as the funds are used for income-generating purposes. We don’t recommend taking out a loan solely to reduce your tax bill; make sure you actually need the funds. But it’s good to know it comes with tax advantages. 

To get the tax deductions, you’ll need to have all your documents in order, including the loan agreement and repayments. Make sure you’re ATO compliant to ensure you’re eligible for any tax benefits (some lenders can also deny you a loan if you have any tax compliance issues, such as outstanding returns). 

Startup Business Loan Alternatives

A startup loan is not for everyone. Depending on your type of business, how fast you want to grow, and your risk level, there are various alternatives to explore. 

One option is equity investment from partners or investors. It means forgoing a portion of future profits, but it can help your business grow bigger and faster. 

You can also opt to bootstrap the startup with your own capital and earnings. Growth will likely be slower, but you escape the pressure of repaying a loan, and you don’t have to share profits. 

There are also a variety of financing options available to businesses that don’t want to take a traditional loan, but be careful, as some of them can be quite expensive. Examples include supplier credit, leasing, vendor financing for equipment purchases, and revenue-based financing. 

Get Startup Financial Advice and Support from PCR

At PCR, we support new and mature businesses with tailored financial advice and business strategy. Depending on the level and kind of support you’d like, we can work with you as a small business accountant or a virtual CFO. 

If you’re torn about getting a startup business loan, we can help you decide whether it is the right choice by assessing your needs and modelling cash flow and the impact of loan payments. We also offer ongoing support after you secure financing to ensure it aligns with your business goals. 

Enquire online today to talk to one of our expert startup accountants. 

Disclaimer: This blog post is for informational purposes only and should not be considered as financial or legal advice. Consult with a qualified professional for personalised guidance based on your specific circumstances.