- Almost every startup, regardless of how amazing their business idea is, needs financial support in order to get going.
- Your number one option when it comes to financing is most likely to be taking out a loan from a bank.
- However, before you jump ahead, there are four key things you need to know to ensure you secure the best possible bank loan.
Even if you build a thorough business plan and have a completely innovative idea for your startup, without financial support, you will hardly succeed. According to a 2016 study, 72% of Australian startups need funding to keep operating.
Although there are numerous options out there, for the majority of small businesses, applying for a bank loan seems like a logical choice.
What you need to know before resorting to this kind of financial aid is that Australian banks have strict criteria when it comes to lending to startups.
How do I get a bank loan for startups?
In order to convince a bank to give you a loan, you need to employ an entire set of strategies. Below is a list of 6 tips to get a bank loan for startups:
- Submit a detailed business plan
- Be specific about the loan you are asking for
- Determine the amount of money you need
- Explain the purpose of the loan
- Make sure that your credit records are clean
- Make personal investments as a guarantee
1. Submit a detailed business plan
Australia is home to a plethora of famous startups. If you believe that, with the help of a bank loan, you stand a chance of becoming a recognizable brand in the hectic Australian startup community, that’s great.
However, before you make your first move in this direction, you need to be fully prepared. Ever since the 2008 Global Financial Crisis, banks have been avoiding speculative investments, including startup funding.
So, in order to raise your chances of getting a bank loan, you first need to submit a well-structured application. And, the backbone of such an application is a detailed business plan.
By providing an extensive business plan, you are showing the bank that you understand the industry. Most importantly, you are presenting your company as professional, organized and, above all, different from its competitors with similar requests.
Delivering such a plan requires synthesizing and interpreting the data from all the surveys you have conducted, including the ones on your target demographics, your business domain, your employees and your expertise in the market you’re about to enter.
2. Be specific about the loan you are asking for
When it comes to funding, bank policies are easy to understand. If you don’t provide the lenders with a detailed financial report, you will be rejected.
First, you should do a comprehensive competitor analysis and, based on the reports of startups within your industry, predict your revenue, expenses and cash flow.
Next, you need to be more precise about the loan you are asking for and here is what you need to have in mind.
3. Determine the amount of money you need
When requesting small business loans, the companies have to point out how much money they need from a bank. Here, it’s crucial for you to be realistic. Remember that both underestimating and overestimating the amount of money you’re soliciting for might pose numerous financial problems to your startup in the future.
4. Explain the purpose of the loan
The next integral step is developing a solid financial plan, in which you will explain where the money the lender gives you goes.
For example, if you’re applying for a bank loan to buy equipment, you should make a list of items you want to purchase and point out how much money you’re planning to spend on each of them.
5. Make sure that your credit records are clean
You don’t have to be a finance expert to understand that every bank needs to verify an applicant’s eligibility for any type of loan. Logically, this process is obligatory since it helps them assess whether you are able to repay your loan on time or not.
Precisely because of this, once you decide to take out credit, you need to make sure that your balance sheets, income statements and credit reports are clean.
6. Make personal investments as a guarantee
Even if you pass all credit checks and prove that you are a viable borrower, a financial institution will expect you to infuse some amount of cash into your startup. This move shouldn’t either surprise or discourage you.
By investing in your own business, you express your confidence in it and, this way, you will have a greater chance to be approved for the loan.
Apart from making investments, you will probably need to provide collateral to back your loan. Put simply, collateral is the guarantee that one’s loan will be repaid on time.
Unlike large corporations, startups don’t possess any assets and, as such, they are not eligible for financial help. In this case, entrepreneurs usually put up their personal wealth as collateral.
Now, no matter if you pledge your real property or you use some other assets, you’re on a slippery slope. To avoid losing your personal wealth in the future, you should consult a financial advisor.
The aforementioned research clearly states that most startups are not able to finance their businesses from personal savings.
Still, taking out a bank loan is a massive commitment for every new company. In order to see its benefits, you need to look at the bigger picture.
First, unlike some other financing options, bank loans allow you to get the money you need and yet keep full control over your business.
Second, no matter how risky it might be at the very beginning, showing such an initiative means that you are ready to launch and manage a startup.
Finally, once all these efforts pay off, you will have both your dream company and financial freedom.
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