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Starting a business

How to Get a Business Startup Loan

Many businesses need startup loans in their early stages. It’s perfectly natural for you to seek funding to hire employees, develop products, conduct market research, expand into new markets, or invest in ways to improve productivity and efficiency.

You may need a loan for various reasons, but remember almost all startups need help sourcing the capital needed to help their business grow.

However, it can be a challenge understanding what’s available, the different types of funding you may need, and the steps of applying for and receiving a business startup loan. 

Funding Available to Startups

Here are five different options of financing available to you as a startup business owner.

1. Traditional Business Loan

You may qualify for a long term or short term loan if you have operated profitably for at least six months. If you want to get a loan from a conventional bank, you'll probably need to have something that can be used as collateral. Collateral includes property and personal assets like your home, car, or business inventory. A traditional business loan puts these at risk if you can’t make repayments.

2. Unsecured Loan

You might be able to get an unsecured business loan from an online lender. An unsecured loan indicates that no collateral is used to back or issue the loan. instead, only the borrower's creditworthiness is used. An unsecured loan is often simpler to qualify for, and you can frequently get the money you need faster. Unsecured loans are riskier for lenders, hence the interest rate is typically higher.

3. Grants

There are many privately-funded and government grants available to startup business owners, offering both funding and support to get your business off the ground or on to the next growth step.

There are usually eligibility criteria to meet, and startups with innovative business ideas or in growing industries are more likely to receive funding.

4. Friends and Family

Many startups benefit from funding from close friends and family willing to back your idea. Of course, these loans may offer greater flexibility for repayment. However, by allowing your friends and family to invest, you are putting their money at risk.

5. Investors

You may seek investment from a venture capital fund or an individual investor. 

With an investor, money is given in exchange for equity in the company, meaning you forfeit some of the ownership of the company. Due to the intense competition in the startup industry, many businesses find it challenging to acquire investors for their ventures.

There are other ways to get funding, including crowdfunding, bootstrapping, or an accelerator programme. However, these five remain the most common.

How to Get a Startup Loan

Regardless of the type of funding you choose, there are certain things you need to have in order to give yourself the best chance of success. By success, we mean both securing the loan and long-term business success more broadly. 

Understand Your Numbers

It's critical to have a fundamental grasp of your finances.

Get a clear picture of your incomings and outgoings by creating a cash flow statement. This cash flow statement will help build a picture of your expenses, current income, net profit, and future projections.

QuickBooks is an accounting software that can help you manage your cash flow without juggling complex spreadsheets for concise, comprehensible cash flow management. Sophisticated real-time reporting enables you to analyse your finances with confidence. 

Prepare a Business Plan

Most lenders will want to see evidence of your plans before lending any money to your business. You’ll need to invest time into creating a comprehensive business plan.

You need a business plan to:

  • Help you prioritise by setting out objectives and goals, allowing you to allocate time and resources effectively.
  • Allow you to step back and evaluate the direction of the business. It helps you identify the strengths and weaknesses of your current approach.
  • Convince investors/lenders to give you financing. The business essentially persuades the lender that your business is viable.

Know Your Financial Limits

As long as you understand your finances and you have a thorough business plan as a guide, you should have a good idea of the limits of your finances. 

You need to assess your ability to pay anything you borrow.

Ensure you can answer the following questions:

  • What maximum repayment can you afford?
  • Do you need funds upfront or on a needs basis?
  • What collateral can you offer?
  • What percentage of your business are you willing to give up?
  • Who can be a guarantor for you?

Choose Loan or Funding Type

There’s plenty to consider when evaluating your financing needs.

You need to think about the stage of your startup and how much capital you need. If you feel established with proven profitability, you may opt for a traditional loan. If you’re a fledgling small business in an emerging industry, there may be grants that can offer you funding for free.

Whichever option you choose, shop around to search for the best and pay attention to costs, interest rates, and any hidden charges. 

Get Your Paperwork in Order

Before you make contact with an investor or lender, ensure all your paperwork is in order. In addition to your business plan, you should have documents relating to your personal finance information, financial forecasts, and ratio calculations.

Get expert advice

Applying for a loan can be stressful and intimidating. Besides relying on automated accounting software to keep your finances in order, you may want to talk through your options with an expert advisor or accountant. 

An expert accountant can help you prepare for any financial questions you may have to answer during the application process. 

Apply for Your Loan

Once you are confident you have chosen a registered lender with terms that you are comfortable with, you can apply for your loan. 

Be as prepared as possible for a loan interview by knowing your stuff in relation to your finances.

Also be prepared for rejection or refusal from the lender. Take their feedback and address any issues for your next application.

FAQs

What is a startup?

A startup is a relatively young but rapidly expanding company that is still developing its goods or services. They are often innovative and look to bring transformative change to their market.

Do I need security for a startup loan?

You may need to provide security or collateral depending on the type of business loan you choose and the lender itself. Traditional business loans usually require you to provide security.

What interest rates will I receive?

The interest rate you get on your loan will vary depending on whether you choose a secured or unsecured loan and the lending provider. Generally, unsecured loans with no security will have higher interest rates.

Do you have to pay back a grant?

No, general speaking, a grant is a one-off payment that you do not need to pay back to the provider. However, there may be conditions you have to meet to receive the grant in the first place.


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