Expert advice on how to fund a startup

Nina Hendy
@ninahendy

So, you’ve managed to get your startup off the ground and you’re starting to build critical mass. Now, you’ve got to figure out how you’re going to fund the next stage of growth.

Securing a traditional bank loan can be extremely challenging until you’ve got some serious business runs on the board, but there are ways to ways to increase your chances with the banks.

If you’re a sole trader, a personal loan could be the right choice for you. Though if you’re set up as a company, a business loan could be a better option. This is because you don’t have a track record to show the bank, which means you’re well within your rights to secure a personal loan.

Independent banking expert Neil Slonim of The Bank Doctor says banks favour startups with some of their own funds invested in their business, because it shows commitment.

“You also need to demonstrate that you can repay the debt from your own cash flow, so the bank feels comfortable that they won’t lose money, otherwise they’ll insist on property security,” he says.

Go to the bank well prepared. You’ll need a well-worded business plan that clearly defines your objectives and strategies, Slonim says.

Borrowing money from family and friends is also a common approach, while leasing or hire/purchase agreements are also worth investigating, he says.

There’s also debtor finance, which costs more than other forms of funding. It enables a business to sell unpaid invoices for a cash advance of between 75 and 90 per cent of the monies owed. This method is also known as factoring, debtor finance or invoice discounting and means finance advances are made within 48 hours.

The other option is a business overdraft, which offers a flexible source of short-term cash – ideal for managing unexpected costs and fluctuating cash flows. However, they’re not easy to come by, with lenders wanting to see a rigorous business plan and budget, which can be expensive to prepare, plus lenders sometimes want property for security, Slonim says.

A method that's a little less understood, but still worth considering, is the marketplace lender. This emerging breed of financiers leverage technology to provide a different kind of borrowing experience to the banks.

“They generally don’t require security, and make decisions much more quickly than banks. Be careful, as they can be expensive - although if you have a good case, you could be able to get a loan at no more than bank credit card rates,” Slonim says.

A credit card requires far less hoops to secure, and if you’ve got a decent credit history, it’s an easy way to access borrowed funds. The other bonus is that credit card applications are processed quickly, and usually offer 30 days of free credit. The downside is that credit cards interest rates are between 14 and 20 per cent.

Nina Hendy

Nina Hendy is an Australian freelance business journalist and wordsmith who writes for BBC Australia, BRW, sections of The Age, Sydney Morning Herald and affiliated mastheads, SmartCompany, Private Media and Edge titles.

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