When you have a world-beating business idea and every minute counts, it’s frustrating to be held back by a lack of the funding you need to get off the ground.
But you can see the bank’s point of view. You have next to nothing on your balance sheet to offer as security, and no profit and loss statements going back year or two to validate your idea’s commercial substance.
Yet there is a solution, and it’s quite simple: a personal loan.
In this guide
Borrow for your business, pay yourself back later
Unlike your fledgling business, you could be a solid borrowing proposition. You may have a house, a car, or other assets you could use as security. If you have a good credit history and a decent credit score, you may not even need to offer security, because you’ll qualify for an unsecured personal loan.
Since there are so many loans, and many of them have variable rates based on your credit score, it's a good idea to compare what’s available.
Work out how much you need to borrow
Don’t underestimate how much you’re going to need to launch your business and also make sure you have adequate cash flow to keep things ticking over until your customers start to pay you.
In the period 2016-2019, ASIC reported that inadequate cash flow was the leading cause of business insolvencies.
The kinds of expenses your loan may need to cover include:
- Hiring employees
- Purchasing stock and equipment
- Marketing and advertising, including creating a website
- Telephone and internet
- Business insurance cover
- Rent of premises and fit-out
- Licences and registration
Don’t forget due diligence
Due diligence – the process of careful investigation of conditions before entering into a contract – will be performed by the lender before approving your loan application, but you should ensure that you do your own due diligence via a thorough comparison of competing loan offers in order to find the one most suitable for you.
Just because it’s a personal loan doesn’t mean you can’t approach it with your business hat on, and you’re not limited to checking out loan options from your existing bank.
The kinds of loan features you should be comparing include:
- The annual interest rate
- Whether the interest rate is fixed or variable
- Loan application and set-up fees
- Ongoing fees, such as monthly or annual account-keeping fees
- Any penalty fees for paying the loan off early
Disclose the loan’s purpose if necessary
Most personal loans don’t need to be for a specific purpose, with the exception of a car loan secured on the car being purchased.
If you’re borrowing $20,000 or less, the lender may not even ask what you are going to do with the money. But if they do enquire, it’s best to be upfront about your plans. This could help you down the track if your business is successful and you need to apply for a business loan. You’ll be able to demonstrate that your business is not only profitable but also has some credit history (even though it will be recorded in your personal credit file).
How to record the personal loan in your business balance sheet
You can deposit the amount you have borrowed personally into your business bank account, and record it on your balance sheet as Owner’s Equity (if you’re a sole trader) or a loan from a shareholder or Shareholders’ Equity (if your business is incorporated – that is, Pty Ltd). Your accountant can help you with this if you’re not sure.
Then go ahead and use the funds for business asset purchases or expenses, recording them in your business accounts in the normal way.
An alternative funding option
As long as you have an ABN you can apply for a business credit card, which is another option for startup funding if you’re confident that you will quickly generate enough cash flow to avoid paying a high rate of credit card interest in the long term. You can compare options here.
Before applying for a business credit card as a sole trader, it would be worth reading some tips for applying for a credit card if you’re self-employed or a freelancer. Owners of both sole trader and incorporated businesses also need to be aware of their credit card debt liability obligations.
Going from zero to hero
There’s no need to be held back by lack of funds for your startup. Although your business may have zero history, you can exploit your good personal credit history for the benefit of your potentially winning venture.
If your startup is operating and has invoiced clients already, you may be eligible to get a loan from a specialist business lender like Fifo Capital or Judo Bank.