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Business borrowing guide stage 2: Loans for early stage businesses

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What you need to know about finding finance in the early stages of your business.

The early stages of a business are crucial to its success. Whether you’re experimenting with business branding, pushing campaigns to increase customers or still working on your product, your cash flow is likely to be uncertain and you’re probably in the market for business funding to help it grow faster.

When is an early stage business?

This varies for each business, but it usually means your business is in its first two years of operation. You may be expanding quickly or you might be experiencing problems that have made your growth stagnate. Either way, your product or service is a fully formed idea with proof of concept and actual customers, and you are trying to make it work.

Common financing needs of early stage businesses

Businesses in early stages have financing needs that are different to businesses in later stages and even different from startups. They tend to need finance that has:

  • Flexibility. There is a lot of change in early stage businesses and you want the financing you have to keep up with those changes. Loans that are flexible with repayments, loan amounts and provide easy account management are ideal for businesses in early stages.
  • A range of loan amounts. Each business will have specific needs, so a range of funding amounts will be beneficial to early stage businesses so they can borrow as much as they need.
  • The option to be ongoing. While early stage businesses may only see the funding needs immediately in front of them, business needs change quickly. The option to increase or extend funding is important.

What types of finance are available?

There are three main types of funding: debt, equity or internal funds. Debt involves borrowing money from a business lender, equity finance is provided by an owner or investor, and internal funds are derived from cash flow or profits.

In a business’s early stages, internal funds can be harder to come by. This leaves you with a choice between debt and equity finance.

Features Debt finance Equity finance
Where to find it
How much you can borrow Business loans usually range from $1,000 to $5,000,000. It could be hundreds or millions of dollars, depending on the source.
How it’s repaid You make regular payments to repay the debt. Terms differ depending on the lender. It isn’t repaid, but the financiers may then own a part of the business or take part in decision-making.
  • You stay in control of your business
  • Some business lenders have flexible eligibility criteria
  • There’s a range of loan types available
  • Funding can be quick depending on the turnaround time
  • No collateral is required
  • You’re not required to repay the funds
  • Investors can provide strategic guidance for the business
  • No exposure to interest rate changes
  • You may be required to provide collateral as security
  • There may be restrictions on the fund use
  • Your profits need to be used to repay the debt
  • Finding equity finance is usually a slow process
  • You usually give up some control of your business or the business decision-making power
  • The funds can come with restrictions on usage
  • There may be conflicts with investors on which direction to take the business

How to compare business loans for early stage businesses

Once you start looking through the financing options that are available to you, you’ll realize just how much choice you have. Here is how to compare your options to find the right finance:

  • How much can you borrow? Lenders usually offer loan amounts for between $1,000 and $5,000,000. However, each lender will come with a minimum and maximum borrowing amount and you need to ensure the amount you need falls within that range.
  • What will your repayments be? While it’s easy to compare rates, the competitiveness of a business loan comes down to how much you pay each month. Work out your ongoing repayments to see if the loan is competitive and whether your business can manage the repayments.
  • How flexible is the loan? Can you make extra repayments? Are you able to repay early? Find out just how flexible this loan will be.
  • Are you eligible for the loan? This is an important question and one that, if considered before you compare your options, will help narrow that comparison down. As you can see from the table below, minimum eligibility criteria varies between lenders. Make sure you find out what the criteria is before applying.

What are the requirements for top online business lenders?

Business lender Requirements Read the full review
National Business Capital Your company must have been in business for at least 6 months and have an annual revenue of at least $100,000. More
SmartBiz SBA Loans 650+ personal credit score, US citizen or permanent resident, 2+ years in business, $50,000+ annual revenue, no outstanding tax liens, no bankruptcies or foreclosures in past 3 years More
LendingClub Business Loans 12+ months in business, $50,000+ in annual sales, no bankruptcies or tax liens, at least 20% ownership of the business, fair personal credit score or better More
Able Lending Business must be in operation for at least one year, bring in at least $50,000 in annual revenue, must have a personal credit score of 600 or higher, no personal bankruptcy in the past 12 months.
Kabbage 1+ years in business, $50,000+ annual revenue or $4,200+ monthly revenue over last 3 months More
OnDeck 600+ personal credit score, 1+ years in business, $100,000+ annual revenue More

What will the loan cost?

Business lenders charge a variety of different rates and fees for their loans. Here are some costs to expect.

  • Interest rate. This rate may be fixed or variable and can be expressed as an APR (annual percentage rate) on the lender’s website. If you’re applying with a short-term business lender you may be charged a monthly rate.
  • Upfront costs. Lenders may charge an establishment fee or application fee for the loan. This will be added onto your loan amount when you’re approved.
  • Ongoing costs. You may have to pay daily, monthly or annual fees to service the loan. Other costs include direct debit fees, transaction fees or line fees.
  • One-off costs. These can include an early repayment fee, a direct debit change fee, document fees, amendment fees and other costs associated with managing the business loan.

Questions to ask yourself before deciding on finance

  1. What do I need the funds for?
    Are the funds to buy a fixed-price item such as equipment, a vehicle or floor space? Or will the cost be variable, such as production supplies or to assist with cash flow? The intended purpose for the funds will help dictate which loan is right for you. For instance, variable costs may require a flexible funding source such as a line of credit.
  2. How will the loan be repaid?
    Can your business afford the monthly payment? What if the loan’s terms include weekly or daily repayments? Have a plan for repaying the loan and make sure it doesn’t affect your cash flow too much.
  3. Is taking out a loan the right decision for my business?
    Extra money is always useful, but is your business in a position to be borrowing right now? Will the loan help your business expand or hinder it by having the repayments eat into your profits?
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