Business borrowing guide stage 1: Loans for startups

Business borrowing guide 1

Find out about the loan options available to finance your startup.

If you are planning to open a company, you probably require a source of finance to get your startup off the ground. A startup loan can come in many forms, and from a range of financiers, any of which might be the right option for you. The guide below takes you through these loan types to help narrow down your search.

What is a “startup” business?

Startups are newly emerged, fast-growing businesses in the process of developing their product or service. These companies can be sole traders, partnerships or organisations that have a model which can be rapidly scaled. Startups are marked by change, regarding product, model or staff. Technically, a startup isn’t a business, but it is in the initial stage of development.

Common funding needs that startups have

Startups may undergo high periods of growth, but they also have funding needs.

  • To develop the product/service. This is one of the most common funding needs for startups. Developing an initial business idea into a market-ready product or service is a costly exercise and is completed in a period where the startup is not making money (yet).
  • For operational expenses. Startups often need to hire staff, lease business space and pay the salaries of staff and founders. This requires funds, and the larger the business and the more staff, the more funds the startup needs.
  • To market the product. Acquiring customers is a common hurdle for a startup business, and this is only done through marketing. Whether it’s online, through social media or using an old-school letter drop, these activities take time and money.
  • To expand the business. This is a positive step forward for any startup.. Due to the uncertainty of cash flow, it is common to use external funds to expand.

What types of finance are available to startups?

Startups have little to no internal funds, that is, profit. Because of this, these companies have the choice between two types of finance: debt or equity. Debt finance involves borrowing the money, so the business takes on debt; whereas equity finance involves the business acquiring funds from investors or a public float in return for a share of the company.

Here are some options startups have when it comes to debt and equity finance.

Debt finance Equity finance
  • Loans from traditional lenders

Banks and credit unions offer loans to people looking to start small businesses. The application process usually requires detailed business plans, and you may need to provide an asset as security.

  • Angel investors

These are individual investors who help finance your startup, usually in exchange for a partnership stake. You can find these individuals yourself or through startup hubs, meetups and investment groups.

  • Loans from online and alternative business lenders

The number of online and other alternative business lenders has increased in the last few years. You can apply for business loans online and receive funding quickly, sometimes within 24 hours.

  • Venture capitalists

This is a specific type of equity capital which involves individuals or venture capital firms providing funds for startups and early-stage businesses. Your business needs to demonstrate potential revenue and a solid business strategy.

  • Credit cards

If you only need a small loan or require access to an ongoing line of credit, a credit card may be an option to consider. You may want to opt for a card that gives you 0% p.a. on purchases for up to 12 months.

  • Public float

This involves listing your company on the stock exchange so people can purchase shares. Remember, this involves a higher degree of transparency with your business than if you remain a private company.


How to compare startup loans?

Finding the right finance for your new company is important, and it starts with comparing your options. Here are a few points to consider:

  • How much do I need to borrow?
    You are offered a loan based on the details you provide in your application. However, you may be able to see the minimum and maximum amounts on offer depending on the lender. This is more likely with online and alternative lenders, and also credit cards.
  • How long do I need to repay the loan?
    You are offered a loan based on the details you provide in your application. However, you may be able to see the minimum and maximum amounts on offer depending on the lender. This is more likely with online and alternative lenders, and also credit cards.
  • Do I need access to ongoing credit or a lump sum amount?
    Will you need continued access to finance? Consider whether an ongoing line of credit or a loan that offers a redraw is a better option. If you opt for a lump sum loan, remember to take the repayments into account when budgeting your startup financials.

What do I need to take into consideration with my new startup?

If you’ve started a new business in New Zealand you can access advice through the government. They provide subsidised advice, mentors and in some cases grants to help you get started, and will put you in touch with advisors. Their focus is to help you build the knowledge you need to succeed. Look on the website for more details.

Other things to consider are:

  • What format your company will have, eg partnership, company or a sole trader.
  • If it is a company, what is its name? You then need to register it with the New Zealand Companies Office.
  • Registering with the Inland Revenue department: If you are a sole trader, you can use your personal IRD number.
  • If you think you will earn more than $60,000 each year, you need to register for GST. If you will earn less than this, then it is up to you whether you register.
  • If you will employ staff, you need to register as an employer.
  • Think about the licences you may require, eg regulatory authorities or local councils.

In New Zealand, some startup businesses have to pay resident withholding tax (RWT). It is required in the following cases:

  • If you receive finance from New Zealand investors that are not a bank or financial institution.
  • You pay them over $5,000 interest a year.
  • You are not a New Zealand citizen or resident, but you do business in New Zealand.
  • You still need to be registered, even if you think you will be entitled to a certificate of exemption.

Companies that pay dividends are automatically registered with the Inland Revenue Department (IRD) to pay RWT. Remember, any company, agent or trustee that pays dividends needs to inform the IRD, and they will send you all the reconciliation forms you need.

Frequently asked questions

Do I need to provide security?

This depends on the lender you apply with, but it’s up to you whether or not you want to offer a guarantee. Doing so helps lower your repayments but also puts the asset at risk should you default on the loan.

What do I need to apply?

If you apply to a bank, you will need a detailed business plan as well as your personal information. Online business lenders usually list the application requirements on their website, and you can also find details on review pages.

What interest rate will I receive?

You are offered a rate based on the details you provide in your loan application. Some lenders may offer you a rate estimate before you submit a full application.

Picture: Shutterstock

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