Business loans for new businesses: what's possible in year one
By Outpace Finance · Published
Lenders judge a business on its track record, and a new business does not have one yet. That does not mean the door is shut. It means the question changes from 'how has this business traded?' to 'what else gives the lender comfort?' The answer to that second question decides which kinds of finance are available, and how soon.
Why trading history matters so much
When a lender assesses an established business, it is mostly reading the past: twelve months of bank statements show what the business earns, how steady that is and how it handles its money. A new business cannot show any of that, so the lender is being asked to fund a forecast.
Most lenders will not lend unsecured against a forecast. They will lend against something they can fall back on, which is why security, an asset or a creditworthy customer becomes so important in the first year.
What you can usually get, by time trading
These are broad patterns rather than rules. Individual lenders set their own minimums, and a strong application at five months can do better than a weak one at eight.
- Not yet trading or under three months: finance secured by property, or asset finance with a deposit or property ownership behind it
- Three to six months: asset finance opens up further, and invoice finance becomes possible if you are invoicing established customers
- Six to twelve months: the first unsecured lenders come into play, usually for smaller amounts based on your bank statements
- Twelve months and beyond: most unsecured lenders, lines of credit and low-doc secured loans are available
Asset finance: the most common first loan
If what you need is a vehicle, machinery or equipment, equipment and asset finance is usually the easiest finance a new business can get. The asset secures the loan, so the lender's risk is tied to something it can value and recover, rather than to a trading history that does not exist yet.
New businesses are often asked for a deposit, or for evidence that a director owns property, which shows the lender there is stability behind the business. The same logic applies to a business car loan, where a utility, van or car is the security. Mainstream assets with strong resale values are the easiest to fund.
Borrowing against property
Where a director owns property with equity in it, a secured business loan can fund a new business from day one. The lender is relying on the property, so the business's short history matters much less.
It is the most flexible option and often the cheapest, but it is also the most serious. Your home is on the line if the business cannot repay. Take advice from your accountant, and think hard about how much of the equity you commit.
Invoice finance, if your customers are established
Invoice finance advances money against invoices you have issued to other businesses. Because repayment comes from your customer paying the invoice, the lender is assessing your customers' reliability as much as your own history.
A new contractor invoicing a large builder or a government department can often get invoice finance well before an unsecured lender would look at them. It does not suit businesses selling to consumers, or invoicing customers who are as new as they are.
Buying an existing business is different
If you are buying a business rather than starting one, lenders will look at the business's own trading history: its financial statements, its bank statements and its customer base. Your experience in the industry matters too. Someone who has managed a café for ten years buying a café is a very different proposition from a newcomer.
Acquisition finance usually needs security as well, often property, and lenders will want to see the sale contract and the business's recent financials before they commit.
How to make an early application stronger
Most of what helps a new business borrow is about making the information a lender does have as clear as possible.
- Open a business bank account from day one and run all takings through it
- Register for GST when you start, if you expect to reach the threshold, so your BAS history starts early
- Keep your personal credit file clean. Directors' credit matters more when the business has no history of its own
- Bring signed contracts, purchase orders or a pipeline of work as evidence of what is coming
- Have a short, realistic forecast, and be ready to explain the assumptions behind it
- Mention relevant industry experience. It is a real factor in early-stage assessments
The short version
A new business can borrow, but usually against something: an asset, property or the invoices it issues to established customers. Unsecured lending generally becomes available from about six months of trading. Wherever you are in that first year, start an application and we will tell you plainly what is available now, and what changes in a few months' time.
General information only. It does not take your circumstances into account and is not financial, credit or tax advice. Lender policies and ATO rules change; talk to your accountant about the tax position of your business.