How to Secure a Loan for Your New Business

Lenders assess new businesses differently to established operations because there is no trading history to demonstrate repayment capacity.

Most startups need to provide a detailed business plan, cashflow forecast, and evidence of industry experience or qualifications. If you are purchasing an existing business or franchise, lenders may also assess the performance of that business under previous ownership. Where there is no trading history, lenders typically require security, which can be residential property, commercial property, or assets being purchased with the loan proceeds.

Secured vs Unsecured Business Finance

A secured business loan uses an asset as collateral, which reduces the lender's risk and typically results in a lower interest rate. Security can include residential property you already own, the commercial property or equipment you are purchasing, or other assets with sufficient value. An unsecured business loan does not require collateral but usually comes with a higher interest rate and stricter serviceability requirements.

For a new business, unsecured finance is difficult to access because lenders have no trading history to assess. Most startup business loans are secured against property or equipment. Consider a buyer acquiring a cafe in Fitzroy with $80,000 in fitout and equipment already in place. If the buyer has equity in a residential property, that property can secure the loan, which allows the lender to offer a variable interest rate comparable to commercial lending rates. The buyer retains full control of the business assets and can negotiate flexible repayment options based on projected cash flow.

Loan Structures That Support Cash Flow in the First Year

Cash flow is usually tight in the first twelve months of operation, so the loan structure needs to reflect that reality. A business term loan with principal and interest repayments may strain cash flow, particularly if revenue takes time to build. Some lenders offer interest-only periods of six to twelve months, which reduces repayments during the startup phase. Others offer a progressive drawdown, where funds are released in stages as expenses are incurred, which means you only pay interest on the amount drawn down rather than the full loan amount from day one.

A revolving line of credit or business overdraft provides access to funds as needed, and you only pay interest on the outstanding balance. This structure suits businesses that need working capital to cover unexpected expenses or manage seasonal fluctuations. The interest rate on a line of credit is usually variable, and the facility is typically reviewed annually. If the business plan shows strong projected revenue but uneven cash flow in the early months, a line of credit combined with a term loan can provide the flexibility needed without over-committing to fixed repayments.

What Lenders Look for in a Business Plan

Your business plan must demonstrate that the business can generate sufficient cash flow to service the loan. Lenders assess the cashflow forecast, the assumptions behind it, and whether those assumptions are realistic given the industry and location. If you are buying a business, they will review the business financial statements from the previous owner and compare them to your projections. If you are starting from scratch, they will look at your industry experience, qualifications, and any contracts or agreements already in place.

A credible business plan includes detailed revenue and expense projections for at least the first two years, a breakdown of startup costs, and an explanation of how working capital will be managed. Lenders also assess the debt service coverage ratio, which measures whether projected cash flow is sufficient to meet loan repayments. A ratio below 1.2 is usually considered high risk. If your projections show a ratio of 1.0 in the first six months, you may need to provide additional security or demonstrate other income sources during that period.

How Residential Property Can Secure a Startup Business Loan

If you own residential property with available equity, that equity can be used to secure a business loan without requiring the business itself to provide collateral. The lender places a mortgage over the residential property, and the loan proceeds are used to fund the business. This approach is common when purchasing equipment, covering fitout costs, or providing working capital for a new venture.

The amount you can borrow depends on the equity available and your ability to service the loan. Lenders typically allow you to borrow up to 80% of the property value, less any existing mortgage. Serviceability is assessed using your personal income, your partner's income if applicable, and the projected income from the business. If the business is not yet generating revenue, lenders may discount projected income or require evidence of savings or other income to cover repayments in the interim. Using residential property as security gives you access to a lower interest rate than unsecured business finance and can support a higher loan amount, but it does place your home at risk if the business cannot meet repayments.

Equipment Financing and Asset-Backed Lending

If you are purchasing equipment or vehicles as part of your startup, those assets can be used as security through an equipment finance arrangement or chattel mortgage. The lender takes a charge over the asset, and if repayments are not met, the lender can repossess the equipment. Equipment financing usually requires a deposit of 10% to 30%, depending on the asset type and the lender's assessment of residual value.

This structure suits businesses that need vehicles, machinery, or technology as part of their core operations. The loan term is typically aligned with the useful life of the asset, and you can choose between fixed or variable interest rates. Some lenders offer flexible loan terms that allow you to adjust repayments based on cash flow, though this usually applies to larger facilities rather than single-asset finance. If the equipment is essential to revenue generation, such as a food truck or specialised machinery, lenders may view the loan more favourably because the asset directly supports repayment capacity.

Building a Business Credit Score Before You Apply

A business credit score is separate from your personal credit score and reflects the creditworthiness of the business itself. For a startup, there is no business credit history, so lenders assess your personal credit score and financial behaviour. Defaults, missed payments, or high credit card balances on personal accounts will affect your ability to secure a business loan. Before applying, obtain a copy of your personal credit file and address any issues that could reduce your credit score.

If you have been operating as a sole trader or in a partnership before transitioning to a company structure, ensure that trade accounts and supplier arrangements are settled and that any existing business debts are documented clearly. Lenders may request personal financial statements, tax returns for the past two years, and evidence of savings or deposits already committed to the business. A strong personal financial position increases your chances of approval and may allow you to negotiate a lower interest rate or higher loan amount.

Comparing Commercial Lending Options Across Lenders

Different lenders have different appetites for startup lending, and the loan products available vary significantly. Major banks may require a longer trading history or higher security, while smaller lenders and non-bank institutions may offer more flexible loan structures or faster approval times for newer businesses. Some lenders specialise in franchise financing and have established processes for assessing franchise business models, which can expedite approval if you are purchasing a franchise.

Working with a broker gives you access to business loan options from banks and lenders across Australia, including those that do not advertise directly to the public. A broker can structure the loan to suit your cash flow, negotiate on loan terms, and manage the application process across multiple lenders if needed. This is particularly useful for startups, where the strength of the application depends on how the business plan, security, and personal financial position are presented. For more information on commercial lending options, visit our commercial loans page or explore specific business loans tailored to different business stages.

Call one of our team or book an appointment at a time that works for you to discuss your business finance needs and explore the loan structures that suit your startup.

Frequently Asked Questions