Because of the risks involved, it’s important to get professional advice to help you understand the options, fill in any knowledge gaps and prepare detailed financial plans to ensure you do the right thing. Not realising something important, or just being overly optimistic, can have disastrous consequences for your future financial wellbeing. 

This article is designed to help you get started on understanding what’s involved, so you’ll be better prepared when you talk to a financial adviser and potential lenders.

What are startup loans?

A startup loan is really just like any other business loan. It’s mainly a marketing term used to help people who are starting a business feel more welcome and motivated to apply. It also allows the loan provider to use language and examples that are more relevant to people starting a businessfor the first time.

Business term loans

Most business loans are term loans. That means you get a lump sum of money that you have to repay within a certain time, known as the loan’s term. You make regular fortnightly or monthly repayments that include interest and a small portion of what you owe (the principal). 

The interest rate can be fixed for an agreed time or vary according to market rates. It also reflects your risk to the lender, i.e. less risk can mean a slightly lower interest rate. One way to reduce the lender’s risk is to offer something as security for the loan, such as a vehicle, house or other asset. However, if you can’t meet your repayments the lender can sell the asset to recover what you owe, plus their expenses, and return the rest to you.

Your repayments are calculated to ensure the loan is repaid in full by the end of its term. On a variable rate loan, if the interest rate increases, your repayments will also increase because the amount of principal being repaid has to stay on track and the interest component will increase. If the interest rate decreases, you may be given the option to reduce your regular repayments or keep them the same to repay your loan sooner than required. The second option can significantly reduce the amount of interest you pay over the life of the loan.

On the other hand, the interest rate on a fixed rate  will not change over the lifetime of the loan. 

Business line of credit loans

A line of credit is like an overdraft or credit card, because there’s a maximum amount you can borrow. You can draw money out (up to the limit) and use it for the purpose of the facility.  The interest rate is normally variable (not fixed). Interest is usually calculated based on the daily balance, and is paid fortnightly or monthly from the same account. 

Because of the freedom involved, a line of credit usually requires you to have a good record of earning money and managing it well. That’s why line of credit loans are much less common, particularly for startup businesses and more common for existing businesses.

Because of the inherent risks of a startup, the borrower will want to see a previous track record with a successful business, how much of your own money you are willing to invest, your credit history, the type of security you are willing to offer and any guarantors.

Before you decide to borrow

As we mentioned above, a loan can remove flexibility, add to stress and even cause your business to fail. Before you dive in it pays to check these things:

  • You have considered all other ways to reduce costs or save money for a while, to reduce the amount you have to borrow.
  • The loan will allow you to increase your regular income by more than the required repayments and the eventual total cost of the loan (loan amount plus interest).
  • Your cash flow forecast (how much money will flow in and out of your business and when) means you’ll always be able to meet the regular repayments every time.
  • You’ve received independent financial advice and you understand the loan’s terms and conditions.
  • The loan offers flexibility, such as having the option to make lump sum repayments or repay it in full without penalty fees if your financial planning indicates you might be able to do so.
  • You’ve explored and considered other funding options.

Startup loan alternatives

Here are some possible options to consider before signing up for a loan.


This refers to only spending as you earn, so not borrowing at all. It suits businesses that don’t need a lot of money to get underway and are able to generate a reliable recurring income immediately. Bootstrapping is a low risk and low stress approach, but it might lead to slower growth.

Self-funding, friends and family

Many New Zealand startups are initially funded from savings. Putting your own money in can let potential lenders know you’re confident and committed to success. With a business loan, you’re basically putting your home up as security to fund the startup..Obviously, there are risks if the startup were to fail.

While friends and family may believe in you enough to contribute, it’s important that this is done in a professional way with a clear written agreement that covers expectations, interest rate and all the what-ifs. Getting the help of a lawyer and making sure everyone receives independent advice can avoid destroying relationships in the future.


There are wealthy individuals and organisations that specialise in funding promising new businesses. Their investment often includes experienced business advice, valuable mentoring and access to established networks. The downside is that they usually provide the money and expertise in return for part-ownership of your business. The value of that share grows as your business grows in value; they may also get a share of any pay-outs to owners/shareholders, such as dividends. 

There’s a lot of competition for these “angel”investors, so you have to be thoroughly prepared with a full business and financial plan, and a convincing professional presentation. Be careful of people offering to introduce you to angel investors for a fee. It can sometimes be a scam, so check them out thoroughly first.

Crowdfunding and peer-to-peer lending

This is where you use the internet to gain a large number of small investors through a platform like Kickstarter. In return, your investors receive a reward or a small share of your business. It’s an increasingly popular method, which makes it much harder to stand out on the Kickstarter website. If it works, you’ll already have a valuable group of supporters to help your business gain recognition. But if you don’t deliver on your promises the group can quickly turn against you with the power of social media. 

Peer-to-peer lending platforms provide a similar service that formally links lenders and borrowers without the need for direct contact. You may need to provide security to get the best rate, but they’re usually quite competitive and all the documentation is taken care of.

How to apply for a startup loan

If you’ve decided a business loan is the best way forward, here’s a quick summary of the steps involved.

Prepare a financial plan

This should include a predicted cash flow, profit and loss statement, and a balance sheet. They can be quite difficult to do for a startup, because of all the unknowns. It’s important to estimate your revenue flow as accurately as you can. There are many examples and templates available online. 

Once you’ve put the draft documents together, it pays to get a business or accounting professional to review them. If you find this sort of thing challenging, you could ask a professional to help guide you from the start. 

Write a business plan

This usually requires careful research, including the aforementioned financial planning. At a high level a plan should cover:

  • What the business does
  • A description of potential customers and competitors
  • An honest identification and assessment of risks
  • What structure your business will have
  • How your products or services will be provided
  • How you will advertise
  • Your expected income, expenses and profit/loss over the next three years
  • Key milestones and when you expect to achieve them
  • Who’s on your team, including partners investors and business support professionals

For more see our article on how to create a simple business plan for your small business.

Create a pitch presentation

Prepare a supporting document that justifies the amount you’re asking to borrow, based on your business plan. This shows you’ve thought it through carefully and know exactly how much money is needed, what it will be used for and why. You could also mention alternatives you’ve considered, such as saving first, and why a loan makes more sense. 

Use an online calculator to see the likely repayments for the amount and loan term you’re seeking. Now add in a budget that shows how you will always be able to comfortably afford the repayments. Identify any risks to on-time payment and how you will mitigate them, such as having the right business insurance. Finally, mention any security you might be prepared to offer to reduce the interest rate and pay off your loan faster.

Next steps

There’s a lot of time and effort involved in properly setting up a new business. Financial planning might not be your favourite business activity, but it can make all the difference between enjoying success and recovering from financial ruin. A small investment in professional help at the beginning can pay huge dividends in the long run. It’s also important to keep your costs down and focus on what’s most important for your startup business.

Afirmo tools provide an easy, quick and economical pathway to get your business started and manage it well. From business set-up, marketing and choosing the right insurance, the tools continue into managing your invoicing, money and taxes with ease. 

To learn more check out the Afirmo tools today.