Video · 1:09

Five questions to ask yourself before starting a business

1:09 · Posted 16 November 2023 on the HomeSec YouTube channel

On-screen captions over stock footage: five questions to answer before starting a business, from how much capital you need to who your competition is, and why running short of money sinks so many start-ups.

In short

The video asks five things: how much capital you need, your point of difference, the problem you solve, who you compete with, and what support you have.
Its warning is the first question: running out of money too early is what stops many new businesses before they get going.
A business that has not opened yet has no figures for a bank to read. A property-secured lender reads the title, the purpose and the repayment plan instead.
The other four questions decide how long the capital has to last, so answer them before settling on how much to raise.

What the video asks

There is no presenter, just captions over footage, set to music. Starting a business is exciting, it says, but there is a lot of work to do first, and it puts five questions to anyone thinking about it: how much capital you need to start, what your point of difference is, what problem you are solving, who your competition is, and what resources and support you have around you. Then it comes back to the first. Running out of money too soon is one of the big problems new businesses face, and having enough capital at the start gives a business its best chance. It closes on HomeSec: if you have real estate to offer as security, the start-up can be funded.

The four questions that set the size of the first

The questions are not equal. The first is a number, and the other four decide what the number has to be. Your point of difference sets how quickly customers come: a business that is plainly better or more convenient wins them faster than one that is merely cheaper, and a business that competes on price needs more capital, because thinner margins take longer to cover the costs. The problem you solve is worth testing with real buyers before any money is spent. A handful of people willing to pay, or to sign a letter of intent, is better evidence than a spreadsheet.

Your competition tells you what customers already pay and how hard it will be to win them, and an established rival can usually wait longer than you can. Resources and support covers more than money: an accountant from the first week, someone who has run a business like yours, and time. It also covers the people on the title of any property you plan to borrow against, because every owner has to agree.

Raise enough the first time

Going back for more money after a business has run short is harder than raising enough at the start. A business that is open and losing cash looks riskier to every lender than one that has not opened, and the owner is negotiating against the clock. So the capital figure should cover the slow first months, not just the fit-out. The guide to how much money you need to start a business works through that sum, and this video on why companies fail shows what ASIC's reports say about running out of cash.

Where a property-secured loan fits

Banks lend against figures they can read, and a business that has not opened has none. HomeSec lends to companies, trusts and sole traders, start-ups included, against equity in real estate, with loans between $20,000 and $5,000,000. Residential property can be borrowed against up to 80% of its value, and commercial property up to 70%. Nobody asks for financial records or a minimum time trading, and interest can be added to the loan for up to the first 6 months, so there are no repayments while the business finds its customers.

Borrowing against your home to start a business is a serious decision, and it is the right one only when the answers to the other four questions hold up. Talk it through with your accountant first, and ring a Lending Manager when you know what the business needs.

Questions people ask next

Does HomeSec assess whether my business idea will work?

Not in the way a bank or an investor would. The loan is not decided on forecasts, and the idea is not given a score. HomeSec looks at three things: the equity in the property, a genuine business use for the money, and a believable way to repay. The idea is still yours to test, and the four questions after capital in the video are a good way to do it, ideally with an accountant who knows your industry.

When should a start-up apply for funding: before or after it opens?

Before you commit to costs you cannot yet cover. Because the loan is decided on the property rather than on trading figures, a business that has not opened is no less eligible than one that has. Settling the funding before you sign a lease or order stock means the commitments are made with the money already arranged.

What exit does a lender expect from a brand-new business?

A realistic one, not a guaranteed one. For a start-up the usual exits are a refinance with a bank once the business has built a trading record, the sale of an asset, or the business's own cash flow once it is established. Interest can be capitalised for up to six months, so it accrues without repayments in that time, and there is no fixed end date, so the plan has room to work.

The full guide

The video is the short version. The written guide has the detail: start-up business loans, with no trading history required.

To talk it through about your own property, ring a Lending Manager on 1300 93 83 87, Mon–Fri, 8:30am – 5:30pm Melbourne time.