Finding the best start-up loan for your business
Start-up business loans can be great for new businesses. With our guide, learn how they work, how to get one, and everything you need to know to find the best deal for your business.
What are start-up business loans?
Start-up business loans are a type of loan designed specifically for new businesses that are about to launch.
These types of new business loans can only be used by businesses under two years old and are intended to provide capital to support a new business cover its initial costs.
You can spend the new business funding you get from a start-up loan on most business expenses, and they’re typically used for setting up costs, cash flow, or securing business premises.
Start-up business loans are offered by many high street banks and independent providers, but as well as this, it’s possible to get a start-up business loan from the UK government.
How do start-up loans work?
Start-up business loans work by borrowing money from a lender and over time, paying the loan back, plus interest. Like other business loans, these repayments are made through monthly instalments, where you pay a recurring amount until your loan period ends.
The amount you pay back each month for small business loans for a start-up will alter depending on the length of your repayment plan. For example, if you decide to pay back a loan over 12 months, your instalments may be more than if you chose to pay it back over 24 or 36 months.
Interest is applied to the total of the loan left to be paid, not on the amount you pay back monthly. The amount of interest you accumulate will be added to the outstanding balance you owe each month.
Here’s an example:
You borrow £25,000 at an interest rate of 8%, and have a repayment plan of £2000 each month. After your first month’s repayment, you’ll have £23,000 of your original amount borrowed left to pay. The 8% interest rate will be applied to this figure, meaning your remaining balance will be £24,840.
Next month you repay another £2000, reducing the amount down to £22,840. 8% of this new figure is also added to your amount due, making your total owed £24,667.
Interest will also compound over time, which means you’ll pay interest on the previous month’s interest. This means you also need to pay back 8% of £1840. This makes your total owed after the second month £24,814.2.
This example illustrates how interest can extend a loan, making it take longer to fully pay off.
In reality, the amount of interest you’ll pay will compound each day, not each month, meaning the amount you’ll pay back will likely be higher still.
Start-up business loans are unsecured loans. This means there’s no collateral securing the loan that can be taken to pay the loan if the business cannot. These loans are riskier for lenders, meaning they’ll need to perform a credit check on your business.
This credit check will likely be a hard check, which is where they look at your entire credit history and should be performed on your business’s credit history. Your business’s credit history will determine the terms of your loan and if you get offered a good interest rate and repayment plan.
As a start-up, your business isn’t likely to have very much credit history because you won’t have been trading long, resulting in a poor or no credit score.
If this is the case, your own personal credit report might be used instead to guarantee the loan personally. Doing this puts your personal credit score at risk.
What are the costs involved?
For most start-up business loans, you will be charged interest on your loan amount.
Interest can alter drastically between providers. The interest rate for start-up loans offered by high street banks can range between 2-13% p.a, and from a start-up loan provider, between 3-10% p.a. The amount you’ll have to pay will depend on your credit report and accompanying business plan. The better your credit history, business plan and cash flow projections, it’s likely you’ll pay less interest.
When getting a start-up loan from the government-backed British Business Bank, you’ll always pay a fixed interest rate of 6% p.a (per annum).
In addition to interest, there may also be other charges applied to your start-up business loan, like application fees and an exit fee, which may be applied when you fully pay off your loan.
How much can you borrow with a start-up loan?
The amount you can borrow through small business start-up loans will depend on the start-up loans provider, your business’s credit report, and other factors like your business plan and cash flow template.
When borrowing from an independent lender, the amount you can borrow will range between £10,000 to £500,000. This is typically lower than what can be borrowed via other business loans. This is because your business is new and hasn’t yet proved it can be responsible when issued credit.
If you fail to qualify for a start-up business loan from traditional lenders, you’ll also have the option to apply for a loan from a UK government-backed scheme. This is called a Start-Up Loan and is issued by the British Business Bank.
Designed for businesses with no or low credit history who may have been rejected elsewhere, these loans offer smaller amounts, ranging between £500 – £25,000.
How do I apply for a start-up business loan?
To apply for a start-up loan for a new business, you’ll need to approach a lender directly. Although high street banks offer these types of loans, you may not be able to get them in-branch. Instead, most of these loans are only available online, mainly because most alternative business loan providers are digital-only.
If you’re struggling to find a start-up business loan, it may be a good option to use a loan broker. Brokers should be able to access loans that are not directly available to the public and may help you find the best start-up loan that suits your business.
The application process for a start-up business loan will be similar to other business loans. You’ll likely have your credit history checked, and this will be a hard credit check.
When applying for a start-up business loan, it’s expected that you’ll have a business plan and a cash flow template prepared to strengthen your application.
A business plan is a document which defines a company’s objectives and details how it intends to achieve its goals. This plan allows lenders to understand your business’s potential and helps you figure out how much you need to borrow and what repayment terms suit you.
A cash flow template is a document showing how money will flow in and out of your business. It should clarify where your income is coming from and your expenses.
Although not always required when applying for a start-up business loan, these documents will always strengthen your application, so consider them essential. They may be what helps your application to be accepted, especially if you have a limited credit history.
Who is eligible for a start-up loan?
To be eligible for business funding for start-ups, there are a few criteria both the business and the individual applying for the loan must meet.
- Must be over the age of 18
- Be the registered owner of the business
- Have a permanent address within the UK
- Have the legal right to work in the UK
- Must be under two years old
- Registered and based in the UK
When you apply, eligibility will also be checked against your business’s credit history, your personal credit history, and your accompanying business plan.
You can apply for a start-up business loan if you’re a:
- Sole trader
- Limited company
- Small & medium enterprise (SME)
- Large firm or corporation
- Charitable organisation
- Social or not for profit enterprise
What are the pros and cons of start-up business loans?
Start-up loans for businesses can be helpful. However, they may not suit every situation. Consider the pros and cons of this type of borrowing to make sure it works for your business.
- You have money to launch your business
- Retain business ownership, meaning you don’t have to give shares or control to investors
- Protect personal wealth because you won’t have to fund the business yourself
- Can build business credit if you keep up with repayments, allowing you to get larger loans and reduce interest rates
- It can be hard to obtain, especially if your personal credit history is poor
- Monthly loan repayments can be a considerable expense for new businesses, restricting cash flow
- Your personal credit score can be put at risk, especially if you gave a personal guarantee because of poor or little business credit history
Are there any alternatives to a start-up business loan?
If you’re looking to fund a new business, you can pursue a few alternatives that might be good options if a start-up business loan doesn’t suit you.
Getting an investor involved with your business can be a good way to secure initial funds to help it grow. Typically, investors will invest capital into a business in exchange for shares in the company.
The benefit of an investor is you don’t have to make monthly repayments back to them, freeing up cash flow.
However, because investors have a stake in the business, they may influence business decisions, taking control away from the business owner. If you’re a new business owner, guidance over business decisions may be beneficial, but for some, this lack of control may not suit you.
Short term business loan
If you’re looking for a short term loan to cover initial set-up costs that you don’t foresee to be a consistent expense in your business’s future, you could opt for a short term business loan. These loans are intended to be paid back over months instead of years.
Because of their short term nature, the amount you can borrow is lower, and the interest rates may be higher. These types of business loans suit businesses that have a single expense they don’t currently have the capital to cover.
Small business grant
Some small businesses under a certain age may be able to get a grant. This differs from a loan because you don’t have to pay them back.
The council usually issues grants, and there’s an application process you’ll have to follow to apply for one. The amount you can get from a business grant can differ, with the maximum for many being £1000.
You can get a business loan for a new business.
These types of loans offer larger amounts, longer repayment periods, and can be beneficial to help a business grow to the next level.
When applying for a business loan, you’ll have to provide many details about your business, including its turnover, financial history, and shareholders.
Start-up business loans FAQs
Do I need a business bank account to apply for a start-up loan?
You’ll likely need a business bank account to apply for a start-up business loan from high street and independent providers. If applying for a business loan from a bank, you’ll first need to have a business current account with the same bank.
You don’t need a business bank account if you’re applying for the Start-Up Loan offered by the government-backed British Business Bank. Because this is considered a personal loan, you will need to provide your personal bank account details.
Will a start-up loan affect my personal credit score?
If you’re providing a personal guarantee on your start-up loan because your business doesn’t have a good credit report, your own personal credit score is at risk.
If you fail to make loan repayments on time, your credit report will suffer, impacting your ability to get loans and other credit products in the future.
Plus, if you’re applying for multiple start-up loans at once, this can also negatively affect your personal credit report because you’ll have multiple applications on your report that suggest you’re desperate for capital.
Do start-up business loans require a personal guarantee?
If your business’s credit history is poor or non-existent, you’ll likely have to give a personal guarantee on the loan. This is where your personal credit history is used to calculate the loan terms and means you’re personally responsible for the loan repayments.
When providing a personal guarantee, if you fail to make loan repayments on time, your credit history could be negatively impacted.
How can you spend start-up loans?
Start-up business loans can be used on most business expenses, such as set up costs and cash flow.
Some examples of what start-up loans can be used for include:
- Buying stock
- Purchasing equipment
- Marketing costs
- Paying premise rent
- Staff wages
Can I get a start-up loan with bad credit?
Yes, getting a start-up loan with a poor credit history is possible.
High street banks and other providers may reject you; however, specialist lenders may offer start-up loans to those with bad credit. The amounts you can borrow will likely be less, and they’ll like to have stricter repayment terms. You’ll also likely have a higher rate of interest applied to your loan.