What are start-up business loans and how could they help make your business idea a reality? That’s where this guide comes in to help.
From how start-up business loans work to what they can be used for, you’ll find all the information you need, right here.
If you’d like to know more about applying for a start-up loan, read along for more information. Don’t forget to take a look at our FAQ section at the end for additional advice.
What Are Start-Up Business Loans?
Types of start-up business loan options
A start-up loan is a type of business finance that’s designed to help new companies that have less than 24 months of trading experience. Start-up loans allow budding businesses to fund essential requirements, such as launching the company or boosting the early stages of business.
A startup loan is typically unsecured so you won’t need to provide any valuable assets as security for the loan.
If you have a new business, the good news is that there’s a wide variety of startup loans available. But, this may make it more difficult to decide which one is best for your business. To help with this, we’ve listed some of the loan types you may be able to get below, to help you narrow down your decision.
Secured business loans
A secured loan is a funding type that uses a valuable asset as security against the loan. This could be a vehicle, property, or another expensive entity. This reduces the risk for the provider and usually means you’ll have a better finance rate.
Many traditional banks offer loans to small businesses. However, business loans for startups may come with strict criteria that you’ll have to meet to be eligible.
Unsecured business loans
An unsecured loan is unsecured, which means you won’t have to provide any assets to secure the loan. Because of this, the risk to the lender is greater so there’s typically a higher interest rate on the finance.
Crowdfunding is the practice of gaining funding from lots of different people who each donate an amount of money of their choice to your business idea. If you’ve got a service or product that people see as beneficial, they have the chance to donate money towards the funding of your idea.
They can invest as much or as little as they want, so if your project appeals to enough people, you could potentially secure enough funding for it.
There are crowdfunding sites such as Indiegogo and Kickstarter that are popular with startups and new business ideas. With crowdfunding, not only will you be able to have the funds needed to launch your new business, but you’ll also gain effective brand awareness by encouraging investors to join.
How Do I Get a Start-Up Business Loan?
What is required to get start-up business funding?
Applying for a startup loan is an easy process. There’s a range of lenders to choose from including lenders backed by the UK government, that can help you. All it takes is an initial online application. You’ll then be assigned a business adviser who can help you submit the whole application.
The lender will typically do a personal credit check, and you’ll need to provide some business documents including a cash flow forecast and a business plan.
This will show potential lenders that you’re focused and serious about your project and that you’ve carefully thought about what you’ll need to do to get it off the ground. There are lots of templates for business plans and cash flow forecasts online, which can help you if you’re not sure where to start.
You’re not obligated to accept any quote you receive, so be sure to consider each one carefully before you make your decision.
How Do Start-Up Business Loans Work?
How much can I borrow on a start-up business loan?
Just like personal loans and other financing, startup loans work by borrowing funds from a lender and repaying it with an interest rate. Depending on which loan and which lender you choose, you could borrow as little as £1,000 or a larger sum of £1,000,000.
Will I need to provide collateral to cover my start-up business loan?
No, you won’t need to provide collateral to get a loan for your start-up. This type of loan is usually unsecured, so you won’t need to offer any assets to qualify for one. This is perfect because, as a start-up, you may not have anything valuable enough to offer as collateral.
Is a personal guarantee required to obtain a start-up business loan?
Before making your application, be aware that some lenders may request a personal guarantee as part of the agreement. Because startup business loans are unsecured, lenders may want some reassurance that there’ll be a way for them to get their money back if your business defaults on its repayments.
But what is a personal guarantee? It’s simply a signed agreement that makes the business owner personally responsible for repaying the money if anything goes wrong.
What Can a Start-Up Loan Be Used for?
You can use the money from a startup loan for virtually any business expense. It can help with boosting your cash flow, set-up costs, or expensive purchases. Additionally, a startup loan can be used for building your team or to help with brand awareness. Other uses include:
- Buying machinery or equipment
- Paying employee wages
- Paying for your business premises
Do I Qualify for a Start-Up Business Loan?
To qualify for a startup loan, you’ll need to meet certain criteria that will be set by the lender. Although this can vary between lenders, you must meet the following minimum requirements:
- You’re starting a new business
- You have or are considering, registering as a sole trader, limited company, or limited liability company in the United Kingdom
- You’re 18 or over
- You’re a UK resident
Will I need a business plan to get a start-up business loan?
Not only is your business plan essential if you want to achieve business success, but you’ll also need one to obtain a startup loan. From your financial outlook to marketing, lenders will need to see this plan that maps out your business idea and your strategies and goals.
Fortunately, alternative lenders offer products that make the loan application process quicker than traditional lending. If you’ve got your business plan ready, there probably won’t be a lot of paperwork from your lender.
Can I Get a Start-Up business Loan If I Have Bad Credit Rating?
Yes. Although lots of new business owners think that it’s not possible to get a loan with a poor credit history, this is simply not true. Many lenders will treat you as a person rather than giving you a “scored” decision.
This is one of the positives of alternative lenders. Many of them are keen investors and will want to understand your wants and needs, by getting to know you and your business plan. Don’t let imperfect credit history discourage you from applying.
What Interest Rates and Fees Can I Expect to Pay on Start-Up Business Loans?
The interest rates and fees can vary as every loan product is different. When you make an application, you’ll be connected to the lenders that are most suitable for your business project. You’ll then be able to decide which one is right for your start-up.
The Pros and Cons of a Start-Up Business Loan
Start-up business financing provides many benefits to new companies that are in the early stages of operation. Many new UK businesses would have to close down without the help of external business funding.
This is why, if you’re confident that your business project will work, you could enjoy the following benefits.
- Your business will be 100% yours as you’re not receiving the funds from an investor.
- You’ll build your business’ credit score. This will show your lender that you’re more reliable, and it’ll make future loan applications easier.
- You won’t need to offer any collateral which is good news for start-up companies that don’t have any assets to offer.
- You’ll be able to give your business venture the cash injection it needs to grow.
Although start-up loans have many benefits, there are some drawbacks you should be aware of before you apply for one.
- You may not qualify for a start-up loan. Some lenders won’t give loans to companies that haven’t been operating for long enough.
- You may not know how to use your loan effectively. Unlike experienced business owners, you won’t know how your business works straight away.
What Are Government-Backed Start-Up Business Loans?
Government-backed startup loans offer new businesses £500 to £25,000, with a 6% fixed interest rate. You can pay it back over 1 to 5 years and they are backed by the government. Start-Up Loans is a government-approved scheme that’s backed by the British Business Bank.
How to Choose a Start-Up Business Loan Lender
To find the right start-up loan:
- Search for lenders that can offer the amount of funding you need.
- Compare different rates to see how much interest you might pay.
- Apply for a loan with the lowest APR (Annual Percentage Rate).
Try to compare multiple start-up loans if possible. This will allow you to find the lowest APR for the sum you need to borrow.
Who Provides Start-Up Business Loans
Although you could go to a traditional lender such as a bank for a loan, there are also many alternative lenders you could go with. These include:
- Northern Powerhouse Investment Fund
- Start-Up Loans
- SME Loans
Hopefully, you now have a good idea of whether start-up business financing is right for you and your business. Whether you want to achieve business growth, need help expanding your company or with getting your name known, looking at startup loans could be the way forward for you.
What is the difference between a startup business loan and a grant?
The main difference between a loan and a grant is that a grant is typically a type of funding that you won’t have to repay. Usually, UK startup grants are backed by the government. But, some of them are provided by charity trusts or big corporate companies that can offer funding for start-ups.
Do I need a business bank account to get a start-up loan?
This depends on a few factors such as your business setup, the lender and the loan you opt for. If you register your startup business as a limited company, then yes, you’ll legally need to have a business bank account. But, if you’re a sole trader, you won’t need to have one.
If I am unemployed, can I still apply for a start-up business loan or grant?
Yes, if you’re unemployed you’ll be pleased to know that there are many UK grant schemes and startup loans available. These loans and grants are specifically for people out of work or who are receiving certain benefits.
How many start-up loans can I apply for?
Although there isn’t a limit on how many loans you take out, you must make sure you can afford to repay them, as missed or late payments can adversely affect your credit score.
Is a credit check required to get a start-up business loan?
Yes, when you apply for a loan for your startup business, you’ll need to have all the typical credit checks as you would if you take out any other type of credit. You’ll also need to prove that you’ll be able to afford the repayments.