A startup loan is a type of finance designed to help brand-new businesses or those that have been trading for just a few years (typically 3 or less). The idea is that it can help pay for the essentials needed to run a business in that key early stage – even if you don’t have much in the way of a credit history.
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The British Business Bank’s Start Up Loans scheme provides government-backed loans for UK small and medium-sized enterprises (SMEs) under 3 years old, delivered through partners at a fixed interest rate via the Start Up Loans Company. You can borrow between £500 and £25,000 over a term of 1 to 5 years.
Because the loan is a personal loan, not a business loan, each partner in your company can apply for a loan of up to £25,000. The maximum your business can get is £100,000.
The scheme also comes with 12 months of business mentoring, which can be a good idea if your company is very new.
Am I eligible for a government-backed loan?
As with any form of credit, you’ll need to make sure that your business can realistically afford to repay the loan before you apply. Your company will also need to meet the following criteria:
Trading for no more than 3 years.
Limited company, sole trader or partnership.
Based in the UK.
The director that applies will need to be aged 18 or above and a resident in the UK with the right to work in the UK, and they will need to pass credit checks.
Your eligibility also depends on the nature of your business, your business model and how you intend to use the funds: Start Up Loans are not available for certain kinds of business costs. You can find more details on the types of businesses that are excluded and what loans can be used for on the Start Up Loans website.
How to apply for a loan as a new business
If you’ve reviewed all your new business loan options and decided that the government Start Up Loans scheme is the right choice for your business, you can apply through the Start Up Loans website.
Use the free eligibility checker on the Start Up Loans website to check you qualify for the loan. If you do, you will then need to register.
Complete the online application form, providing details about your situation, how much you want to borrow and how you intend to use the loan. A credit check will be carried out at this point.
If you pass the credit check, you’ll need to supply personal bank statements for the past 3 months. You’ll also be assigned to a Business Support Partner with a business adviser to help you with your application. There is a 90-day window in which to complete your application.
Your business adviser will review your business planning documents and will work with you to get them ready for assessment. You will need to show your business plan and cash flow forecast. You’ll also need to show your affordability through the ‘personal survival budget’ which details your personal average monthly income minus your typical monthly expenses.
Once approved, you’ll need to sign a loan agreement. After you return this, you’ll get the money and have access to 12 months of free mentoring to help you build a successful business during this crucial early stage.
The Start Up Loan is an unsecured loan which means you won’t need to use an asset, such as property, as security. This makes it less risky for you, the borrower. But it’s still essential that you can afford to repay your loan on time.”
What if I’m not eligible for a government-backed loan?
If you can’t get this loan, there are other options. There are a number of lenders offering business loans, and some of them have products designed for the specific challenges you face when you first start a business, such as a lack of business credit history.
Of course, you and your business will still have to pass some eligibility checks to borrow from these lenders, just like you would with a personal loan or any other kind of credit. And not every lender will be prepared to offer loans for every kind of business or for every spending purpose. But many individual lenders will be less prescriptive with their lending criteria for startup business loans than the government’s Start Up Loan scheme.
Business credit cards work in a similar way to personal credit cards, but you can add more cardholders and potentially track and manage spending from a centralised platform. If you always pay off your balance in full at the end of the month, you typically won’t be charged interest (unless you, for example, withdraw cash on the card), making this ideal for very short-term borrowing. Find out more about business credit cards for startups.
A business overdraft works much like a personal overdraft: it allows you to borrow through your business bank account up to a specified limit, making it a hassle-free way to manage variable cash flow. However, you’re likely to find higher credit limits and more competitive rates with another form of finance.
A line of credit could offer a similar degree of flexibility to a business overdraft or credit card, but with the opportunity to borrow more money. You’ll usually only pay interest on the amount you borrow and only for the amount of time you borrow it. You’ll have the freedom to repay or top up as it suits you, subject to credit and minimum repayment limits.
Invoice financing allows you to unlock the value in outstanding invoices. You sell the invoice to the lender for a percentage of its value, giving you immediate access to funds rather than having to wait for your creditors to pay you.
Asset financing is a form of business loan that is used to cover the cost of a business asset. The loan is secured against the asset itself. Compare asset finance options.
With a merchant cash advance, a lender will give you a lump sum for a fixed fee (rather than ongoing interest). You will need to repay a percentage of all your sales until you have cleared the debt, which makes this an appealing option for businesses with a high degree of fluctuation in their income.
Peer-to-peer business lending companies connect investors with borrowers without the need for a middleman. These companies have lower overheads which means borrowers can benefit from lower interest rates on their loans.
Personal loans or credit cards Since lenders can be fussy about how long a firm has been trading, a director may choose to borrow on behalf of their business, via a personal loan or personal credit card instead.
Who is more likely to recommend their card issuer to friends/family: business loan users or personal loan users?
Response
% of customers that would recommend
Personal loan users
89.80%
Business loan users
94.25%
Source: Finder survey by OnePoll of 1,150 Brits
Frequently asked questions
Many business lenders offer loans to startups, and some, such as Tide, have products specifically designed for companies that have been trading for a certain time. See our guide to business loans for more information.
The Start Up Loans Company administers this scheme, but your loan funds will be provided to you by either your business support partner or one of the company’s finance providers.
Start Up Loans are designed to help new businesses get off the ground or expand. You could use your loan to buy new equipment or stock, buy a business premises, or help with marketing and advertising costs, for example. However, you can’t use it for debt repayment or training, qualification or education programmes.
No, there are no fees involved when applying for or taking out a Start Up Loan. The loan itself has a fixed interest rate.
Each individual can only apply for a Start Up Loan for one business. But if, after successfully securing a Start Up Loan, you later require additional funding to help you grow that same business, you might be able to get a Second Loan. Certain rules and requirements apply.
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To make sure you get accurate and helpful information, this guide has been reviewed by Rachel Wait, a member of Finder's Editorial Review Board.
Grace was a Finder writer specialising in credit and loans. She's been writing about personal finance for several years and enjoys helping consumers sort the facts from the fluff. See full bio
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