How to get a startup business loan

Starting a business from scratch takes time, commitment, hard work - and money. Find out how to get a startup loan for your business and who provides them.

Nic Redfern Published on 05 June 2020. Last updated on 06 July 2021.
How to get a startup business loan

Startup business loans are a commonly-used option for young businesses to borrow the funds they need. They can be used to finance everything from renting office space and equipment to hiring staff, building a website, paying for business insurance and covering basic marketing costs.

If you are planning to take out a startup business loan, you first need a good understanding of your startup’s financial health and your projections for the next few years in order to work out how much you need to borrow and, just as importantly, how much you will be able to afford to pay back each month.

What is a startup business loan?

Most traditional business loan lenders are unwilling to lend to startups as they have no trading history or assets on which they can assess their credit worthiness.

However a growing number of alternative finance providers including regional banks and online lenders are now lending to small and startup businesses.

As well as lending directly to startup businesses, many lend via the government-backed Startup Loans Scheme (see below) that provides government loans for new business.

How to get a startup business loan

Taking out a startup loan could be an attractive option for startups who wish to retain complete control of their business but who don’t have the funds to launch their business or to be able to keep it going before it starts generating revenue of its own.

As with any business loan application you will need an expense sheet, business plan and financial projections for the next five years if you want to increase your chances of securing a startup business loan.

Accruing this information will help you understand how large a loan you need to ask for, as well as demonstrate to the prospective provider that you are serious and fully understand your financial circumstances and obligations.

Once you have your materials prepared, you’re ready to contact credit unions, banks, online lenders and peer-to-peer business lenders to request a startup small business loan. You’d be well advised to compare offers and ensure you’re acquiring a loan on the best possible terms.

If you are considering taking out a small business loan of any type, read our guide on the pros and cons of small business loans for more information.

» COMPARE: Startup business loan rates and deals

Decide how much funding you need

Your business is unique. By calculating the startup costs for your small business, you will be in a better position to source funding, attract investors, and estimate when you’ll make a profit.

Common startup costs include:

Once you have a list of the costs for your startup, you will then need to associate an accurate cost for each of these individual expenses. This should give you a full picture of how much funding you’ll need.

It's advisable to present your startup costs in a formal document. This allows easy access when presenting it to potential investors or when you’re ready to apply for funding.

If you apply for a startup business loan through the government’s Startup Loans scheme, you will be assigned a Business Adviser who will help you assemble your business planning documents and key supporting documents including your business plan, cash flow forecast and personal budget.

» MORE: Steps to create a cash flow forecast

Startup Loans Scheme

The Startup Loans Scheme was created and funded by the government through the British Business Bank and its subsidiary Start-Up Loans Company to try and bridge the gap between lenders and startup business.

As well as mentoring and other support, the scheme provides personal loans to business founders.

Traditionally many business founders fund the launch of their business by taking out a personal loan to or looking to relatives and friends to provide financial support.

The government scheme is intended to provide a targeted option and increase the chances of those businesses succeeding.

Am I eligible for the government’s Startup Loans Scheme?

You are eligible to apply for the government-backed loans for startup businesses if:

  • You’re at least 18 years old.
  • You are a UK resident.
  • Your business is based in the UK.
  • You have the right to work in the UK.
  • You’re starting a new business or the business is less than 24 months old.
  • You haven’t been able to get financing from other sources (a self-declaration will suffice here).
  • Your business type and purpose of the loan meets the Startup Loan Schemes criteria.
  • You pass the credit checks and show that you are able to repay the loan.

What other startup business funding options are there?

Startup business grants

Startup business grants are non-repayable sums of money that are normally given for a specific purpose or project, such as training, employment, expansion, research, property improvements or the revitalisation of a local area.

Grants are amongst the most sought-after forms of business funding because they do not need to be paid back. Every grant comes with different eligibility criteria, and many entail a lengthy application process to account for the intense competition.

» MORE: Top small business grants in the UK

Establish a credit line

A lot of banks and credit institutions offer startups a credit line, a form of borrowing that can help with growth in the early stages of a business.

A line of credit is a type of loan that doesn't just give one lump sum like a traditional loan. Just like with a credit card, you can use credit when you need to pay for something that is financially out of reach. Just make sure you keep purchases to a minimum during this time, or you’ll risk becoming bogged down in debt.

Venture capital

You could look to find an investor to provide you with venture capital for your startup. This is generally invested in exchange for an active role in the business or a share of ownership.

You could either tap a venture capital fund or an individual, also known as an angel investor for investment. Either way, they will likely both want a seat on your board of directors at the very least. You therefore need to weigh up whether you’re prepared to relinquish some of your ownership and control in exchange for funding.

Venture capital diverges from traditional financing in a number of ways. It is not a loan, so it is invested in return for equity, not debt. It has a longer investment horizon and is generally targeted at companies that demonstrate high growth potential. Venture capital is also generally associated with higher-risk investments and for potentially even higher returns.

If you bring on an investor, they will review your business plan to ensure it aligns with their own investment criteria. They will consider the market you’re looking to launch in and, if they wish to continue, both parties will need to agree on the terms and conditions of the funding.

Once the term sheet has been finalised, funds generally come in larger and larger amounts, called rounds, as the business meets milestones.

Crowdfunding

Crowdfunding involves many people each contributing a small amount to your startup.

There are different types of crowdfunding and in some cases, the crowdfunder will not expect any money back but will receive a gift by way of thanks. This may take the form of one of your products, being credited in some way or meeting the business owner.

Crowdfunding platforms do differ in their terms and conditions, so be sure to read the small print and understand your legal and financial obligations before signing up.

Self-funding

Self-funding, otherwise known as bootstrapping, involves utilising your personal finances to support the launch of your startup. Perhaps family and friends can help you with capital. Alternatively, you may need to look at dipping into one of your savings accounts or ISAs.

Self-funding allows you to retain control over your startup. The flipside is that all responsibility for the financial prosperity of the business is placed on your shoulders.

You need to be savvy with your money and not spend more than the business can afford. You’ll need to exercise even greater caution if you choose to tap into your pension for capital, as you could face a hefty penalty or fee and jeopardise your ability to retire when you want to.

Liaise with a personal financial advisor and check in regularly with whoever is administering your startup’s financial strategy.

» MORE: How to start a business with no money

Start funding your business today

There is no one-size-fits-all solution to your startup’s financial needs, so you need to work out exactly how much money you’ll need to launch the business and how much you’ll need to maintain it. Only then can you begin to consider how to fund it - and the choices you make may have implications for how you run and structure your company.

» MORE: Business loans vs personal loans

Image source: Getty Images

About the author:

Finance Director at NerdWallet UK and business adviser to SME's Nic is spokesperson for small and growing businesses with a strong understanding of the financial needs of business Read more

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