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Business Startup Loans

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When it comes to setting up a new business, one of the most important steps is securing funding to invest in your big idea – and that’s exactly what startup business loans are for.

What is a startup business loan?

A startup business loan is simply a loan which is available to new businesses – also known as startups.

Because startup businesses often struggle to secure funding – and getting a new business off the ground can be a cash-intensive process – startup business loans can be lifelines for new enterprises.

By taking on a business loan, a new venture can acquire the capital it needs to get up and running.

Am I eligible for a startup business loan?

To be eligible for a business startup loan, you’ll generally need to be at least 18 years old, a UK resident, and looking to start, or already have a business that is based in the UK. Startup loans tend to be aimed at businesses that have been trading for three years or less, though this can differ between lenders.

Your business plan and forecasts, your personal credit history and that of your business, and your business’ trading history, if it has any, are all likely to be considered as part of the startup loan eligibility process.

What credit score is needed for a business startup loan?

In general, there is no one universal minimum credit score that either your business, or you, must have in order to get a business loan as a startup company.

However, if your business is up and running, and has a good credit score, this could improve your chances of being approved for a loan and may give you access to lower interest rates.
If your business isn’t yet set up, is still finding its feet, or has some blemishes on its credit record, lenders may be more wary of lending money and want greater reassurance that you’ll be able to pay it back. As a result, it’s likely that lenders will check your personal credit history before you’ll be offered a startup business loan. It’s also possible you’ll be asked to provide a personal guarantee, where you promise to repay the loan from your personal assets if your business can’t.

Do you need security for a startup loan?

Many startup business loans are unsecured, meaning they don’t require an asset as security or collateral for the loan. This partly reflects the likelihood that newer businesses may not have suitable assets to put forward anyway. That said, some startup loans are available that do require collateral. Importantly, with secured business loans, there is always the risk the asset could be taken by the lender if you fail to keep up with loan repayments.

» MORE: Unsecured business loans explained

What can startup business loans be used for?

Startups often need funds to get off the ground, and a lender is likely to ask how you intend to use the loan. You may need the funds for the following reasons:

Marketing and advertising: to promote your business.
Startup costs: including buying equipment, stock and premises.
Business growth: to launch new products and services, or buy another business.
Cashflow: to help cover short-term cash flow challenges, perhaps if your business is seasonal.
Short-term overheads: such as your business’ utility bills and rent.
Employees: covering the cost of hiring, training and wages.

How to get a startup business loan

Applying for a business startup loan may be easier than you think. Just follow the steps below.

Decide how much you want to borrow and for how long. It’s important to find the balance between what you can afford and what you need to help grow your new business.

Compare loans and lenders. It’s important to shop around and compare different lenders. Bear in mind that it’s considered more risky to lend to new and unproven ventures, so some lenders may not consider startups. Always check that you are eligible for funding and that a loan suits the needs of your business.

Submit your application and all relevant documents. Be prepared to share details around the finances of your business, both past and projected, your business plans, how long you’ve been trading, and why you want a startup loan.

Sign the agreement. If you’re offered a loan, and you wish to proceed, you’ll need to sign the necessary agreement, being sure to double check the terms and conditions.

» MORE: How to get a business loan

How long does it take to get a startup loan?

It may be possible to apply for a startup loan in minutes online and get the funds later that day, or a loan could take several weeks to arrange. Much depends on the lender, the type of loan you want, and your circumstances.

Startup business loan pros and cons

There are several benefits to business startup loans, as well as some potential drawbacks.

Advantages

The funds can be used to pay for equipment, premises, staff and whatever you need to help your business get off the ground or grow.
Many startup loans are unsecured, avoiding the need to find an asset to put forward as security for the loan.
Provided you repay it in full and on time, taking out a startup loan could boost your business credit score.
Using a business loan to fund your startup means you’ll retain ownership of the business, rather than giving away equity.

Disadvantages

Like all loans, startup loans must be repaid with interest and often come with fees.
Due to the risk associated with lending to new businesses, interest rates on startup loans can often be higher.
Eligibility criteria can sometimes be strict, with some loans requiring businesses to have been trading for a certain period of time.
Some business startup loans will require an asset to be used as collateral for the loan, which a lender could take if repayments aren’t met.
You may be required to provide a personal guarantee for some loans, which puts your personal assets at risk if loan repayments aren’t made.
If you fail to meet the repayment terms of a loan, your business credit score may suffer.
If you default on your loan, you may face additional charges.

» MORE: Understanding the cost of business loans

How much can you borrow with a business startup loan?

Depending on the lender, it may be possible to borrow as much as £500,000, or perhaps more. For smaller startup loans, the minimum you can borrow is around £500.

How much you are allowed to borrow for your business mainly depends on the amount a lender thinks you can afford to repay.

» MORE: Try our business loan calculator

How long are startup business loan terms?

Some startup loans are available over a term of up to 25 years. Or if you want to repay faster, you could consider a short-term business loan. The minimum term on startup business loans tends to be around three months, or sometimes shorter.

How to get a startup business loan through NerdWallet UK

We can help you to find the best business loan for your startup business, without affecting your credit score. Here’s how it works:

Answer a few quick questions about your business and what you’re looking for.
See your matched loan options – we’ll check our panel of lenders and find the loans you’re most likely to be eligible for.
Compare and apply with key details pre-filled, making the process quicker and easier.

» COMPARE: Find the right startup loan today

How are startup loans different from other business loans?

Startup loans share many similarities with other types of business lending, including how they work and the application processes. Essentially you apply to a lender for a loan amount and must repay it, plus interest, over the set loan term. The key difference is that startup business loans are available to businesses that are relatively new, or are yet to start trading, whereas other business loans may require an established trading history before you apply.

You may find also find that startup loans:

Have higher interest rates, as new businesses represent a greater risk to lenders.
Require you, as the business owner, to provide a personal guarantee. This also reflects the great risk to the lender, and assumes that a new business won’t have many assets the lender can rely on for security.
Offer lower loan amounts than standard business loans.
Involve a check on your personal credit history, as your business is unlikely to have one yet.

That said, you’ll find that some lenders don’t offer dedicated startup business loans or make a distinction between startup loans and standard business loans.

» MORE: How do business loans work

BUSINESS OWNER INSIGHTS

“We self-funded our set-up costs, and supplemented this with a startup loan. This helped to get the business on its feet, and covered the development costs of having our product designed – which is incredibly expensive. We got the loan through British Business Bank, and we had an account manager who gave us advice on how to improve our application to get the best chance of success.”

Matt Palfrey, Director & Co-founder, Comfa

What are the alternatives to a startup business loan?

There are many funding alternatives to consider if you’re unsure about whether a startup business loan is the right option for your new business. Some of these include:

Business overdrafts

Some banks offer access to a business overdraft: a short-term line of credit which can provide your business with greater financial flexibility. If you are faced with an unexpected cost, for example, then an overdraft could take pressure off your cash flow.

Be warned that your business will be charged interest on the amount you are overdrawn, and you may also be charged a fee for using the overdraft. Your bank can demand that you repay the overdraft at any time.

If you ask your bank, you may be able to increase your overdraft amount.

» COMPARE: Business bank accounts with overdrafts

Business credit cards

A business credit card could provide your startup with greater financial flexibility, since they come with the option to spread the cost of your purchases. This can help with cash flow.

Business credit cards can also help to build your business credit score, and some lenders offer balance transfer credit cards, fee-free foreign use cards, or rewards and cashback business credit cards which reward your spending.

Be mindful, however, that unless you pay off your business credit card in full each month, you will be charged interest and the cost of borrowing will be greater in the long term.

» COMPARE: Business credit cards

Merchant cash advances

Merchant cash advances are a funding option for businesses that take card payments. Unlike some small business loans or startup loans, you can generally access merchant cash advances without needing to provide assets as security.

With a merchant cash advance, a lender will provide your business with an up-front sum of money – to cover a short-term shortfall or cash-flow issue, for example.

A percentage of your business card sales income will then be deducted daily, weekly or monthly, and this will be sent to the lender until the initial loan is repaid. Be warned that your business will be charged interest for a merchant cash advance and will also have to pay a fee for this service.

» COMPARE: Merchant cash advances

Invoice finance

Invoice financing is a way of releasing some of the money tied up in your unpaid invoices. A lender will use your unpaid invoices as security for a loan, with some loan approvals taking less than 24 hours. This means invoice financing can provide quick access to up to 90% of the money you are owed by your customers or clients.

There are different types of invoice financing arrangements, including invoice factoring (where the lender takes on the responsibility for managing your sales ledger and collecting payments from your customers) and invoice discounting (where your business keeps control of customer payments).

» COMPARE: Invoice finance

Asset finance

Asset finance is a versatile source of funding which can be used to help cover the cost of business-critical assets.

Through leasing or hire purchase, asset financing arrangements can ease the cash-flow pressure on businesses by providing a way of spreading the cost of equipment acquisitions or upgrades.

Just bear in mind that fees and interest payments are likely to apply if you use asset finance to finance the cost of buying assets for your startup business.

» COMPARE: Asset finance

Small business grants

The key difference between a grant and a loan is that a grant usually doesn’t have to be paid back.

While small business grants can be very competitive – and may come with more stringent requirements or eligibility criteria than small business loans – it’s worth considering every option to fund your startup.

There are many grants available to UK small businesses, some of which are available based on the sector, location or age of your business.

Several lenders in the UK offer startup business loans, each with its own eligibility criteria. Lenders will look at your business plan, cashflow forecasts and personal credit score to determine whether they are able to offer you a loan.

The easiest type of business loan to get as a startup business tends to be an unsecured business loan. This type of loan doesn’t usually require any collateral or security for the loan but may still require a business owner to provide a personal guarantee.

There are some lenders that offer bad credit business startup loans, though a loan is likely to be more difficult to get and the interest rates will almost certainly be higher. Always consider the risks carefully if you’re thinking of borrowing with poor credit.

» MORE: Bad credit business loans

The type of loan that’s best for you will depend on the nature of your business, the reason you need financing and how much you need to borrow. Your business credit score, and sometimes your personal credit score, will also determine which type of loan you’re likely to be eligible for.

» MORE: Finding the right type of business loan

Getting a startup loan can be a good idea if your business needs funding to get started or expand, but only if you’re comfortable that the loan can be repaid. Always weigh-up the benefits of startup loan against the potential risks.

It should be possible to repay a startup business loan early. Some loans may allow this for free, but others will have an early repayment charge or interest penalty for doing so. Always check with your lender first.

Failing to keep up with your loan repayments may lead to missed or late repayment charges and higher interest rates. You also risk losing any business assets that may have been used as security for the loan, and you may have to pay out of your own assets if you provided a personal guarantee. Your credit score, and that of your business, could also be impacted negatively.
It’s important to let your lender know or get professional advice if you’re ever struggling to keep up with repayments.

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