Start Up Loans For New Businesses

  • If you are looking for funding to start or support your new business, then start up loans or finance may be worth considering
  • Our comparison table below lists a panel of varied UK funding options

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Information written by Connor Campbell Last updated on 03 August 2022.

Start up loans and financing can help you meet your business goals, whether that’s beginning a new venture, or expanding your recently formed company.

One way new businesses can access funds is through the UK government’s Start Up Loans scheme. It provides finance for people who want to start or grow a new business that’s been trading for no more than two years, and allows you to potentially borrow from £500 to £25,000. You don’t need to offer assets as security or provide a personal guarantee for a government Start Up Loan. It’s an unsecured personal loan where each individual is liable for their loan, which is used for business purposes.

If you want to borrow more than £25,000, or aren’t eligible for the Start Up Loan scheme, there are other forms of borrowing that you could engage in. This includes personal loans and traditional business loans, as well as different types of financing, such as asset finance, invoice finance, and business bridging loans.

However, it is important to stress that each of these products come with its own risks and requirements. This may include providing a personal guarantee, or putting up an asset, such as property or expensive machinery, as collateral that could potentially be repossessed if you default on your loan.

Not every business is a success. According to Government statistics, between 2020 and 2021 the UK’s total business population decreased by 390,000 (6.5%), a jump of almost a quarter (23%) on the previous year’s business failures. This isn’t said to scare you off from starting your own business, but rather to better inform you ahead of what is a significant financial decision.

So before applying for any form of start up loan or finance, seriously consider how much you need, how long that money needs to last and how you’ll realistically meet your repayments.

Our comparison table shows the current deals on offer, and the loan terms and amounts available. You can also find out more about the government Start Up Loans scheme, as well as other forms of financing, with our detailed guide below.

What is a start up loan?

A start up loan is funding that can help get a business up and running or expand in its early stages. This can come in many different shapes and sizes. It is important before borrowing that you are aware of the varying level of risk that comes with each of these products.

How do start up loans work?

Like with any loan, a business start up loan sees you borrow a set amount and pay it back, plus interest, over an agreed period of time. You can get a start up loan directly from a mainstream lender such as a bank, from an alternative online lender, through the government Start Up Loans scheme or through a broker. Ultimately, the exact way a business start up loan works will depend on the type of loan.

For a commercial small business loan the interest rates charged and loan amounts and terms offered depend on the provider, the type of loan and your financial history. Whatever the loan type, you’ll need to prepare a clear business plan and cash flow forecast before applying.

There is a similar level of variation when it comes to other types of start up financing, such as asset finance and invoice finance. You should make sure you understand the terms of the lending before you apply.

What can I use a start up loan for?

There are plenty of ways a start up loan or start up finance might be used, including:

  • securing business premises
  • marketing campaigns
  • outsourcing expertise
  • essential equipment and machinery
  • stock and materials
  • recruitment
  • easing cashflow problems
  • buying an existing, viable business

Am I eligible for a start up business loan?

Sole traders, SMEs and large businesses could all qualify for a start up loan, as long as they meet the eligibility criteria of the product and lender in question.

At the most basic level, to be considered for a start up business loan, you will need to be:

  • over the age of 18
  • a UK resident
  • starting a new business in England, Scotland, Wales or Northern Ireland
  • looking into setting up as a sole trader, limited company (LTD) or limited liability partnership (LLP) in the UK, if you have not done so already

Each lender, and type of start up loan or business finance, will then have its own criteria. If you’re applying for a commercial small business loan, that may have different requirements to a personal loan, or another form of financing such as asset finance. For example, there may be a minimum turnover requirement, or limits on the assets that can be used as collateral.

What are UK Government start up business loans?

A government-backed Start Up Loan is an unsecured personal loan. You won’t need to offer collateral or a personal guarantee as security for the loan. The loan is taken out in your name rather than your business’s name. You can borrow anywhere between £500 to £25,000.

As well as the funding, you’ll currently be offered free business support and guidance, and a year of free business mentoring. There is no application fee and no early repayment fee, and the annual interest rate is fixed.

The government Start Up Loan scheme was created because it can be harder for new businesses to access finance. Small business loans that aren’t government backed may require security, like a business asset or a personal guarantee, and require your business to have a minimum turnover.

What types of finance are available to business start ups?

There are other forms of financing available to new businesses that don’t take the form of government start up loans. You should make sure you properly understand the risks attached before using them to fund your start up, and that you are confident in your ability to make repayments.

Personal loans

If you didn’t want to use the government-backed Start Up Loan scheme, for example if you were not eligible, then you could consider taking out an unsecured personal loan to support your business. You won’t need to provide collateral, and approval can be quicker than with a business loan.

Your options will be more limited, however, as many providers do not allow you to take out a personal loan for business purposes.

Since this would be taken out in your name, rather than your business’s, you would be personally liable for the loan, regardless of the number of partners in your business. You also won’t be able to borrow as much as you would with a business loan, and any missed payments can damage your own personal credit score.

» MORE: Can I use a personal loan for business purposes?

Traditional business loans

A traditional business loan typically can help your start up access anywhere between £1,000 and £500,000 in funds. Depending on the lender, and the size of your business, you may even be able to borrow millions of pounds. However, this form of borrowing can come with different risks and requirements to personal loans.

While you can get unsecured business loans, these may come with higher interest rates than secured business loans.

A secured business loan, meanwhile, would require you to put up collateral. This would be an asset owned by your business, for example a property or piece of expensive machinery. If you are unable to make your payments, and end up defaulting on the loan, your asset could be repossessed.

As a start up, you may not have any assets to use as collateral. It is still potentially possible to get a secured business loan, however, by providing a personal guarantee. A personal guarantee means you would be responsible for repaying the loan if the business cannot. Sometimes you may be asked to supply a personal guarantee alongside the asset you have put up as collateral.

All of this means it is incredibly important to consider whether you can realistically afford to repay what you have borrowed before taking out a secured business loan.

Asset finance

Asset financing can come in different forms. These can include:

  • Hire purchase – where you spread the cost of buying an asset, usually equipment, over a period of time. At the end of the payment schedule if you keep up your payments, you will own the asset outright.
  • Equipment leasing – where the lender buys the equipment for you, and rents it out to you for a set period of time. At the end of that period, you can either extend the lease, return the asset, or purchase it outright.
  • Finance leasing – this is like equipment leasing, except that you do not have the option to buy the asset at the end. Either you would extend the rental period, return the equipment to the lender, or sell it to a third party on behalf of the lender.

While this means you could get the asset you need quickly, the terms of your contract may mean you are paying for its use for anywhere between one and seven years. Therefore it can be more expensive in the long term than buying the asset outright straight away. Missing repayments may also mean you lose access to an asset your business is reliant on.

Asset refinance

Asset refinance is similar to a secured business loan. In both, you put up collateral owned by the business in order to unlock funds in the form of a loan.

Asset refinancing also allows you to use an asset you only partially own (such as a piece of equipment bought on a hire purchase contract that you are close to paying off) as collateral.

The key difference between asset refinancing and a secured loan is that when you use asset refinance, you will transfer ownership of that asset to the lender and lease it back from them until the debt is cleared.

So you need to be confident that you both need the loan, and can make the repayments, before using asset refinance.

Invoice finance

With invoice finance, you borrow money against your unpaid invoices, to bridge the gap between payments. If you opt for invoice factoring, your lender will chase your clients and customers for payments. Invoice discounting, on the other hand, leaves the credit control up to your business.

You should make sure you are confident your clients and customers can and will make their repayments before choosing invoice finance, and that you can swallow the fees and interest charges that come with this form of borrowing.

» MORE: What is invoice financing?

Merchant cash advance

If your start up business receives payments from your customers via debit or credit card, and meets the eligibility requirements when it comes to minimum card sales and trading history, you could look into a merchant cash advance.

You would borrow funds from a lender, and then pay the advance back as a percentage of the value of your incoming card transactions, instead of a fixed monthly repayment. So the greater the volume, and larger the size, of these transactions, the faster you will pay off your loan. But if your transactions drop during a quiet period for your business, so too will your repayments.

However, you should be aware of the factor rate, which is the fixed amount you will pay per £1 borrowed, decided at the start of the contract. If you borrow £500 at a factor rate of 20p per £1 borrowed, for example, you will end up paying back £600.

Business bridging loans

If your start up needs short-term funding, you could look into a bridging loan. It is typically secured against property which means if you default your asset is in danger of repossession.

For example, you may need to bridge the gap between future funds from a round of equity financing, and your current cash flow requirements. A bridging loan can help in this situation.

However, since you pay off the loan in full, rather than in monthly instalments, your lender will require you to have a realistic exit strategy, i.e. way to pay off what you have borrowed, before approving your loan.

You should also be aware of the high interest rates that come with bridging loans, as well as the fact the market is currently unregulated.

Peer-to-peer lending

If you opt for peer-to-peer lending in order to unlock funds for your start up, you will be matched with an individual, group or business that is prepared to lend you money. You will then pay interest on this loan.

If you default on this loan, the company that acts as a broker may pass your debt on to a debt collection agency. Missed payments, meanwhile, can negatively impact on your credit rating.

Other options for new businesses

In the early days of your new business, you might consider looking into using a credit card to fund portions of your start up. It is important to remember that, just as proper use of a credit card can help your credit score, misuse can have a negative impact on your credit rating. And interest rates can be high outside of your 0% interest periods, so you will need to keep on top of your repayments.

You may also consider borrowing money from a family member or close friend. However, you should make sure you consider the risks posed to your relationship if you are unable to make the repayments.

» MORE: Getting a loan from friends and family

What are the pros and cons of business start up loans?

Below, take a look at the advantages and disadvantages of start up loans and other forms of business finance.

What are the advantages of business loans for start ups?

Generally, start up loans let you grow your business or manage cash flow issues without giving away equity to investors. A business loan repaid on time will also help build a good business credit score, potentially increasing the possibility of accessing further business finance in the future.

What are the disadvantages of business loans for start ups?

As with any form of borrowing, there are risks attached to start up loans and other forms of business finance that you need to be aware of. For example:

  • You are committing to making regular repayments which could restrict your business’s cash flow.
  • Certain types of borrowing, such as a secured loan, will require an asset as collateral, which you could lose if you fail to meet your repayments.
  • A personal guarantee can leave you as an individual liable for your business loan if the business defaults.
  • Failure to meet your repayments may have a negative effect on your business or personal credit score.

What interest rates are available with start up loans?

The interest rate and fees payable will vary depending upon the type of loan that your business opts for. If you take out a government-backed Start Up Loan, you’ll pay a fixed interest rate on the amount borrowed. There are currently no other fees chargeable, and no early repayment or application fees.

It’s less straightforward when it comes to commercial start up loans and other financing options. That’s because the interest and fees you’ll pay will depend on factors such as the provider and the type of loan, how much you borrow and for how long, and your business sector and credit score.

This should all be set out in the agreement, so read the terms carefully so you’re clear on what you’ll pay – and ask if you’re not sure. And consider fees and charges when you’re comparing start up loans, along with representative interest rates.

How do I apply for a start up loan?

To apply for a business loan, you’ll usually need to supply a business plan and financial projections, along with some personal details. This will help providers look at your affordability levels and the strength of your business plan.

The business plan must include how you’re planning to spend the money you borrow, and how you’ll make the repayments.

You may also need to provide business bank statements and your balance sheet to show assets and liabilities, so having that documentation ready will help prevent delays.

Then you will need to follow the specific application process of the loan or finance you are looking to secure, including going through the relevant eligibility checks.

» MORE: Business loan application tips

How long will it take to apply?

The length of the application process for start up loans and other business finance can vary greatly, depending on the type of finance, the lender, and your level of preparedness.

By getting everything you need together ahead of time, such as bank statements and a final draft of your business plan, you may be able to ensure that your application is as smooth and efficient as possible. On the other hand, if you require more support with your application, this may slow down the process.

How much money can I apply for?

The amount of money you can apply for depends on what form of finance you are interested in. In general, however, borrowing starts from £500, and can run into the hundreds of thousands of pounds.

Are any businesses excluded from applying?

Start up loans can support most types of businesses. Even so, some sectors, such as gambling, are usually excluded, along with some loan uses such as debt repayment.

You will also then need to meet the eligibility requirements for whatever form of start up loan or business finance you have opted for. At the most basic level, this is likely to include being over 18 years old, being a UK resident, and looking into setting up as a sole trader, limited company (LTD) or limited liability partnership (LLP).

Can I get a start up loan with bad credit?

It’s possible to get a business start up loan if you have a poor credit history. However, when you apply, a full personal credit check will be carried out, and the lender will need to make sure the loan is affordable.

Start Up Loans FAQs

Do start up business loans or business finance require a personal guarantee?

Whether you need a personal guarantee to access start up business funding will depend on the type of business loan or business finance. Government-backed Start Up Loans don’t require a personal guarantee or an asset as security for the loan. It’s an unsecured personal loan, and you are personally liable for repaying the full loan amount and interest, but you don’t have to secure an asset such as your home against it.

Commercial small business loans, and other types of financing for start ups, may ask you to provide a personal guarantee. This means you’re agreeing to act as guarantor for your company’s debts, and will pay what’s owed if the business can’t make repayments.

How do I get a start up business loan without collateral?

Unsecured business loans, including the government-backed Start Up Loans, won’t ask you to provide collateral as a condition of the loan.

So it’s possible to borrow the money without offering an asset, such as your home, as security.

Are start up loans and grants the same thing?

No, they’re not the same. A small business grant is funding for business use that doesn’t have to be paid back. A grant is usually awarded by an individual or organisation for a specific purpose or project, such as training, expansion or research.

Start up loans must be repaid in full, plus interest and fees, over an agreed term.

Do I need a business bank account for a start up loan?

You don’t need a start up business bank account to apply for a government-backed loan scheme. But if you’re taking out another type of small business loan, the lender may ask you to have a business bank account as a condition of the loan.

Whether you need a business bank account more generally depends on the structure of your business and the bank’s terms and conditions. It also depends on how you’d prefer to manage your finances.

How do I improve my business credit score?

There are ways to potentially improve your business credit rating to help boost your chances of borrowing money or arranging credit. It makes sense to do this before applying for finance.

A few of the steps you can take are:

  • Check that the information on your credit report is accurate and up to date.
  • Check your credit score regularly to keep an eye out for changes.
  • Limit the number of credit applications you apply for.
  • Pay bills and invoices on time and manage debt responsibly.
  • Deal with county court judgments (CCJs) straight away.
  • File accounts on time.
  • Check your suppliers’ credit scores to help avoid unpaid invoices.
  • Manage your personal finances well. Lenders may consider personal credit scores, as start ups tend to have a limited business credit history.

Can I get a business start up loan without a credit check?

While you may struggle to find a start up loan that doesn’t require a credit check, you should be aware that you can still get business finance with a poor credit rating.

Can I get a start up loan if I’ve been subject to a Debt Relief Order?

If you are subject to a Debt Relief Order (DRO), you will not be able to get a government-backed start up loan. You will also have restrictions placed on you setting up and promoting a business, and acting as director.

As for other forms of business finance, you will be unable to borrow more than £500 without telling your lender that you have a DRO, which may make it more difficult to secure funding.

Can I get a start up loan if I’m on a Debt Management Plan?

Until you have repaid your debts in full, you will not be able to get a government-backed start up loan while on a Debt Management Plan. The same is true for most other forms of business finance.

Can I apply for a start up loan if I’m unemployed?

While it might not be easy, it isn’t impossible to get a business loan while unemployed. They may even be dedicated loans, and grants, for those looking to start a business while unemployed.

Can I get a start up loan if my business is more than 36 months old?

You likely won’t be able to get a specific start up loan if your business has been operational for longer than 36 months. However, other business finance options will still be available to you.

Do you have to pay back start up loans?

Yes, with start up loans and other forms of business finance, you will need to repay the sum you have borrowed.

How many start up business loans can you get?

With the government-backed start up loan, up to four partners can take out a maximum of £25,000 each. This means each business can borrow a maximum of £100,000.

About the author:

Connor is a writer and spokesperson for NerdWallet. Previously at Spreadex, his market commentary has been quoted in the likes of the BBC, The Guardian, Evening Standard, Reuters and The Independent. Read more

Start Up Loans For New Businesses

2 products found
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    Nationwide Finance Secured Start Up Finance

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    • Minimum Turnover
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  • Tide Start Up Business Loans logo
    Broker

    Tide Start Up Business Loans

    • Start Up Loans is a credit product powered by the British Business Bank and backed by the British Government
    • It consists of a personal loan for business purposes that aims to support the creation and growth of new businesses
    • Minimum Turnover
      No minimum
    • Available Amounts
      £500 to £100,000*
    • Available Terms
      1 to 5 years

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