Startup business loans explained: Options, benefits & considerations

8 min Read Published: 12 Dec 2023

What are business startup loans?Getting a business up and running can be time-consuming, stressful and complicated, but also expensive. Some people looking to set up a new company will rely on the money they have saved up over the years or perhaps outside investment to provide the finance they need. Many entrepreneurs will also look to business loans for funding, including specialist startup loans. This is a type of borrowing aimed at people trying to get a new business idea off the ground or grow a company they have recently set up. In this article, we explain the basics of a startup loan, who is eligible and how to pick the right option for your new business.

What is a startup business loan?

A startup loan is a form of borrowing that you can use to fund a new business venture. In some cases you can take out a startup loan to fund an existing business if it has been trading for a short time. Startup loans are available from major banks, specialist lenders or through a government scheme.

We cover the basics of a standard business loan in our article 'How do business loans work?'.

Startup business loans may be necessary due to the fact that most lenders require at least two years of trading for a company to be eligible for a standard business loan. This is because lending to an established business is less risky than lending to a new one. As a consequence of this risk level, startup loans tend to come with higher interest rates than standard business loans. This can make it a more expensive way of borrowing, though it may be the best option to get a startup off the ground.

Keep in mind that the final rate you are offered will be affected by your personal credit history and that of other individuals involved in the business. Any assets used as security, the term of the loan, the amount you are borrowing and the details of your business plan will also have an impact.

Most startup loans are personal loans, which means that it is an individual borrowing the money and not the business itself. The individual is responsible for repaying the debt whether the business is successful or not.

How much can you borrow with a startup business loan?

The amount you can borrow will depend on the type of business you are starting or already running, your credit history, how long you want to borrow the money for, whether the loan is secured or unsecured and over how long you want to pay it back. We cover long-term business loans in our article 'What are long-term business loans?'.

Lenders will also look at your business’s existing or projected revenue to decide whether you can afford to repay the amount you intend to borrow in the agreed time period. For example, some lenders will offer as much as £500,000, but that may require you to secure a valuable asset – such as a house – against the debt, which could be sold if you are unable to make the repayments. You will likely also need to show that your company will be able to bring in enough revenue to repay such a sizeable loan.

Another consideration will be your credit history. The better your credit history, the more likely you are to be approved for the loan you want. It is easy to see how lenders rate your credit history by checking your credit score. We have more information in our article ‘The best way to check your credit score for free’.

If you find that you need to improve your credit score, try out the tips in our article ‘How to improve your credit score quickly’. You can read about business credit scores in our article 'What is a business credit score?'.

We also have more information on applying for a business loan with a low credit score in our article ‘How to get a business loan with bad credit’.

How much can you borrow with a government Start Up Loan?

Start Up Loans, which are funded by the government, start at £500 and go up to £25,000. This is less than other startup loans, but keep in mind that it is an unsecured personal loan. As it is unsecured, you do not need to use your home or car as collateral to borrow the money. Because it is a personal loan, the application is from an individual, not the business. This means that multiple individuals involved in the business could each apply for a Start Up Loan separately, though there is a total cap of £100,000 per business.

How does the government Start Up Loan scheme work?

The UK government funds the Start Up Loans Company, which is part of the British Business Bank. It provides personal loans to fund new businesses that may find it difficult to get finance from other sources. Eligible companies will need to have been trading for less than 36 months.

Borrowing from the Start Up Loans Company is unsecured. This means that your home, car or any other valuable asset will not be used to guarantee the debt. As it is a personal loan, the individual borrowing the money is responsible for paying it back, not the business the money is funding.

You can borrow any amount from £500 to £25,000 and repay the debt over one to five years. The interest rate will be fixed at 6%, which is lower than a lot of startup loans and comes with the security of knowing you will repay the same amount each month for the whole repayment period. You will also not have to pay any application or set-up fees.

A significant benefit of the Start Up Loans scheme is that you can access specialist advice and mentoring from a dedicated business advisor for the first 12 months. An expert will also help you fill out the necessary forms and complete the application process for free, whether you are successful or not.

You can find out more about this scheme on the Start Up Loans website.

What is the repayment period on a business startup loan?

Most business startup loans are repayable over a period of one to five years, as is the government-funded Start Up Loan. However, there may be options available if you want something short term or much longer term.

Some specialist lenders will offer startup loans that can be repaid over as little as three months, while others may have repayment periods of up to 10 years. If you have a particularly long loan period, it can be worth exploring refinancing your startup loan once your business is established and profitable. Startup loans are not usually the cheapest form of borrowing, but it is often the only option when you first get up and running. A business that has been trading for a number of years could access much lower interest rates.

Find out how to get a standard business loan by reading our article ‘How to get a business loan’.

Who is eligible for a startup business loan?

A startup business loan may not be the right option for every business, as you will need to meet a number of specific requirements. The exact details can vary from lender to lender, but the most common requirements are that you have to be:

  • Over 18-years-old
  • A UK resident
  • Eligible to work in the UK
  • Operating a UK-based business trading for under three years, or planning to start a new business in the UK

Keep in mind that even if you tick all of these boxes, you are not guaranteed to get a startup business loan. Lenders will perform checks on your credit history and financial situation, as well as ask questions about your business. You may need to explain what you plan to do with the money, how it will make your business profitable and what your future revenue expectations are. This could be explained as part of an online form, via a face-to-face meeting or through a well-researched business plan.

Some loan providers – including the government-funded Start Up Loans Company – will have restrictions on the type of business they will lend to. Any business involved in illegal activity will be ineligible, along with companies that operate in property investment, banking and gambling, amongst other fields.

Read our article ‘Who can get a business loan?’ to learn more about business loan requirements.

Pros and cons of a startup business loans

Here are some of the advantages and disadvantages of choosing to fund your new business with a startup loan.

Pros of a startup business loan

  • Secure money to grow your business.
  • Startup loans are often unsecured (read our article ‘Secured vs unsecured loans: Which is best for me?’ to see if this would be an advantage for you).
  • Government-funded Start Up Loans are available at a fixed interest rate of 6% with no fees, application support and 12-months of expert mentoring.
  • Retain control of your business by avoiding funding from investors who would take a share in the company.
  • Build a credit history for your business.

Cons of a startup business loan

  • How much you can borrow, how long for and at what rate of interest will depend on your personal credit history.
  • Failing to repay your loan will impact your personal credit file.
  • Interest rates can be much higher than with standard business loans.
  • You will usually be personally liable for the debt, even if your business venture fails.

You may find that your business is better suited to a small business loan. We cover this option in our article 'How do small business loans work?'.

What can startup loans be spent on?

Your lender will usually have specific rules around what you can and cannot spend the money from your startup loan on. Business expenditure such as paying wages, promoting your products, buying equipment or relocation costs are all likely to be allowed.

Banned spending will commonly include anything not directly related to the business, servicing other debts or investing in different companies.

You will usually need to tell the lender what you intend to spend the money on as part of the application process. This could involve a short answer or a detailed business plan explaining how you aim to grow the company – it depends on the lender. Some lenders may even periodically check on your business finances to ensure that the company is performing as expected, or at least well enough to repay the debt.

Types of startup business loans

Most startup loans will be unsecured personal loans, including the government-funded Start Up Loan. This means that you are taking out a loan, rather than the business itself. You will need to repay the money in full, plus interest, but it will not be secured against any property you own. Find out more about unsecured loans in our article 'What is an unsecured loan?'.

Some lenders will offer startup loans that are not personal loans, but that are instead taken out by the business. In theory, this means that the business is responsible for the debt rather than the individual. However, many of these providers will require a personal guarantee from a director. This guarantee means that you will need to repay the loan if the business fails. It is a basic requirement of taking out a business loan, which we cover in more detail in our article ‘What is a business loan?’.

You can also find business startup loans that are secured. This means that some kind of valuable asset will need to be secured against the value of the debt. If the money is not repaid by the borrower, the asset can be sold to clear the debt. This is generally seen as a more risky type of borrowing, as your home or another valuable asset will be at risk. However, it can open up higher borrowing amounts and lower interest rates. Read our article 'What is a secured loan?' to see if it is the right option for you.

Where can I get a business startup loan?

There are a whole host of different lenders offering a variety of startup loans. You could go to a big-name lender, a specialist provider or your local high-street bank. We weigh-up using a bank for a business loan in our article 'Pros and cons of a business bank loan'.

A lot of fledgling businesses will find that the best option is the government-funded Start Up Loan scheme.

If you want to borrow £25,000 or less, this is usually a good place to start, especially if you can benefit from the 12 months of free mentoring. You can find out more information on the British Business Bank website.