What is a startup business loan?

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 does the government Start Up Loan scheme differ from a standard startup business loan?

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.

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	Cons of a startup business loan
Secure money to grow your business	How much you can borrow, how long for and at what rate of interest will depend on your personal credit history
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)	Failing to repay your loan will impact your personal credit file.
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	Interest rates can be much higher than with standard business loans
Retain control of your business by avoiding funding from investors who would take a share in the company	You will usually be personally liable for the debt, even if your business venture fails
Build a credit history for your business	You will need to pay the money back, unlike with a grant

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?'.

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.