Start-up business loans and grants explained

A new start-up business opening their shop

If you’re thinking of setting up a new business, but you’re worried about funding the initial startup costs, you might want to think about looking into applying for a business start-up grant in the UK.

Startup business loans are a common method to help new businesses in the first couple of years of trading.

In our guide to start-up business loans, we’ll explain what they are, how they work and the pros and cons of getting this type of loan to fund your business endeavors.

What is a business start-up loan?

Startup loans, or new business loans as they’re often referred to, are a type of finance that is designed to help new businesses within the first 24 months of trading.

They can be used by new businesses to pay for the initial startup costs of their business, such as funding the initial launch of the business, or the costs that are involved in the very early stages of trading.

How do start-up loans work?

As startup loans are a type of unsecured loan, there is no need to provide valuable assets as a means of collateral against the loan, so they’re considered to be less risky than other types of loans. 

Startup loans often have competitive interest rates and you can receive an initial loan from anywhere between £1,000 and £500,000. The repayment term differs between loan providers, but you can usually expect to have to pay the loan back within 1-3 years. 

Government business startup loans range from £500 to £25,000, so if you need to borrow more money, you might want to look into an alternative startup business loan. Government loans can also be paid back from 1-5 years and they come with an interest rate of 6% a year.

What is needed for a startup business loan?

In order to be eligible for and apply for a startup business loan, you will need to meet the following criteria with most lenders:

  • Be aged at least 18 years or older
  • Your business must have been trading for between 6 and 24 months
  • The business must be registered in the UK

What can I use a start-up loan for?

There are several purposes that a startup loan can be used for, including:

  • Recruiting staff
  • Designing and building a website for your business
  • Advertising and promotion
  • Setup costs such as buying stock and inventory
  • Purchasing or leasing business premises
  • To help out with cash flow issues, especially within the first year

How do I get a startup business loan?

You can get a startup business loan from traditional lenders such as banks or building societies, or you can obtain one from an alternative lender such as online brokers or credit unions.

You can also get a government business startup loan. Government loans can be between £500 and £25,000, and these are unsecured personal loans, unlike business loans.

What is the main difference between a small business start-up loan and a grant?

Essentially, a business start-up loan requires you to pay the money back over a certain period of time, where a grant acts almost like a gift and doesn’t have to be paid back.

Grants can be awarded by government departments, other businesses, trusts, non-profits and more.

Can my business partner and I both apply for a start-up loan?

Multiple business partners can apply for a startup loan for the same business, and they will usually have to apply through the same loan provider. Each business partner will be assessed individually, and their own personal credit score, as well as other eligibility-determining factors, will be taken into account during the application process.

Can I use a start-up loan to pay for my employees’ wages?

Startup loans can be used to pay for myriad things, including staff wages and your own salary.

Pros and cons of startup business loans

Of course, just like with any type of loan, there are pros and cons involved. Let's take a look.

Pros

  • You retain 100% ownership of your business, unlike when you get funding from investors who usually get a share in the business.
  • There’s no collateral attached with a startup business loan, so you don’t have to worry about offering any assets up.
  • It provides you with enough working capital to get your business off the ground and helps to pay for initial business costs.

Cons

  • Startup business loans can often have a relatively high barrier to entry, so they can sometimes be difficult to qualify for.
  • These types of loans can sometimes restrict cash flow within a business as you need to ensure that you’re making the loan repayments on time each month.
  • If the business defaults on repayments, the loan provider will likely come after your own personal finances in order to receive payment, which could mean that your credit score and personal assets are affected.

You might like: What affects your personal credit score?

Can I get a start-up loan with bad credit?

While it might seem more difficult to obtain a loan with bad credit at first, there are actually many lenders who specialise in offering loans to people with bad credit. 

If you have a poor credit rating, it is still possible to get a startup loan without offering up collateral as well. A good place to start is to check your personal credit history and credit report to see how likely you are to be eligible for a business startup loan, and then you can consider whether you will likely need to apply for a loan with a specialist provider. 

Can I get a start-up loan if I’m unemployed?

It can feel like there’s very little financial support available to you if you’re unemployed, but you’ll be pleased to know that there are actually plenty of startup loans and grants available to you even if you’re unemployed.

The New Enterprise Scheme is one option that you might want to look into. It’s a government-run scheme that’s designed to help unemployed people start their own businesses and become self-employed.

However, if this scheme doesn’t seem right for you, or if you’re not eligible for it, you can look into many other loans and grants available to unemployed people.

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