How to get a business start up loan

When looking to start your own business or boost your start-up, funding may be one of the things you find yourself thinking about the most – without financing, growth could be challenging.

Small business loans could provide budding entrepreneurs the funding to launch their start-ups or help an established start-up grow.

In 2023, there were 5.1 million small businesses in the UK, making up over 99% of the business population.

However, not all business funding options will be the right fit for every business.

From government grants to crowdfunding services, there are several ways to get a cash investment, but for many small businesses, getting a loan could make the most financial sense – British SMEs borrowed approximately £59.2 billion in business loans in 2023.

Business loans can vary depending on who offers them, with different amounts and terms available.
Thorough research could be needed to find funding that's a good fit for your business.

If you need to raise funds for your new business, read on to learn how to improve your application for a small business loan.

What is a business loan?

A business loan is a type of loan used specifically for commercial purposes, such as starting a business or expanding operations.

The loan is repaid over a specified period, typically with interest added, following terms set by the lender that ensure the loan is repaid in full.

Business loans can be secured (requiring collateral) or unsecured (not requiring collateral) and can be offered by banks, specialist lenders, and government-backed schemes.

How do business loans work?

A business loan is a sum of money that a company borrows from a lender, such as a bank or specialist finance provider, which is then paid back to the lender over a set period.

This repayment includes the initial borrowed amount (known as the principal) and an extra charge (interest), which is a percentage of the principal.

The repayment is usually made in regular instalments, which could be weekly, monthly, or quarterly, depending on the agreement made with the lender.

Several factors, including the loan amount, duration, purpose of the loan, and the business's credit score can affect the repayment terms, interest rates, and payment schedule set out in the agreement.

What can a business loan be used for?

A business loan could be used for a wide variety of reasons:

•    starting a new business – loans may provide the capital needed to launch a new business, covering the initial costs

• purchasing equipment or assets – loans could provide the cash needed to buy more expensive items such as machinery, vehicles, or technology
• expanding operations – if a business wants to grow, a loan could help finance expansions, such as opening new branches
• hiring staff – loans could cover recruitment and salary costs for new employees as your start-up grows
• research and development (R&D) – a loan could fund the development of new products or services so your business could move into new markets
• managing cash flow – if a company has a slow season or unexpected expenses, a loan could help ensure business continuity and daily operations.

Types of business loans

There are two types of business loans you could secure: secured or unsecured.

Secured loans

A secured business loan is a type of loan where the business puts up an asset, such as property or equipment, as collateral.

This means if the business can’t pay back the loan, the lender can claim this asset to recover their money.
Secured loans could be a good option for businesses needing to borrow a significant amount.

They often have lower interest rates due to the lender’s reduced risk.

However, it’s crucial to remember that you could lose your assets if you are unable to repay the loan.

Unsecured loans

In contrast, an unsecured business loan doesn’t require the business to offer collateral to secure the loan.

This can make it a more accessible option, especially for small businesses or start-ups that may not have major assets to offer as security.

However, because the risk to the lender is higher, unsecured loans can come with higher interest rates and may require the lender to have a strong credit history.

This type of business loan could be best suited to businesses seeking to borrow smaller amounts or those confident in their ability to repay in a timely manner.

How much can I get as a business loan?

The amount you can get in a business loan varies widely and can depend on several factors.

These include the type of loan (secured or unsecured), the specific requirements of your business, your company’s credit history, and the duration of the loan.

Small business loans could range anywhere from a few hundred pounds to tens of thousands of pounds.

Secured loans, backed by assets, usually offer larger amounts than unsecured loans – consider how much you realistically could need and can afford to repay.

Start Up Loans offers loans from £500 to £25,000, depending on your business needs.

Where can I get a business loan for my start-up?

There are a number of places where you could secure the best business loan.

You could secure business loans from high-street banks, which can provide larger loans at lower interest rates but may have stricter eligibility criteria.

Alternative lenders could include online banks or peer-to-peer lenders, or you could consider a friends and family loan.

Government loans may also be an option – Start Up Loans is a government-backed scheme that offers personal loans for business purposes at a fixed interest rate of 6% per annum, which can be repaid over 1-5 years.

You would also receive a year of free business mentoring and support.

Pros and cons of business loans

Pros

• growth opportunity – loans can provide immediate capital to invest in business expansion, like purchasing equipment, hiring staff or launching new products
• cash flow management – loans could help cover day-to-day expenses during slow periods
• build credit – regularly repaying a loan could improve your business credit score, helping you secure future funding.

Cons

• interest charges – loans need to be repaid with interest, which could add significantly to the total repayment amount over time
• collateral risk – for secured loans, you’re at risk of losing the asset you’ve used as collateral if you can’t repay the loan
• strict terms – loan agreements often impose strict terms and conditions, which could restrict how you manage your business finances or use the loan.

Alternatives to business loans

There are a number of start-up funding alternatives available to you besides a business loan – you could consider grants, crowdfunding, or angel investors.

Grants are funds provided by government bodies or organisations, often for specific industries or purposes.

They don’t need to be repaid, but they can be competitive, and they may have restrictions on how the money is used.

Crowdfunding involves raising small amounts of money from a large number of people, often through online platforms like Kickstarter.

This could be a great way to validate a business idea and build a community around your start-up.

Angel investors are wealthy individuals who provide funding in return for equity in your business, and they may also offer expertise and business connections – find out more about angel investors.

Read our free guide to funding alternatives.

How to get a start-up business loan

Do thorough research

It could be tempting to take the first business loan you find to save time, but that may not be the best way.

While existing customers with a solid financial history may secure a decent deal, there are other ways to secure funding.

You may want to look at alternatives such as Start Up Loans, asset finance, overdrafts, or even convertible loan notes if your business has sold an equity stake.

Not all loan types may suit your start-up needs, so doing comprehensive research is important to find the best fit.

Investigate the loan details

Some loans may sound too good to be true, such as if they offer free payment periods or lower-than-expected interest rate repayments.

Thoroughly investigating all the costs and requirements for the loan, such as the APR (the Annual Percentage Rate, which includes all the fees and any extra charges) and the loan conditions, could help you determine whether the loan financially suits your business.

If in doubt, you could ask the lender to separate out all the costs of lending and servicing the loan.

If you’re unsure, seek professional advice from a business advisor or accountant.

Prepare a solid business plan

A well-structured and convincing business plan could increase your chances of securing a loan.

It shows lenders that you’ve carefully considered your business’s potential.

Download our free business plan template.

Take advantage of your assets

Before hunting out a small business loan, you may want to ensure you’re making the most of the assets of your business.

Assets such as current and future invoices issued to customers have a value that can support your loan application.

These can show your business has the ability to meet loan repayments.

Some specialist loan providers – known as factoring companies – will pay you in advance for these invoices with deductions for their fees, then collect outstanding payments from the customer.

Be honest with loan lenders

Some small business owners can be overly optimistic about their business’s financial health, so it may be best to be transparent about your business when seeking a loan.

This includes evidence about cash flow, trading position, other loans and debts, credit history, and forecasting.

Lenders can be cautious about providing credit to a small business, and it could be better to be clear about the state of your business and why you want the loan.

Get professional funding advice

Before raising funds or applying for a loan, it could be best to seek professional financial advice.

Speaking to a business finance expert and visiting events or online advice services to get a view on how you can get a loan may be a benefit to you.

They may be able to recommend other sources of funding or suggest ways to optimise your P&L accounts to minimise tax and maximise profits, which may reduce the amount you need to borrow.