It can be difficult to qualify for traditional financing options when you’ve just started a business.
To help your start-up get the financing it needs to succeed, we’ve put together a guide on the different types of start-up loans you could be eligible for, along with how to find and apply for the right start-up loan for you.
Why start-up loans for new businesses are important
Getting a new business off the ground eats a lot of resources. As you find market-fit, hire the right team and get a market-ready product in place, you’ll need to find ways to cover your costs. That can be tough, especially because it takes a while to start generating revenue.
Start-up loans for new businesses are there to help finance those early expenses.
Aside from providing funding, start-up loans allow you to keep full control of your company. That’s compared to investor equity-based financing, which often requires you to give up a share of your company.
Start-up loans give you more leeway to decide who to partner with, leaving the door open for investor partnerships later further down the road, when you’re less pushed to give away an early chunk of your business.
Start-up loans also help you build credit. Your business might later need a significant cash injection to fuel further growth. When the time comes, it’s helpful to have a positive credit history in your loan application.
Start-up loans for new business: how do they work?
A startup loan is a line of credit offered in exchange for interest payments on top of the loan repayments.
The lender doesn’t take any equity in the business, although you might need to provide some collateral (like your own property or your business’s existing equipment) as a guarantee.
There are a couple of different types of start-up business funding that don’t require a guaranteeーsomething that many founders and small businsses owners won’t have at hand.
9 start up loans available for new businesses
Here are eight startup business funding options to choose from.
1. Business bank loan
Business bank loans are traditional loans from either high-street banks (like Lloyds TSB, Halifax, Barclays, RBS, HSBC and Santander in the UK) or smaller ‘challenger banks’. Business loans are offered as secured (requiring security in the form of an asset) or unsecured (no assets required as security).
Typically, the shorter the terms of the loan, the higher the interest and monthly repayments.
- Flexible payment terms (anywhere from one month to 30 years)
- Fixed repayment rates
- Access to large amounts of finance
- Often require assets as security
- High bank charges on late or missed payments
- Interest rates are typically high
Who it’s best for: Start-up businesses who already have a decent turnover as well as a strong business plan and a good business or personal credit score.
2. Personal loans
Since many startups are still too new to have a track record, founders may need to look at personal loans based on equity and personal surety. In this case, the lender will only consider your personal finances, not your business finances.
- A range of funding options available
- No collateral required
- Relatively quick and easy funding process
- The lender has no say in how you use the money in the daily operations of your business
- You risk your personal credit
- Lower loan amounts available
- Higher interest rates
Who it’s best for: Startup founders without any business history but with great personal credit.
3. Government start-up loan
Start Up Loans are government-funded personal loans provided by the Start Up Loans Company. They are designed to help your business grow and allow you to borrow up to £25,000 to pay back over a term of one to five years with a fixed interest rate of 6% per annum.
Since it’s a personal loan, all partners can apply with a maximum of £100,000 available per business.
- Fixed interest rate with flexible repayment terms
- 12 months of free mentoring
- You don’t need to provide any assets as security
- Not everyone qualifies
- Smaller loan amounts
- Personal credit checks
Who it’s best for: Great for anyone looking for a first-time business loan and startups that are less than two years old.
4. Equipment financing
Equipment financing covers the costs of equipment and machinery. It’s similar to traditional loans in that you will have monthly repayment terms over a set period; however, you can only use the loan to purchase equipment or machinery.
- No need for collateral
- Retain full ownership of your equipment (unlike equipment leasing)
- Quick access to funds
- Flexible payment terms
- Usage is restricted to equipment
- Higher rates than traditional loans
- You are responsible for the equipment and all maintenance costs (as opposed to equipment leasing)
Who it’s best for: Startup businesses that rely on expensive equipment, including those in the manufacturing, construction, transport and entertainment industries.
5. Business credit cards
Business credit cards are a simple finance option for startups. They work the same way as personal credit cards but are based on your company income rather than your personal income, which usually means you can borrow more.
- Good way to manage cash flow
- Comes with attractive perks like cash back on purchases, free travel insurance, 0% interest periods and reward points
- Immediate access to funds when you need them
- Not always available to new businesses
- Potentially higher interest rates
- Banking fees
- Cash withdrawals are expensive
Who it’s best for: Useful for all types of businesses with good business and personal credit scores.
6. Friends and family
Funding from friends and family is one of the biggest sources of startup capital available to early-stage startups.
- You don’t go into debt with a bank
- Your friends and family trust and support you
- Flexible loan terms and may come interest-free
- Less likely to need a detailed business plan
- Relationship and business entanglement
- They may want to get more involved in your business
- Limited to the amount your friends and family can offer
Who it’s best for: Early-stage startups who can’t access any other form of funding or who have family and friends who are invested in their success (and have the funds to back them).
Crowdfunding is the act of pitching your business idea to consumers or investors and giving something in return for their investment. There are different types of crowdfunding, including donation or reward crowdfunding or investor crowdfunding.
- Good alternative to traditional finance
- Helps to build a loyal following
- Relatively fast way to raise funds (if successful)
- No guarantee of raising the funds you need
- You’ll give up some control of your business
- Relies on marketing
Who it’s best for: The most successful crowdfunding campaigns come from companies who already have a large following or a business idea that is exciting enough to pull in wide interest.
Multiple schemes across the UK, including private foundations and government agencies, offer grants to new businesses in all industries. Each grant provider has strict criteria for who is eligible for funds. If you qualify, you still need to provide a detailed business plan to prove that your business idea is worth the investment.
- Free capital that you don’t have to repay
- Most grants come with mentorship and advisers
- Receiving a grant shows people that you have a business that’s worth investing in
- Difficult to qualify for and harder to come by
- Long, sometimes complicated application process
- There may be restrictions on how the money can be used
Who it’s best for: Business owners who might have struggled to get finance from a traditional lender.
With revenue-based financing, ecommerce and SaaS businesses receive funds they pay back, with a fixed fee, as a share of their monthly revenue.
Pros of Revenue-based Financing
- You don't pay interest
- Your payments slow down if sales slow down
- No dilution
- Get funding within 24 hours
Cons of Revenue-based Financing
- You need proof that you're able to reliably generate revenue
- Invested amounts generally aren't more than $5m
Who it's best for: Companies with predictable recurring revenue, such as ecommerce or SaaS businesses, benefit from this type of flexible, as they can fund ads without giving away part of their business.
How to get a start up loan for your new business
Requirements vary from loan to loan, and really come down to the lender you choose to go with.
Start by reviewing your startup costs, including equipment purchases, technology purchases, initial inventory, any permits or licenses required, office supplies, furniture, etc. From there, you should also consider any ongoing expenses, like payroll and rent, that you’ll need to cover while growing your business.
You can increase your chances of getting a loan by following these steps:
- Get your financial needs and business plan together. Make sure you can demonstrate how your business will succeed and acknowledge any potential risks.
- Have a plan on how you intend to pay back the loan. Your business plan needs to include a budget that outlines how you’ll afford to repay the loan, including when you’ll start the repayments.
- Let the lender know if you have any security. If you have any personal assets, like a house or vehicle, it may increase your chances of getting a secured loan.
Which type of startup loan is best for each type of business?
Here are a few options of the best types of startup loans for different types of businesses:
Common options to consider include lines of credit, inventory financing, business credit card, personal loan or a business loan.
Popular SaaS financing options include crowdfunding, venture debt, revenue-based financing and bank loans.
Common options to consider include lines of credit, business loan, equipment financing and secured loans.
Since startup costs may be low, a personal loan or loan from friends and family may be the easiest to secure. You can consider equipment financing to cover the costs of laptops and other required equipment.
Professional industry (including financial, medical & law)
Common options include business credit cards, business loans, grants, and government startup loans.
Know what you’re getting into with a business loan
There are many different types of startup loans for new businesses, including bank loans, personal loans, crowdfunding, and loans from friends and family. Each loan type comes with its own set of terms and conditions.
It’s important for founders of startups to carefully consider what type of loan is best for them by analysing the repayment terms and how they’ll repay the loan. The last thing any founder wants is to find themselves in a situation where you can no longer finance your growth or make your loan repayments.