It can be difficult to qualify for traditional financing options when you’ve just started a business.

But that doesn’t make the need for capital any less real. 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 start-up loan that’s right for you.

Why start-up loans for new businesses are important

Getting a new business off the ground uses up a lot of resources. Resources a business owner doesn’t always have on hand. 

You’ll need to cover costs as you find market-fit, hire the right team and get your product in place. That can be tough, especially because it takes a new business a while to generate revenue.

Start-up loans for new businesses are there to help finance those early expenses. But that’s not all they do…

A start-up loan helps you keep control

Aside from providing funding, a start-up loan allows 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 further down the road.

Build credit with start-up loans

Start-up loans also help you build credit. 

One day, you might need to fuel further growth in your business. A positive credit history can help open up more loan options if and when that time comes. If you’re like most new businesses, that time will come.

Start-up loans for new business: How do they work? 

A start-up loan is money offered to a business with the expectation that it gets paid back in regular instalments plus interest.

The lender doesn’t take any equity in the business, but you might need to provide some collateral (like your personal property or your business’s existing equipment) as a guarantee.

There are some start-up loans that don’t require a guarantee. That’s a good thing too because many founders and small business owners won’t have collateral to offer. So whether you’re one that or doesn’t, there are options.

9 start-up business loan options

Here are nine start-up business funding options you can choose from.

1. Business bank loan

Business bank loans are traditional loans from established banks (like Lloyds TSB, Halifax, Barclays, RBS, HSBC and Santander in the UK) or smaller ‘challenger banks’ such as Monzo or Revolut. 

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.

Bank funding is usually the first type of financing businesses think of but that doesn’t mean you should skip weighing the pros and cons.

Pros

  • Flexible payment terms (anywhere from one month to 30 years)
  • Fixed repayment rates
  • Access to large amounts of finance

Cons

  • 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.

When it comes to securing a start-up loan from your local bank, the odds are usually not in a new business’ interest. That’s why while it’s an option, it’s not the only option on our list.

2. Personal loans

Since many start-ups are still too new to have a track record, founders may look to take out personal loans that are based on equity and personal surety. 

In this case, the lender will only consider your personal finances, not your start-up finances. 

You will be personally liable for the loan, even if there are other owners in the business. Though if there are multiple owners in your start-up, you can each take out a personal loan to accumulate the necessary funding you require. That’s assuming none of you have a poor credit history.

Pros 

  • 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

Cons

  • You risk your personal credit
  • Lower loan amounts available
  • Higher interest rates

Who it’s best for: Start-up founders without any business history but with great personal credit.

3. Government-backed start-up loans

A government-backed start-up loan is a personal loan provided by the Start Up Loans Company and funding by the government. 

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 type of personal loan, all partners can apply with a maximum of £100,000 available per business. The difference is this start-up loan comes with free business support and guidance plus a year’s worth of mentoring.

Pros

  • Fixed interest rate with flexible repayment terms
  • 12 months of free mentoring
  • Government-backed
  • You don’t need to provide any assets as security 

Cons

  • Not everyone qualifies
  • Smaller loan amounts
  • Personal credit checks

Who it’s best for: Great for anyone looking for their first start-up business loan and businesses that are less than two years old.

4. Equipment financing

Equipment financing covers the costs of equipment and machinery. You’ll have monthly repayment terms over a set period just as you would with a more general loan. The major caveat is this start-up loan can only be used to purchase equipment or machinery. 

Equipment and machinery can be expensive and if you’re a new business with limited or no revenue who needs these items then this is a great way to purchase it. 

A SaaS start-up can even use it to purchase office equipment.

Pros

  • No need for collateral
  • Retain full ownership of your equipment (unlike equipment leasing)
  • Quick access to funds
  • Flexible payment terms

Cons

  • 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: Start-up 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 start-ups. 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.

A business credit card is great for covering ongoing expenses or expenses you never saw coming because the funding is there when you need it.

You’ll secure more funding if you have a strong business credit score. It may not be the first financing you secure as a start-up but it can still be helpful for new businesses in those early years.

Pros

  • 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

Cons

  • 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 start-ups with good business and/or personal credit scores.

6. Friends and family start-up loans

Funding from friends and family is one of the biggest sources of start-up capital available to early-stage businesses. It is almost as popular as founders investing their own money into the business.

This business start-up loan is far more flexible than one you would get from a bank for a few reasons. The terms aren’t as strict and the application won’t require credit history. It does however rely on the wealth and generosity of those you know. Not everyone wants to take risks when it comes to their personal finances so you will have to navigate this source of funding carefully. 

Pros

  • 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

Cons

  • 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 start-ups 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).

7. Crowdfunding

Crowdfunding is the act of pitching your business idea to consumers or investors and giving something in return for their investment. It facilitates peer to peer lending.

There are crowdfunding platforms that present various opportunities to investors which you can use. It works best for new businesses who have built up a social following and can tap into that network to attract more interest.

Crowdfunding as a start-up loan option is common with eCommerce or SaaS businesses.

There are different types of crowdfunding, including donation or reward crowdfunding and investor crowdfunding.

Pros

  • Good alternative to traditional finance
  • Helps to build a loyal following
  • Relatively fast way to raise funds (if successful)

Cons

  • 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.

8. Grants

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.

This isn’t a traditional start up business loan at all. In fact, grants will never need to be paid back. However, there’s only a select amount of money available and you’ll be competing with other businesses for the funds.

Pros

  • 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

Cons

  • 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.

9. Revenue-based financing as a start-up loan

With revenue-based financing, eCommerce and SaaS businesses receive funds they pay back, with a fixed fee, as a share of their monthly revenue. We have a whole guide on revenue-based financing that will help you understand how you can use this funding in the same way you would a start-up loan.

Pros of revenue-based financing

  • You don't pay interest - just a flat fee
  • 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 $10m

Who it's best for: Companies with a predictable recurring revenue, such as eCommerce or SaaS businesses because they can fund growth activities without giving away equity.

How to get a start-up business loan

Requirements vary from loan to loan, and really come down to the lender you go with and their loan application process (or lack of).

You can increase your chances of getting a loan by following these steps:

‍‍

Get your financial needs and business plan together 

Start by reviewing your start-up 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.

Once you know the amount of money you need to support your new business you can put a thorough business plan together. With a business plan it’s really important to demonstrate how you will succeed in your industry and what risks exist.

Have a game plan for paying back the start-up loan

Your business plan needs to include a budget that outlines how you’ll afford to repay the loan, including when you’ll start repayment.

Lenders, even when they’re friends and family, want to be confident you can pay back anything you borrow. Otherwise, it doesn’t make sense for them to offer financial support. 

By outlining your repayments and including a contingency plan, you’re alleviating a lender’s anxieties.

Let the lender know if you can offer security

If you have any personal assets, like a house or vehicle, it may increase your chances of getting a secured loan. 

If you’re looking for an unsecured start-up loan then feel free to skip this step but when applying for a secured loan with low interest rates, its best to be up front about what you can offer.

Which start-up loan is best for your business type? 

Not every start-up loan is created equal. Some suit certain industries better than others because of their requirements and use cases.

Below you can see a few business types and the start-up loan they should go for.

Ecommerce

Common options to consider include lines of credit, inventory financing, business credit card, personal loan or a business loan.

SaaS

Popular SaaS financing options include crowdfunding, venture debt, revenue-based financing and bank loans.

Hospitality

Common options to consider include lines of credit, business loan, equipment financing and traditional secured loans.

Online service

Since start-up 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 start-up loans.  

Know what you’re getting into with  start-up business loans

There are many different types of start-up business loans, 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 new businesses to carefully consider what type of business 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.

At Uncapped, we offer investment capital with offers ranging from $10k to $10m through a revenue share agreement similar to a merchant cash advance. See if you qualify