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A startup loan is for businesses under 36 months old

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Author

Kyle Eaton

Editor

Lucinda O'Brien

Last updated

November 8th, 2024

Is my business eligible for a startup business loan?

If you would like a startup business loan, then you can apply for one so long as your business is less than three years old.

That means you don't have to apply for a startup loan at the very beginning of your business journey. The loan can help to finance a new business that is already up and running, just so long as it's less than 36 months old.

A startup business loan is a lump sum from a lender which can be used for a variety of things from creating cash flow to covering staff wages, paying rent on business premises or investing in tech or equipment.

While most businesses under three years old can apply for a startup loan, it’s always worth doing your research to see which loan is the right one for you.

What is considered a startup?

A startup is a company that is new and in the initial stages of business. It is normally a small business funded by the founders, but startups also seek investment elsewhere to get their business off the ground.

A startup can also be in ‘startup’ mode for as long as three years, so it is not isolated to the first year.

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1.1million

What do I need to apply?

Specific requirements may differ for startup business loans - it'll depend on the loan provider you choose. But there are some general criteria that usually applies regardless of the lender.

You need to be:

18 or over
A UK resident

Your business must be:

Less than three years old
UK-based and registered

If your business ticks these boxes, then you need to start thinking about the application process. Before you can apply for the loan you’ll need to create a business plan. Your business plan is an important document that sets our your idea, market research, how you plan to make money, repay borrowing alongside a cash flow forecast.

You’ll need to demonstrate the position of your business and illustrate how you plan to use the loan to ensure your business is a success.

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How is a startup loan different to a typical business loan?

A startup loan acts in a similar way to a business loan. It requires you to go through an application process and then the lender will decide if your business can use the loan and then repay it within a specific timeframe. Some startup loans, including the government scheme, also come with the benefit of support from business advisers.

Startup loans normally come with a greater risk for lenders, so you might have to pay a higher interest rate or have a personal guarantee. You might also find that lenders look at your personal credit history if the business is still in the early stages and doesn't have a credit history of its own. It's a good idea to try and limit your debt before applying, as lots of credit applications in a short space of time could be seen as unfavourable to lenders.

Traditional business loans are typically used by businesses that have been trading for at least two years and you can normally borrow more with a traditional business loan compared to a startup loan.

“Startup loans can be the rocket fuel to kickstart your new business venture, but remember you need a clear path to turning a profit from your idea - it’s one of the first things a lender will ask. Understand your business and its cash flow and invest the funds wisely to make the most of the exciting opportunities a start up loan can bring in making a success out of your business.”

Kyle Eaton

SME Editor

How to choose a startup business loan

Follow these tips to decide which startup loan is right for your new business

Create a business plan and think about how the loan will positively impact your business. Then search for lenders that are currently offering that amount of money.

Once you’ve decided on the loan amount, compare the interest rates as these will vary. The higher the rate the more you're likely to pay overall which could impact your decision.

Compare as many startup loans as possible and try to find the lowest annual percentage rate (APR) for the amount you would like to borrow.

What is the government-backed Start Up Loan?

The government-backed Start Up Loan is a scheme which aims to help small businesses with a cash injection. This is in the form of a loan of £500 to £25,000. To apply, you’ll need to live in the UK, be over 18, and have started (or about to start) a UK business that cannot have been trading for more than three years.

This loan differs slightly from a business loan as it is an unsecured personal loan, which means the applicant, rather than the business, will have a credit check during the application process. If successful, you can repay the loan over a period of time, ranging from one to five years. The government-backed Start Up Loan charges a fixed interest rate of 6% per year and there’s no application or set-up fee, which can make it easier to work out the affordability of the loan for your business.

Pros and cons

Pros

You’ll have money to start your business or continue to grow it

Keep control of the business as you haven’t given away equity

Build a positive credit history if you pay back the loan on time

Startup loans tend to be unsecured meaning you won't usually need to put forward collateral or assets as security

Cons

Interest rates can be higher making it harder to pay back the loan

Startup loan fees can be an extra burden on businesses

Eligibility can be strict so some businesses might not find a suitable loan

Things to look out for

Fees

If you apply for the government-backed Start Up Loan there are no fees involved, but other startup loans could come with some fees attached.

For example, there might be an early redemption fee if you wish to repay the loan before the end of the agreed term, or an application fee which can be a percentage of the loan amount. You might find lenders with no fees, so always look into the terms and conditions of the loan to understand the full story and be sure to check and compare fees when deciding on a loan to apply for.

Eligibility

The eligibility criteria can be strict. Ensuring you have good credit history could help, if you don't then you may not be eligible or you may need to provide a guarantor.

Five myths about startup loans

There are plenty of myths surrounding startup business loans, but it's important to understand the reality of getting one.

It's often said that traditional banks won't lend to startup businesses, but this isn't accurate. While it's true to say that it can be difficult to secure lending, especially if you're just starting out and have little history to point to, it's not impossible. By having a clear and researched business plan that demonstrates your objectives, how you will make money and repay any borrowing, you can help the lender see your vision and help reassure them you're able to repay the loan. There are also alternative lenders that exist solely to help startups secure funding for their business.

The cost depends on a range of factors including the loan term - this is how long you need to repay the loan - and the interest rate. Shop around and look at different providers to find a rate that suits you. As a startup, your business might not have much credit history and banks will usually offer their best rates to businesses with a good credit rating, so consider building your credit score first. If you're looking for the cheapest loan then a simple rule is to borrow only what you need and aim to repay it in the shortest possible time.

Business loan applications can be tricky - but no more than a personal loan application. Any lender will request the information it needs to be satisfied that you can pay it back. With a business loan, particularly if you're a startup, it's likely the only information you can provide is projections and market research. This is why a business plan is so important. If you've done your homework there's no reason why the process should be more complicated. Just be sure to cover off what you need the money for, how you intend to make money and repay the loan.

A good credit score almost certainly helps with a business loan application - but a less than perfect score doesn't mean you have no chance. You could look at offering up some collateral or using a guarantor. Both of these come with their own risks, so it's really important that you understand what it means to use one or both in support of your application. Or consider building your credit score before applying for the loan. This may involve using alternative credit, such as a business credit card. If you use this and repay it each month you should start to see your score improve which should improve your chances.

A grant is a cash injection that normally doesn't need to be repaid. So on that basis, it's an attractive option. But getting a grant isn't easy and can be very competitive. Grants are available from all sorts of places including the government, local authority or industry-specific grants, but be prepared for a time-consuming application process and the risk of disappointment. Grant applications can also be complicated - and knowing which is the right one to apply for is also important as some are meant for specific reasons, such as research and development (R&D). Having alternative options in mind such as a startup loan can help avoid delays to your plans.

Alternative funding options for startups

Business loans

If your business is more than three years old, you can look into applying for a traditional business loan. This loan is a way to get external funds to run or grow your business.

Compare business loans

Crowdfunding

Pitch your business idea online and offer perks, rewards or equity to investors if your target's met. Crowdfunding can be a good alternative to startup business loans, but remember getting the amount you need can be a slow process and if you don't reach your funding target you may not get anything.

Find out more about crowdfunding

Business grants

Business grants don’t have to be paid back making them a very competitive form of business finance. Small business grants are available from your local council and could provide the funds to help your business idea.

Find out more about business finance support

Alternative funding options for startups

Business loans

If your business is more than three years old, you can look into applying for a traditional business loan. This loan is a way to get external funds to run or grow your business.

Compare business loans

Crowdfunding

Find out more about crowdfunding

Business grants

Find out more about business finance support

FAQs

Can I get a startup business loan with bad credit?

Getting a business loan with bad credit can be more difficult, but it's not impossible. You may need to accept higher fees or interest rates, particularly if you're looking at more traditional banks to lend to you. You could also consider building your credit score before applying for a loan, or looking at alternatives such as private lenders through angel investment.

How much can I borrow with a startup business loan?

The amount you can borrow with a startup loan varies depending on the provider and loan type. The government-backed Start Up Loan for example allows you to borrow between £500 and £25,000.

Other commercial lenders may lend more, with some lending between £1,000 and £500,000 to limited companies.

What are the common term lengths for startup loans?

Startup loan terms will vary, but you can usually set the term during the application process. Typically the term is between one year and seven years, but some lenders may require it be paid back in under five years.

How long does it take to get a startup business loan?

The time it takes to receive the startup loan funds into your business account will depend on the lender and the amount you're borrowing. Once approved, you should usually expect the funds within 24 hours, but it can take up to a week.

Can I get a startup business loan for a home business?

Yes, you can get a startup business loan for a home business. However, you should still check with each lender to check if your business is eligible to apply.

What can a startup business loan be used for?

A startup loan can be used for a whole range of things to help start or grow your new business. These could include:

Paying wages
Buying equipment such as machinery, tools or computers
Paying bills or rent on office, retail or warehouse space
Paying suppliers and stocking up inventory
Marketing and advertising your business

Do I need a business account to apply for a startup loan?

Some lenders require you to have a business account with them to qualify for a business loan, but some are more flexible. Ask before you apply.

Can I repay a startup loan early?

Yes, you can repay a startup loan early but you may get an interest penalty based on your remaining loan balance. Check with your lender if you can afford to repay your loan early.

What happens if I can't keep up with repayments?

If you fall behind in repayments, or find you're struggling during the term of the loan, it's important to notify the loan provider straightaway. If you ignore the situation, it can have a negative impact on your credit file - potentially on your personal credit file too - making it harder to get other forms of credit or even certain types of jobs.

Are startup loans hard to get?

Startup loans can be difficult to obtain - it depends on the information the provider requires, how quickly you're able to provide it and how well you can evidence your business plan and ability to repay borrowing.

Carrying out research and ensuring you have a thorough business plan can make the process more straightforward and hopefully reduce the chance of disappointment.