A loan may be a viable option in helping to get your start-up off the ground and on the path to success.
Over £57.7 billion was lent to Smaller businesses by UK banks in 2021, and the Government’s Start Up Loans scheme has delivered over 100,000 loans, providing over £1 billion of funding since 2012 to entrepreneurs across the UK.
Applying for a loan opens in new window is an alternative route to funding your business idea.
There are a variety of loans you apply for, all with different criteria that your business may need to meet opens in new window.
Business and personal loans may have certain restrictions, so it may help if you understand the difference between the types of loans and the most suited for your circumstances.
You can use two broad types of loans to fund your start-up – an unsecured personal loan and a business loan.
Understanding the difference between the two types is essential to help you understand what type of loan best suits you.
You should always seek professional independent financial advice to help identify the best form of funding for your business.
Starting a business doesn’t come with a set of instructions.
We know that understanding the many different types of financial product in the marketplace can be difficult.
Our Making business finance work for you guide is designed to help you make an informed choice about accessing the right type of finance for you and your business.
Unsecured personal loan
An unsecured personal loan can be used on almost anything you want opens in new window.
They can be helpful if you need to borrow money to buy a car, fund a wedding, renovate your home or consolidate debts, for example.
Personal loans are typically unsecured, meaning you don’t need to provide collateral opens in new window to receive one.
Personal loans may be used for business purposes, but not all lenders permit this, so check in advance.
Applying for a personal loan can be quicker and easier than seeking a business loan when funding your new business.
They may take a few days to a week to process, and the state of your start-up opens in new window doesn’t matter.
Some other benefits of taking out a personal loan for your start-up include:
- Since the bank relies on your personal credit score opens in new window when assessing your application and not your business, a personal loan may be ideal if your start-up hasn’t been trading for long opens in new window.
- not being secured against personal assets, such as your home.
- Having lower Interest charges than credit cards if borrowing a larger amount.
Yet there are some disadvantages to personal loans you should consider such as:
- the size of a loan is typically smaller than a business loan. If your start-up requires a larger cash injection, other funding options opens in new window may be worth exploring.
- You being personally liable for the loan. Your credit rating may be impacted if the business cannot repay the loan.
- The loan may have to be paid back sooner than a business loan.
Business loans provide funds that can help start or grow your business opens in new window.
You can typically borrow anything from as little as £1,000 up to £100,000 or more.
You may have to agree on the collateral to be used when securing your loan.
Collateral can include premises or land owned by the business, assets such as machinery and equipment, vehicles, or sometimes personal assets of the business owner.
This security ensures the loan can be repaid if your business defaults on loan repayments.
Transparency of your business credit history and score will need to be provided, as well as details of other outstanding loans.
There are several potential advantages to taking out a business loan:
- you could borrow a larger amount than with a personal loan
- your business can start building its credit score − making it easier to receive funding later
- different financing options may help you, such as secured or unsecured loans and peer-to-peer business loans
- some business loans may offer business support and tools.
Disadvantages to business loans may include:
- a potentially lengthy application process
- strict eligibility criteria, and businesses with other existing loans may not be accepted
- the risk of losing business assets if the secured loans is not repaid.
Read our guide to secured vs unsecured business loans opens in new window.
Start Up Loans
An alternative form of funding is a Start Up Loan opens in new window.
This is a government-backed personal loan available to individuals looking to start their own business or grow an existing one.
Successful applicants can also receive 12 months of free mentoring and business support to help push their successes even further.
As it’s an unsecured personal loan, there’s no need to put forward any guarantors or assets.
It also allows all owners or partners of the same business to apply individually for up to £25,000 each (a maximum of £100,000 available per business).
If your application is approved, you can borrow between £500 and £25,000 with a fixed interest rate of 6% per annum repaid over 1-5 years.
The application process is straightforward.
It involves an eligibility check, and you will need to register to start.
You then need to supply information on the business, such as how much you want to borrow and for what purpose.
A personal credit check is then conducted, and if passed, you will need to submit a Business Plan opens in new window, Cash Flow Forecast, and Personal Survival Budget – there are free templates opens in new window to help you with this part of the application.
A Delivery Partner will be assigned to you and will work with you to submit your application and documents.
If your application is successful, you can begin your 12 months of free mentoring once your loan is drawn down.
To apply for the loan, you have to fit the following criteria:
- be aged 18 years of age or over
- be a UK resident
- be starting a new business or trading for up to 36 months
- have the right to work in the UK
- have a business based in the UK.
Check our ‘Am I Eligible?’ page opens in new window for further criteria and information.
Thinking of starting a business? Check out our free online courses in partnership with The Open University on sustainability in the workplace.
Our free Learn with Start Up Loans courses opens in new window include:
- Effective communication in the workplace opens in new window
- Succeed in the workplace opens in new window
- Leadership and followership opens in new window
Plus free courses on climate and sustainability, teamwork, entrepreneurship, mental health and wellbeing.
Reference to any organisation, business and event on this page does not constitute an endorsement or recommendation from the British Business Bank or the UK Government. Whilst we make reasonable efforts to keep the information on this page up to date, we do not guarantee or warrant (implied or otherwise) that it is current, accurate or complete. The information is intended for general information purposes only and does not take into account your personal situation, nor does it constitute legal, financial, tax or other professional advice. You should always consider whether the information is applicable to your particular circumstances and, where appropriate, seek professional or specialist advice or support.