Comparing a Business Loan and a Start Up Loan for a new business

Starting your own business is an exciting adventure but getting it off the ground often means you'll need a bit of external funding. 

Whilst there are a number of ways of financing a start-up, two popular ways to secure funding are through a business loan from a high street lender or a Start Up Loan.

In this article, we’ll take a closer look at both options, exploring how they work and what might make one a better fit than the other. 

Our goal is to help you make an informed choice that suits your business needs.

Of course, when it comes to financial decisions, it’s always wise to consult with an independent financial advisor. 

They can guide you to the best solution for both you and your new business, making sure you’re set up for success.

What is a business loan?

Business loans from high street lenders are a popular choice for businesses needing finance and are often one of the first options entrepreneurs consider. 

Essentially, a lender provides funds that the business, as the borrower, repays with interest over an agreed time frame.

What makes business loans so appealing is their flexibility.

They can be used for a wide range of needs—from big-ticket expenses like purchasing new equipment to increasing your business’s working capital reserves. 

This versatility makes them a great fit for businesses at different stages of growth.

Because they’re so adaptable, business loans are available in various forms tailored to how a business plans to use the funds. 

Whether you’re looking to invest in equipment, expand operations, or manage your cash flow, there’s likely a loan designed to support your goals.

Learn more about business loans.

What is a Start Up Loan?

In contrast to a business loan, a Start Up Loan is a personal loan aimed at helping people start or grow their businesses. 

It’s specifically created for aspiring entrepreneurs and new business owners who often face challenges securing funding. 

To address this, the government introduced the Start Up Loan to make financing more accessible for these groups.

One of the key features of a Start Up Loan is that it’s unsecured. 

This means you don’t need to offer your home or other valuable assets as security to access the funds. 

It also comes with a fixed interest rate of 6%, providing predictability in your repayments. 

Beyond just funding, the Start Up Loan includes additional support to help set your business on the path to success.

Learn more about a Start Up Loan.

How much funding could I access via a Start Up Loan or a business loan?

With a Start Up Loan, you could borrow anywhere from £500 to £25,000 to help get your business started or to grow it. 

If your business has more than one director, there’s even more potential. 

Each director (up to a maximum of four) can apply for their own Start Up Loan. 

This means your business could benefit from a combined funding boost of up to £100,000.

Due to their sheer flexibility, loans for smaller businesses from high street lenders can range in value from £5,000 to as much as £15m or more, depending on the business and the lender.

It’s not uncommon for a lender to approve your loan application but for less than the amount you originally requested. 

This might happen for a couple of reasons. 

The lender might feel that the full amount isn’t actually needed to achieve your business goals, or they may consider offering the entire sum too risky.

To prepare for this possibility, it’s a good idea to think ahead and explore how you could adapt your business plans with a smaller injection of funds. 

This way, even if you don’t get the full amount, you’ll still be ready to move forward and make the most out of what’s available.

How easy is it to get a Start Up Loan or a business loan?

Business loans for smaller businesses are offered by a variety of providers including:

• high-street banks
• challenger banks
• Community Development Finance Institutions (CDFIs)
• peer-to-peer platforms
• other online providers.

Depending on the provider, applying for a business loan can often feel like a lengthy and demanding process. 

Lenders carefully evaluate several factors before making a decision. 

They’ll assess the financial health of your business, review its credit history, and even take a close look at your personal credit score. 

All these details help determine whether the loan is approved and what interest rate you might receive.

For start-ups and newer businesses, this process could be particularly challenging. 

Without an established financial or trading history, it could be tougher to convince lenders of your business’s ability to repay the loan. 

Since its launch in 2012, the Start Up Loan program has helped over 100,000 people bring their business ideas to life. 

Many of these individuals had struggled to secure funding through other means, such as traditional lenders.

Applying for a Start Up Loan is straightforward and quite similar to other types of loans. 

The process begins with an eligibility and credit check to ensure you qualify. 

From there, you’ll need to complete an application form and submit important documents, such as a business plan and a cash flow forecast.

What do I need to prepare before applying for a Bank loan or a Start Up Loan?

Generally speaking, the documents you’ll need to prepare in advance of a business loan or start up loan application will be the same, including:

• a business plan
• a cash flow forecast 
• a personal survival budget
• some lenders may also ask for a balance sheet.

These documents are essential as they help a lender assess how strong and viable your business idea is, as well as your ability to manage loan repayments comfortably.

To make things easier, Start Up Loans offers templates for the documents they need. 

In addition, a lender is likely to ask to view both your personal and business credit scores (via what’s known as a credit check) to help them determine whether or not your business meets their lending criteria.

A credit check will impact your credit score, as will defaulting on your loan repayments, should that happen, which could make finding finance in the future more difficult.

Generally, the lower your credit score, the harder you’ll find it to secure a loan.

Depending on the type of loan you apply for, you may need to put up an asset you own (such as a car or your house) as security against non-repayment of the loan.

This is known as a secured loan, which tend to be for higher amounts than unsecured loans.

A Start Up Loan is an unsecured personal loan for business purposes so does not require any asset to be put up as collateral against the loan.

What will a Start Up Loan or a business loan cost?

Often, the amount of interest a lender will charge a business for a loan will be largely dependent on the circumstances of the business, as expressed by its credit score, as well as the documents submitted by the business in support of their application.

In essence, if a lender feels the loan is low risk in terms of the applicants ability to repay, they will offer an interest rate that is lower than if they deem the loan applicant to be more likely to default on their repayments.

The lender could also offer the applicant a fixed or floating interest rate.

A fixed interest rate stays the same throughout your loan. 

This means you’ll always know exactly how much you need to pay each month, making it easier to plan your budget.

On the other hand, a floating interest rate can go up or down. 

It’s tied to changes in your lender’s rates and the Bank of England’s rates, so your payments might change over time.

A Start Up Loan is an example of a loan with a fixed interest rate of 6%.

You’ll be expected to repay the full amount you borrow, along with interest. 

Repayments are spread out over a period agreed with the lender, ranging from one to five years, giving you some flexibility to manage your finances while growing your business.

What additional support does a Start Up Loan or a business loan provide?

When you take out a Start Up Loan, you’ll get 12 months of free business mentoring. 

A mentor can bring a fresh and unbiased perspective to your plans, helping you refine your strategies and make smarter choices. 

They can also introduce you to valuable knowledge and resources you might not have discovered on your own.

On top of that, you’ll gain access to a customer benefits program packed with great offers and discounts. 

These include:

• deals on business and personal development
• tech tools to boost your efficiency
• savings on everyday top brands. 

It’s all designed to support you as you grow your business.

By contrast, whilst some lenders of business loans will offer additional support or benefits to businesses, this is not common.

How long does a Start Up Loan or Business loan last for?

With both business loans and Start Up Loans, your relationship with the lender is complete once you’ve fully repaid the amount you borrowed, along with any accrued interest. 

This repayment happens over an agreed time frame, which in the case of Start Up Loans could range from one to five years.

Business loan providers may offer longer repayment terms depending on the type of loan applied for and whether it is secured or unsecured.

If your business is still under five years old after paying off a Start Up Loan, you might be eligible to apply for a second Start Up Loan to continue growing your business.

Interested in learning more?

Start Up Loans and business loans are popular choices for entrepreneurs looking to fund their ventures, but they’re not the only options out there. 

If you’re exploring ways to finance your business, our Making Business Finance for You guide is here to help. 

It walks you through a variety of funding options that could be a great fit for starting your business.