In this guide to startup business loans, we look at considerations to make before taking one. We also provide a list of current startup business loans examples that could be beneficial to your business.
When starting a new business, initial funding is vital. You need cash to establish your business. If you don’t have cash on hand to cover the costs of setting up a business, you may be looking for alternative financing methods. An alternative to business credit cards or an overdraft on your business bank account (which can be expensive) are startup business loans.
The funds from startup business loans could be used to help you build a website, purchase stock or equipment, market your business or lease office space. Unless you have substantial financial backing, this funding can be difficult to find. This is where startup business loans may be beneficial.
Considerations before applying for startup business loans
Startup business loans are not something to be taken without independent professional financial advice. Loans are long-term commitments and can have a real financial impact on your business and possibly your personal credit rating – both positive and negative. Before taking a startup business loan, you should consider the following:
- Your credit rating
- Ability to repay the loan in full
- Impact if you default on payments
- The monthly repayment schedule
- APR and overall repayment value
- Any other features the loan provides
- Secured or unsecured loan – your assets may be at risk
Firstly, take a look at your credit rating. Your credit score is often pivotal in securing a small business loan. There are many companies like Experian that provide a free credit score rating. We advise finding your credit score so that you can see if you meet the eligibility criteria for securing a startup business loan.
Secondly, we advise checking out the different loan options and using their loan calculators if available. This should allow you to estimate the monthly repayments including value, and for how many months. You can then clearly see if you can comfortably repay that amount.
Having the ability to repay in full is vital as defaulting on payments could negatively impact your credit score and business finances.
The representative APR (Annual Percentage Rate) and total repayment value is also top consideration. Ideally, you want a low APR percentage – less than 10% if possible.
This means that you are not paying over the odds, and your total repayment value is less. Regardless of the APR, you must always remember that you will pay more back than you borrow. For example, if you take a loan of £5,000, you may end up paying back £5,800.
You must also carefully consider the benefits of unsecured loans and secured loans. Secured loans are backed with collateral. This means that your business must use its assets as collateral. These can be seized in the event of non-payment. The benefit is that the APR and terms are usually more favourable.
In contrast, unsecured loans do not require any collateral. This means that your business assets are safe. However, as a result, the representative APR is typically higher. You must therefore consider if you are OK with placing business assets as collateral, or if you would prefer to pay slightly higher interest.
Lastly, many startup business loans have additional features that make repayments and managing the loan easier. A common feature is a payment holiday or payment deferral. Financial institutes often give you the option to defer your initial loan repayment for a set number of months – up to 6 typically. This can greatly help in those all-important initial months of your business’s operation.
Current Startup Business Loans / Small Business Loans for UK Businesses
Below, we have found 5 startup business loans that would be suitable for startup businesses. These are all from reputable banks or financial providers.
The best provider for you will depend on your personal and business circumstances.
1. Lloyds Small Business Loan
Lloyds offers one of the best startup business loans with flexibility in repayments, and simple terms that anyone can understand. Small businesses can apply for loans between £1,000 to £25,000 with one of the lowest interest rates.
Repayments can also be spread out up to 25 years which can make managing the loan easier. It is also a benefit that there are no charges for early loan repayments. Therefore, if your business had a cash injection, you could choose to repay the loan quicker than anticipated.
Eligibility requires that you must be a director, sole trader, or partner, and the loan must only be used for business purposes.
- A Loan value of between £1,000 to £25,000
- Repayment plan of between 1 to 25 years
- Secured and unsecured options available
2. HSBC Small Business Loan
Another great option is the HSBC Small Business Loan. This is ideal for startups that want minimum APR rates and flexible repayment options. You can borrow up to £25,000, and the representative APR is incredibly reasonable.
HSBC also offers some useful repayment options. For example, you can choose to defer the initial payment for 3 to 6 months. Also, they have a holiday repayment feature. This means that you can choose to forego loan repayments each January for the entirety of the term.
Anyone can apply for this business startup loan, however, you must be prepared to provide some financial documents. This includes a business plan, management accounts, and cash flow forecast.
- A loan value of £1,000 to £25,000
- Repayment plan of between 1 to 10 years
- Must provide various financial info including a cash flow forecast
3. Barclays Small Business Loan
Barclays offers larger business startup loans of up to £100,000. This could be ideal if you need large initial funding to pay for things like offices or production facilities. This is also an unsecured loan so no business collateral is required.
As a result, however, the representative APR is a little higher. The repayment terms are still flexible though, and you can choose to spread payments up to 10 years. We also like that you can use the loan calculator on their website to see the exact APR, monthly payments, and total repayable value.
To make the loan more manageable, you can also choose to make interest-only payments. Lastly, they also offer a repayment deferral option which means you can defer the first payment for up to 6 months.
- A loan value of up to £100,000
- Repayment plan of between 1 to 10 years
- Must be an Ltd company, charity, sole trader, or partnership
4. TSB Business Loan
TSB offers some of the larger startup loans available with amounts of up to £1,000,000. You can choose between secured and unsecured loans. This also includes flexible repayment plans of between 1 to 10 years.
To apply for their loans, you must be a director, sole trader, or partner. You can also only use the loan for business purposes. To help with payments, TSB offers capital repayment holidays. This means that you can defer the initial loan repayment. This is an incredibly useful feature and can help during those first few important months of business operation to manage your cash flow.
- A loan value of £1,000 to £1,000,000
- Repayment plan of between 1 to 10 years
- Must be a sole trader, director, or partner
5. NatWest Small Business Loan
NatWest also offers startup business loans and they have the benefit of having hundreds of bank branches too. This means that if you want assistance you can easily head to your local high street branch for advice.
The startup business loans are available for values of £1,000 to £50,000. This includes a variable APR rate that depends on the loan terms. Generally, their APR rates are on par with other finance providers, however.
You can spread repayments between 1 to 7 years. However, if you want longer, you can also request a 10-year repayment plan subject to approval. NatWest also offers a quick and easy online application process.
- A loan value of £1,000 to £50,000
- Variable APR depending on loan criteria
- Repayment plan of between 1 to 7 years
- Secured loan with collateral
Startup Business Loans – Summary
Startup business loans are one of the simplest forms of financing for your new business. Banks and financial institutes readily provide them, and the APR and total repayments are usually reasonable.
Some digital banks, such as Revolut, are also looking into the possibility of providing small startup business loans as part of their digital banking offerings.
A loan could give your business a financial boost during its inception. It could help pay for important assets like a website, raw materials, premises, or even marketing. Before taking a loan, make sure you are clear on what you intend to use it for. Have a clear spending plan. This will make sure you do not waste money.
Also, make sure you fully understand the terms of the loan, including the monthly repayments, the total repayment value, and the length of the loan term. Relating to this, you should also create a clear financial plan that shows how you will repay the loan.
If this startup business loans guide helped you, please recommend DigitalSupermarket.
We recommend also checking out our guide to small business loans and small business grants for more information.
Always seek professional financial advice before applying for any loan or credit.