Our Pick Of The Best Start-Up Business Loans (2024)

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If you require any personal advice, please seek such advice from an independently qualified financial advisor. While we aim to feature some of the best products available, this does not include all available products from across the market. Although the information provided is believed to be accurate at the date of publication, you should always check with the product provider to ensure that information provided is the most up to date.

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* Your home is at risk if you do not keep up repayments on a loan secured against it

To arrive at our Forbes Advisor star ratings, we considered the following criteria for each business loan provider, which was overlaid with editorial judgement:

• Minimum turnover: the minimum turnover, or sales, required to apply for the loan
• Size of loan available: the minimum to maximum amount that could be borrowed
• Length of loan: the length of repayment periods available
• Other factors: we also considered other differentiating factors such interest rates, fees, early repayment charges, security required and length of trading history needed

Start-up loans for businesses are available from mainstream lenders, such as banks and building societies. But many require two or more years’ trading history before they will lend.

However, alternative online lenders, specialist brokers, or a Government scheme can be more flexible – which we explain in more detail below.

The government introduced the Start Up Loan scheme back in 2012 to provide a source of funding for start-up businesses that might otherwise be unable to access finance. Since then, according to the government’s own figures, the Start Up Loans scheme has provided over 100,000 business loans, exceeding £941 million in value.

Loans under the scheme are available to businesses that have traded for less than three years, and come with a fixed interest rate of 6% per annum against terms of between one and five years. Loans are unsecured, which means a personal guarantee is not required.

Start Up Loans are personal, rather than business, loans. Each individual can apply for a loan of up to £25,000, subject to an overall limit of £100,000 per business. However, the average loan amount taken by small businesses is £7,200, according to government figures.

Business mentoring is provided for the first year, together with support for writing a business plan and cash flow forecast.

On the whole, start-up loans come with repayment periods of between one and five years. That said, some loans allow short-term funding of three to 12 months, while on the other end of the spectrum, loans of up to 10 years may be available.

Once your start-up business has been trading for 12 months, you may want to look at refinancing with the same, or a different lender, as you could qualify for cheaper rates.

Start-up loans can be secured (against an asset such as a house), or unsecured where no asset backing is required.

Most of the lenders in our pick of the best business loans for start-ups require a personal guarantee. This means that, if your business is unable to repay the debt, you will assume personal responsibility for the balance.

If you are looking for a larger sum and/or lower interest rate, the lender may look for a higher level of guarantee, such as a charge over your home. However, be extremely cautious about signing up to any borrowing that puts your home at risk.

Start-up business loans can also be secured against other high-value assets, such as commercial property, equipment or cars.

Due to the higher risk profile of start-up businesses, start-up loans tend to come with higher interest rates than conventional business loans.

The interest rate you are offered will depend on factors such as the company’s trading history and cash flow forecasts, the credit history of the individuals, the level of security required and the amount and borrowing term of the loan.

According to the latest data from the Bank of England, the average interest rate charged by UK banks for small and medium business loans was 8%.

With rates well into double-digits for start-up business loans, it’s worth regularly reviewing if and when your business might be eligible for a conventional business loan.

There are two main types of fee charged for taking out a start-up loan:

• Initial fee: this may be called an application or arrangement fee, documentation fee and/or a ‘draw-down’ fee. It can be as much as 5% of the loan amount, although this is typically spread over the term of the loan and added to the monthly payments. Not all lenders charge this fee, however.
• Early redemption fee: if you want to repay the loan before the agreed term, you may be charged an early redemption fee. Some lenders do not charge early redemption fees, but instead charge interest that would have been payable had the loan not been redeemed early. Always check the terms and conditions of any loan agreement thoroughly.

Lenders will typically ask for a business plan and cash flow forecast, as well as running a personal credit check.

The British Business Bank has produced a detailed guide to writing a business plan. But, as a summary, it should cover the following areas:

• Your company’s objectives and how you plan to achieve them
• An analysis of your customers and market, together with any market research you’ve carried out
• Your sales and marketing plan
• Potential issues and plans to resolve these, including any funding shortfall
• Other information including information about the individuals working in the business

You will also need to provide a cash flow forecast for at least the next 12 months. Again, the British Business Bank has a cash flow template to help with this.

The cash flow forecast should cover the following items:

• Income: revenue (sales to customers), any personal investments and business loans
• Expenses: wages, rent, council tax, supplier costs, sales and marketing costs, VAT and tax, as well as any loan repayments
• Net cash flow: the difference between income and expenses, which may be positive or negative

You will also be asked to provide the personal details of all the individuals applying for funding, including address history, details of existing loans and bank statements. It is not usually necessary to hold a business current account with the lender.

Each lender will have slightly different rules on what you can do with the funds – but expenditure, such as purchasing stock, hiring new staff, moving into premises, marketing costs and buying new equipment, is generally permitted.

Funds cannot usually be spent on debt repayment, training and educational opportunities or investment opportunities that are not required for the ongoing business.

You will be required to describe your intentions for your loan at the outset, to show that the loan will help you expand your business, and the lender is likely to undertake periodic monitoring of your cash flow position to identify any possible barriers to repaying your debt.

Pros

• The ability to borrow large sums of money which can be used to finance expansion
• Funds could be at lower interest rates than other forms of borrowing, such as business credit cards, with the option of fixed or variable interest rates
• Clear interest and capital repayments for fixed rate loans
• The option of long-term borrowing, with terms of up to 25 years
• Avoids the need to dilute owners’ shareholdings by bringing in new investors.

Cons

• May ask for personal guarantees or security over personal assets such as property
• Not as flexible as some forms of borrowing as the amount is set at the beginning of the loan, with better options for financing temporary cashflow issues
• Minimum loan amount may be higher than needed
• Interest rates can rise for variable rate loans
• Eligibility requirements can be hard to achieve and higher interest rates may be charged for businesses with poorer credit rating
• Possible early repayment penalties.

• Crowdfunding: businesses pitch their ideas to a ‘crowd’ of small investors who become shareholders in the business. Crowdfunding has become very popular in the UK, with notable successes including Scottish brewer BrewDog and challenger bank Monzo
• Business credit cards: these can be a quick way of accessing smaller sums of money. However, they typically charge a high interest rate if the balance isn’t repaid in full at the end of the month. We’ve also produced a guide to our pick of the best business credit cards
• Overdrafts: some business current accounts have interest-free or low-interest overdrafts which can be useful for businesses wanting to borrow small amounts of money for a short period
• Invoice finance: this is a loan against money owed by customers, for example, when invoices are waiting to be paid. Once the invoice has been paid, the cash is used to repay the finance
• Government grants: these may be offered to businesses in certain sectors or regions and don’t need to be repaid.