Your guide to finding a start-up business loan

13th July 2018

By Kurt Wood

The first steps of starting a new business are exciting, scary and every emotion in between. There are many worries that you may have, including how you are going to fund your ideas and how to get the capital you need. One of the most common ways to raise the funds is through a loan.

If you’re wondering how to get a business loan for your start-up venture, read on for advice from our experts.

Should I get a business loan?

A loan can be a great way to kick-start your business, but there’s lots to think about before going ahead. The first thing you need to consider is whether you really need to borrow from the bank. If you can raise the money yourself or borrow from friends/family on a zero-interest basis, for example, you’d save yourself some money.

Secondly, you should think about whether you can comfortably pay back the loan based on your business projections. Do you have a contingency plan if you don’t hit your targets? Is there a backup source if you experience cashflow problems?

Today’s business landscape is very welcoming of start-ups. This includes banks, who are often willing to offer start-up loans to get entrepreneurs on their feet.

For the ambitious, this is the time to shine. But it’s also important to remember that a large percentage of start-up companies don’t even make it past their first year. According to research conducted by RSA Insurance Group, around 50% of all UK start-ups fail within the first five years of trading. If you are considering a business loan, it’s very important to have a solid plan in place.

What is the Government Start-up Programme?

The Government has teamed up with several loan providers to help new businesses across England, Wales, Scotland and Northern Ireland. The loan is a low-interest personal loan designed to help entrepreneurs start or grow a business, and applications can be made via the official website.

In addition to an affordable fixed rate and no setup fees, this programme also supports you in writing business plans and forecasting cash flow.

How much can I borrow?

There are a number of different small business loans UK banks can offer. For these, the amount you can borrow will vary depending on your provider, and some will require at least six months of trading before you are allowed to apply. Generally, small business loans are up to £25,000 with major banks, but there are also bigger loans (usually secured) if you meet the application requirements.

With the Government’s Start-up Loan programme, you can borrow between £500 and £25,000 at a fixed rate of 6% with a 1-5-year repayment plan.

Different types of loans to consider

For more established small business, which won’t be eligible for the Start-Up Loan scheme, there are many other loan options available.

Secured loans

Secured loans are suitable if you need a large sum of money. The loan will be secured against property or other assets. This type of borrowing often comes with a longer repayment period and can be good for people with poor credit.

Unsecured loans

This type of borrowing is safer due to it not being secured against property, so you don’t run the risk of your house being repossessed if you can’t make the repayments. But loan amounts are typically smaller than with secured loans.

Business line of credit

A business line of credit is a very common form of borrowing for companies of all sizes, offering flexibility that other loans can’t. This short-term financing solution comes with a set limit that you can access when and as you need, and you only pay interest on the amount you borrow.

How to apply for a business loan in the UK

As with other loans, you can go directly to your bank or shop around online to see what’s available. Sometimes smaller banks and lenders can offer lower interest rates, so it’s worth reviewing your options.

To take advantage of the best rates out there, having a good business credit score will work in your favour. Check your credit profile online before applying to get a better picture of your company’s ‘creditworthiness’. This can help you assess whether your application is likely to be accepted.

For your business loan application, you may have to provide the following:

A business plan: a strong business plan is very important when applying for a loan. You will need to detail the purpose of the loan, with information on how you intend to increase profits over a period of time.

Legal and financial documents: You should have these documents readily available: balance sheet, income statement, tax returns documents and bank statements.

Collateral to back the loan: you may need to secure your loan against assets if your loan amount is high value or your credit rating is poor. These assets could be property, equipment or business inventory.

The pros and cons of business borrowing

Before deciding to take out a loan, you should weigh up the advantages and disadvantages of borrowing. Here are some factors to think about carefully:

The pros

Kick start your business: start-up costs can be considerable, especially if you need to buy equipment or pay for manufacturing/production costs. A loan can help you take care of those expenses.

rates are available: business loans are relatively low interest when compared with other forms of lending (such as credit cards and financing).

Interest is tax deductible: any interest you pay for taking out a loan can be deducted from your annual tax returns.

Loan capital doesn’t affect your company: unlike venture capital investments, you don’t have to sign away shares in your company to get a loan.

The cons

The application process can be lengthy: business loan applications require a lot of documentation, and it can be an exhaustive procedure. If you’re borrowing a large sum, you might need to pitch for the money, as well as presenting a detailed business plan.

Good credit scores are a must: it’s hard to get a business loan if your business credit profile isn’t looking healthy. This means the best rates may not be available to you, or you may need to secure the loan against assets.

Defaulted payments can impact your business: if you experience cash flow problems, you may struggle with repayments. Missed payments will negatively affect your credit score.

How to get a business loan with bad credit

Getting a business loan can be tricky when you have bad credit. The same applies for start-up loans if your personal credit score is poor. However, there are still ways to borrow even if your credit history isn’t great.

First of all, talk to your lender and discuss your options. This could involve secured lending, personal guarantees, asset refinancing or invoice finance.

Other ways to fund my business

If you are looking for other ways to fund a new business or start-up, a personal loan could be an accessible alternative, particularly if can’t get the amount you need from a commercial lender.

Although interest rates may be higher with a personal loan, they’re usually easier to get than a business loan. Many personal loans are also unsecured up to £25,000, which means you won’t run the risk of getting assets seized if you hit a financial shortfall.

To shop around for the best personal loan rates, make sure you use an online comparison tool to compare different deals side by side.

Don’t forget to check your personal credit report and use our handy loan eligibility calculator to give yourself the best chance of approval!

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