Baffled about business loans? Find out the best type for you.

By Hayley Hemmings

So you need a loan to get your business off the ground, but with all the choice out there, which loan type is best?

According to Moneywise, starting a business can cost an average of £27,520. If you don’t happen to have that kind of cash lying around, there are several borrowing options you can look at.

Before you race off to the nearest bank, a little research is crucial to make sure you’re getting the right sort of loan for your business.

You’ll need to consider how much dough you need to borrow, what your personal circumstances are and what shape your credit rating is in before applying.

Here are some of the most common business loan types for start-ups:

Government-backed loans

The government has a rather handy start-up loan programme in place for all sorts of small businesses. As long as you’re planning to start a business (or you’ve been trading for less than 2 years), you’re over 18 and live in the UK, you can apply.


How much can you borrow?

You can borrow £500 to £25K over 1 to 5 years at a rate of 6% interest per year (fixed). Happily, there’s no application fee or early repayment fee to worry about.

Extra bonus alert! With a government-backed loan, you’ll get access to free mentoring and support with your business plan too.(Get in.)

This type of loan is a good choice for entrepreneurs who might like the idea of mentoring and don’t need to borrow more than £25K.

Business loans from high street banks

Many of the high street banks offer business loans but their terms, interest rates and eligibility criteria vary.

For example, Santander offer business loans as long as you have a business account with them. They offer a loan length of 1 to 5 years for £2K to £25K but their interest rate depends on a credit check and assessment of your circumstances. A £10K business loan over 5 years could mean a 7.9% interest rate according to their website.

If you have a credit rating worthy of a trophy, can prove that you’re committed to the business and depending on how much you want to borrow, you may be able to bag a business loan from them with as little as 4.9% APR attached.

If you can’t get a business loan from a bank for some reason and you need to borrow more than £25K, you could try a peer to peer lender such as Ratesetter, who also offer business loans.

Don’t forget to explore special grants

Certain businesses are eligible for grants (money that you don’t have to pay back). Check out the government finance and support finder website for details of business grants in your area that might be available to you.

A mumpreneur wanting to set up a childminder business could pocket £500 to £1K from the government to help with setup costs and training. There are some other grants available that are geared up for women entrepreneurs – find out more here.

Innovate UK also offers Research & Development funding support to businesses who are developing new products and services. For example, if you’re hoping to develop an innovative product, or collaborate with another organisation on an innovative project, you could receive funding from Innovate UK to support this. Funding amounts can be between £25K to £10 million!

Read more here to brush up on the specific areas in which Innovate UK tend to prioritise funding awards.

Set up a line of credit

Only need to borrow cash now and then? A flexible option would be to set up a line of credit with a bank or business funding provider.

What is it?

Also known as Working Capital Loans, a business line of credit allows you to access money when you need it most and it could help you to keep afloat whilst you’re trying to improve cashflow. A great big plus is that you won’t be paying interest until you actually need to borrow the money.

Be sure to keep your business credit score in tip top condition though otherwise you could run into trouble!

Borrowing from friends and family

If all else fails, why not look closer to home to borrow the money you need for your business? Keep in mind that money can be the source of all evil when it comes to personal relationships though – make sure you pay back those nearest and dearest to you when you say you will.

Before applying for a business loan, consider:

How much funding you need and whether you can get any special grants to help with start up costs.

How long it will take you to repay a business loan (and how much the total cost would be with interest).

How watertight your business plan is – the better the business plan, the more your chances of success when applying for a business loan.

Top Takeaway

The best business loan type for you will depend on your personal circumstances, how much you need to borrow, your credit rating and your experience in business.

Are you about to take the plunge in starting your own business? What’s your biggest challenge currently?

Author Bio: Hayley Hemmings is a freelance writer and blogger from Yorkshire. She’s passionate about money matters, frugal living and loves anything handmade. When Hayley’s not writing, she’s most likely to be found enjoying snuggles with her little girl or walking her border collie through the beautiful Yorkshire countryside.

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