Start-Up Loans: Everything You Need to Know

Explore what a start-up business loan is and what benefits it could bring your business.

Updated: January 25, 2024
Matt Crabtree

Written By

Matt Crabtree

 

Do you have a great business idea but no cash to back it up?

A start-up loan could be the answer to your problems.

Beginning your entrepreneurial journey with enough cash in the bank is essential. Almost 20% of new businesses fail in their first year, so the stakes are high.

The chances of business failure do not diminish as the years go by, either. Around 60% of new businesses fail within three years of starting up.

In this article, we will explore what a start-up business loan is and what benefits it could bring your business.

ServiceScoreRegister
1. Tide★★★★★Click Here
2. CubeFunder★★★★★Click Here
3. Funding Options★★★★★Click Here

What Is a Start-Up Loan?

Startup
Image: Investopedia

Startup business loans are financial products used to establish a new business. They are offered to companies in the first stages of operations.

It is not possible to apply for a start-up loan if your business is already up and running. This type of business loan is solely reserved for brand-new business ventures.

Why Would I Need a Start-Up Loan?

You would apply for a start-up loan to pay for your initial costs and to help your business begin its operation.

Start-up costs include:

  • Business plan — Startups need a business plan that explains the goals of the new business along with the strategies in use. 

Financial projections, such as a cash flow forecast, will be included. A comprehensive business plan may be difficult to create. 

Therefore, a startup might pay an expert to create the plan for them, incurring a considerable cost.

  • Market research — Market research answers your questions. Who is your target market? What does your competitive landscape look like? 

Detailed market research can cost money, however, especially if your sample size is large. Market research is beneficial to inform your decision-making, however.

  • Fees — When starting a new business, there are always legal fees, insurance costs, and regulatory fees to pay for. 

For example, you will need to register the business and obtain any necessary permits or licences, if applicable. 

You may employ the services of a specialist to complete all requirements, however, ensuring that every box is fully ticked.

  • Premises — You will need to pay for premises, whether that is an office space, a warehouse or a shop. The premises you choose must meet the needs of the business and your business operations.

You may want to purchase premises or get a mortgage. This ensures that you can make any necessary changes to the premises, subject to planning regulations. 

Or, you may prefer to keep costs lower and rent premises. However, you will be subjected to the landlord’s rules and they may not renew your tenancy in the future.  

  • Fixtures and fittings — Almost every premise will require some sort of fixtures and fittings. Some startups may forget to factor these costs in, yet the business cannot operate without fixtures and fittings.

For example, a shop will need shelving and a counter, an office will need desks and chairs, and a warehouse will need storage units.    

  • Equipment — Consider the equipment you need to operate your business. This may include a cash register and POS system, computers, and kitchen equipment.   
  • Hiring costs — If you are hiring contractors to renovate the premises, their work costs must be paid for before you start operating the business. 

In addition, you will need to factor in your employee costs for several months before you can rely on sales revenue to pay staff.   

Why Do Startups Fail?

With so many startups failing during their first year, it is wise to ensure you do not make the same mistake.

Here are some of the reasons why a start-up business fails:

1. Running Out of Money

Money is a huge factor associated with business success, with 38% of startup businesses failing because they have run out of money. 

You may underestimate the cost of setting up your new business, leading to significant financial outlays before the business has opened. 

Prevent running out of money by applying for a sufficient start-up business loan, ensuring your business has the amount of cash it needs to thrive.

Startup fail
Image: Resolve Financial

2. Lack of Market Need

If customers do not want to buy your product, you will not make any sales. A lack of sales means ultimate business failure.

Prevent creating a product or service by completing sufficient market research. Find out what your target customers want and what they need. 

What does your competition look like? For example, if you are planning to open a pizza restaurant in the same proximity as five other pizza restaurants, is that sound business sense? There are only a certain number of customers in that area who will want to visit a pizza restaurant so you will be sharing sales with your competitors.

To prevent failure due to a lack of market need, find a niche. Offer the customer something different that they will flock to buy.

3. Cost/Price Issues

If you underestimate the costs required to start a new business, you will soon discover a problem that only money injections will solve. 

However, if you price the products or services you are selling incorrectly, you will also face problems. For example, if you charge a price that is too high, customers will not buy it. If you price a product too low, you may not make enough money to cover your costs.

To prevent this from happening to you, first calculate your costs. Find out how much you would need to charge per item to break even and cover all costs. Then add a 30% markup to secure a reasonable return on each item sold.

Additionally, check how much your competitors charge for a similar product. You want to be competitive without failing to make a profit.

How Can I Apply for a Start-Up Loan?

You can apply for a start-up business loan from a lender, such as a bank. Or, you can visit a business loan broker who will search for start-up business loans for you. 

You could also see whether you are eligible for a government Start-Up Loan of £500 to £25,000 or a government-backed loan from the British Business Bank.

You could also gain months of free mentoring and a lower fixed interest rate when seeking the services of the British Business Bank.

Business Plan

Whichever route you decide to follow, you will need a solid business plan. Your business plan will explain to the lender what you want to do with your business and what your goals are. 

Financials

Provide detailed financial projections, such as cash flow forecasts, to highlight what profit you think you will make and when.

You should also have evidence of the exact amount of money you want to borrow and why. You must be specific yet realistic when discussing business financials.

Eligibility

Your eligibility will then be assessed, including your credit score. If you have a responsible credit history and a high credit score, you may be offered a start-up loan at a good interest rate. An unsecured business loan may be the best option, with zero security required.

However, if your credit score is poor, your start-up loan application may be rejected by a traditional lender. You could still secure a business loan for bad credit, however. Although, remember that a higher interest rate is typically charged on loans for bad credit.

An additional option for you could be applying for credit cards for bad credit if you only need to raise a smaller amount of money.

An unsecured personal loan could be another choice for you if your personal credit check is good and you are unable to secure a startup business loan. An unsecured personal loan would not be secured on your personal property. Such personal loans would provide less risk than a secured loan. 

Acceptance

If you are approved for the start-up loan, you will need to formally accept the terms and conditions before signing. It is vital to read through all the documentation given to you by the lender to ensure all charges and fees are transparent.

You will then receive the money from the start-up loan within the lender’s set period. This could take a few days or a few weeks, depending on the lender and the total money borrowed.

At a Glance, Start-Up Loans Pros and Cons

To gain a succinct overview of start-up loans, their benefits, and their limitations, take a look at this section.

Pros

✔️ Fast access — As a start-up, you need to access cash fast. Saving up your own cash or waiting for investors or business grants to arrive can take time, and may not come to fruition at all. 

When applying for a start-up loan, you will discover your fate within a short period, usually a few days or even a couple of minutes in some circumstances. You will know whether your startup application has been successful so you can access the money quickly, or try a different lender if you are unsuccessful.

✔️ Building credit — Many businesses need credit to secure capital to start a business or expand their business empire. Credit is not a bad thing if you use credit responsibly, gain good interest rates and terms and always repay your loan payments on time. 

This will lead to building your credit and increasing your credit score, developing a responsible credit history and reputation with lenders. You could also build up your credit scoring with business credit cards for start-ups.

✔️ Flexibility — A startup loan will usually be flexible, allowing you to use the money any way you wish. This may include paying for a full year of rental payments for premises, purchasing the latest equipment, or for a range of costs. Most startup loans do not provide stringent rules in this area, offering you flexibility in comparison to the average loan.

✔️ Fixed interest rate — With start-up loans, company interest rates are fixed. This means that your business will know the exact cost of each monthly repayment so you can budget accordingly. 

Cons

❌️ Defaults — as with all loans and finance products, you must pay your loan repayments on time or else suffer a default. Debt repayment defaults affect your credit history and will hinder your chance of borrowing further money with good interest-rate deals.  

Numerous payment defaults will result in greater action being taken by the lender. For example, if your startup loan is a secured loan, secured on a property for example, defaulting repayments will risk you losing that property. 

If your startup loan is a guarantor loan, then the guarantor will be liable for your debt, causing relationship repercussions. This is a significant risk that guarantors must accept, despite your personal guarantee.

❌️ Instant debt — using a startup business loan will mean that your business is in debt before operations have commenced. This is not ideal although is typically realistic in the business world. However, once you are in debt, you will spend your time trying to get out of debt!

❌️ Higher interest rates — if you are new to business and have an unproven record in this field, a lender may view your business idea as a risk. As a result, your start-up loan options may be limited to higher interest rate choices. This means you will need to repay more money back to the lender than other businesses. 

❌️ Short loan terms — once again, if you have an unproven track record of business and loan repayments, you may be deemed a possible risk by some lenders. Lenders may therefore offer you a startup loan with shorter repayment terms. This will mean that your monthly loan repayments are higher than you might expect as the loan must be paid back in full much quicker than anticipated.

Best Start-Up Loans — Reviews

Here are the top 3 startup business loans currently available on the market:

1. Tide Start-Up Loan — Great Overall

  • Fixed rate business loan
  • 6% APR
  • Minimum loan amount: £500
  • Maximum loan amount: £100,000
  • Loan terms: 1 year to 5 years
  • Maximum trading: 36 months
  • Connect the loan to your business bank account

Representative example — when borrowing £50,000 over 2 years at an APR of 6%, you will pay £2,216.03 per month, paying £53,184.73 in total at the end of the loan.

The Tide Start-Up Loan is a good overall fixed-rate loan for new businesses. An APR of 6% features, which is a solid, moderate rate for your business. No specified turnover is required when applying for this loan and businesses who have traded for up to 36 months may be eligible.

You can secure as little as £500 from this loan through to a substantial £100,000. Loan terms, however, are generous and range from 1 year to 5 years. Security may be required, in addition to a personal guarantee.

As an incentive, Tide encourages businesses to connect the loan to their business current account, increasing accessibility to business loans.

2. CubeFunder Short-Term Business Loan — Great for Smaller Loan Terms

  • Fixed rate business loan
  • One set fee
  • Minimum loan amount: £5,000
  • Maximum loan amount: £100,000
  • Loan terms: 3 months to 12 months
  • Minimum trading: 3 months
  • Minimum turnover: £4,000

The CubeFunder Short-Term Business Loan is a good, fixed rate startup loan for shorter loan terms.

You can borrow an amount from £5,000 to £100,000 over a short-term period of 3 months to 12 months. However, one fixed fee is charged instead of a fixed interest rate. The total fee is calculated on an individual basis.

However, the CubeFunder loan does require that you have traded in the business for at least 3 months and that you have made at least £4,000 in profits to date.

Security for the loan may be required, in addition to a personal guarantee. However, CubeFunder does not charge an early repayment fee if you decide to clear the debt early.

3. Funding Options Unsecured Loan — Great for Larger Loan Amounts

  • Unsecured business loan
  • 7.63% APR
  • Minimum loan amount: £1,000
  • Maximum loan amount: £15,000,000
  • Loan terms: 6 months to 6 years
  • Minimum trading: 12 months
  • Minimum turnover: £100,000

Representative example — Great when borrowing £50,000 over 2 years at a rate of 7.63% APR, you will pay £2,252.94 per month, totalling £54,070.56 at the end of the loan.

The Funding Options Unsecured Loan is perfect for larger loan amounts, offering loans up to £15,000,000. The minimum amount you can borrow in this loan is £1,000.

Loan terms for this loan option range from 6 months to 6 years, helping you to spread the cost of larger loan amounts. However, you must have evidence of 12 months of trading to apply for this loan, as well as £100,000 minimum turnover.

No security is required for this loan, although a personal guarantee may be sought. Excellent credit history is typically required, however, consisting of zero personal or business county court judgements.

Leading Start-Up Loans for Business: The Verdict

If you have a viable business idea, you need cash fast for your own business. Personal loans and a government scheme may offer slim possibilities for some successful applicants, although the majority of business finance investments are derived from startup business loans. 

Give your business the best fighting chance and secure enough cash from a startup business loan. Many businesses fail within the short term due to a lack of cash. Mitigate such problems by acting in advance, investing more than enough money into your own business.

There are many startup business loans out there, each with its benefits and limitations. As always, if your personal and business credit scoring is high, you will have much better options available to you. If you are looking for a business loan with bad credit, however, a business loan broker could find you the best option on the market.

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