It is often said that the key to a successful business is a great idea. While the concept behind your enterprise does need to be strong, it cannot create a business on its own. You need appropriate finance to make it a reality.
A business loan is one way to secure the funding you need to build your company from its initial idea. This can enable you to inject a sizeable sum into your business, which will help to cover start-up costs, launch your operations and introduce working capital into the enterprise.
When seeking a loan, it is essential to find one that works for you. Loan repayments can stick with you for years, so you need to be sure you can meet monthly instalments without placing additional pressure on your company finance while giving you the working capital you need to launch your SME.
Fortunately, the loan market is now vast and varied, offering businesses the chance to find one that fits their needs. This includes loans specifically aimed at start-ups.
In this blog, we have compiled the best sources of business loans for start-ups to help you find the ideal solution for you.
Government-backed start-up loans
One of the most common sources of loans for start-ups is from the government’s Start-Up Loan scheme. Under the scheme, individuals apply for personal loans to launch their business. All the loans are government-backed and unsecured, meaning you do not need to have assets or personal guarantees in place to get funding.
Loans can vary from £500 to £25,000, with the average borrower receiving £7,200, with a fixed interest rate of 6%. The loan terms are between one and five years, depending on the amount you borrow and your needs. Another bonus of the scheme is that every individual involved in the launch of the enterprise can apply. So, if you are launching a business with co-owners, you may each apply for an individual loan to pool together, with a limit of £100,000 per company.
What gives the Start-Up Loans the edge over other business loans is that applicants will receive a year’s worth of free mentoring and support, which many enterprises will value in the early stages of development.
Start-Up Loans are available through a range of lenders. You can apply through the Start Up Loans Company, who will also support you through the application process.
If you are applying for a Start-Up Loan, you will need to pass a credit check, as well as provide documentation highlighting your business plan, financial plan and a personal survival budget. If you are accepted, it may provide substantial working capital to invest in your company.
Non-specific business loans
Even if you are a start-up, it does not mean you are restricted to only start-up specific loans. Many lenders will offer a variety of loans – some may be start-up specific, while many will be more generic.
An example is a small business loan, which most banks will offer. In some cases, they may provide these loans to start-ups, but you must check the requirements to make sure you are eligible. Unlike the Start-Up Loan scheme, these won’t be a personal loan which may be preferred by some owners.
Any business loan you apply for will usually require supporting documentation in order for you to be approved, such as business plans, financial forecasts and so on. So, make sure you have considered this before filling out an application. This planning will also help you to understand what you need from a loan.
When seeking a loan, it is fundamental to shop around to find the best one for you. The market is currently broader than it has ever been, which means there is a lot of choice out there. This makes it challenging to find the ideal loan for you – so, if you are struggling, consider speaking to a broker or advisor who will point you in the right direction.
Below, we have outlined what to consider when comparing loans to help you find one for your start-up requirements.
Commercial vs alternative lenders
One of the reasons that the loan market for start-ups and SMEs is so varied is due to the rise of alternative lenders. With loans offered from traditional banks and commercial lenders, as well as up-and-coming, smaller lenders, anyone seeking a business loan has the advantage of a competitive market.
Commercial lenders tend to be better known so, as a result, may seem more trustworthy. They also offer larger sums of funding for enterprises, so can be extremely beneficial in getting you the working capital you need to launch your business. It is worth noting that commercial lenders tend to be more risk-averse in who they loan to, so you will need to have a watertight application in place that demonstrates the value of your idea.
Alternative lenders tend to have access to a broader range of loans and may be more open to businesses seen as potentially ‘risky’. As a result, they will provide an offer that you would not be able to get from a traditional lender. These lenders are often digitally-based too, which can make applying easier. Plus, with the alternative lending market growing, it is now possible to get reasonable amounts of funding from such lenders.
What else to consider when seeking a start-up loan
When it comes to determining which loan source to go for, there is plenty to consider. In order to effectively compare loans and find the perfect one for you, you need to understand the jargon. We’ve listed key terms around business loans and what they mean:
- Secured vs unsecured: A secured loan is when you use your assets and a personal guarantee (stating that you will pay the loan if the business fails to meet payments) as collateral for a loan. Many lenders will ask for this security to assure them they will get their money back, even if the business runs into trouble. The secured element is particularly key for high-value loans. If a loan is unsecured, you do not need to have collateral in place, however typically a personal guarantee will be required and interest rates tend to be higher.
- Term: The loan term is how long you will make repayments. The longer the term, the lower the monthly payments will likely be – however, it also means you will pay interest for longer. It is important to remember that your repayments will be a regular expense for your company accounts for however long the term is, so make sure you are comfortable with the length of time you will make those payments.
- Interest rate: Another thing to consider when researching loans is the interest rate. Loans can vary between fixed rates (meaning you pay the same amount of interest for a set amount of time) or variable rates (meaning the interest rate changes over time in line with Bank of England base rate). Generally speaking, you want to find a loan with as low an interest rate as possible to reduce the amount you pay. However, you will need to weigh up what fits most to your business needs.
By understanding how loans may differ and what it could mean for your finances, you will be able to identify the ideal loan for you and compare different sources.
Get advice
The wide choice available to businesses now makes it easier than ever to get funding for your start-up. However, this funding needs to build strong foundations to ensure the success of your company – so, it’s vital to find the perfect loan for you.
By knowing the different sources available to you and understanding what to look out for in a loan, you will be able to make an educated choice about which to go for. By doing so, you will access the working capital you need to launch your enterprise.
It’s also worth noting there are alternative sources for start-up funding asides from a loan, so you may wish to consider these too.
If you need support in accessing start-up funding or finding an appropriate loan for you, we are here to help. Our team of financial advisors have expertise across a range of business types, including start-ups, so we can provide bespoke guidance for you.