What is a startup loan?
A startup loan is finance for a business that's new or not yet trading, where conventional lenders have no accounts or bank history to assess.
The best-known option in the UK is the government-backed Start Up Loan: an unsecured personal loan of £500 to £25,000 at a fixed 6% a year, with up to £100,000 available across a founding team.
Because there's no trading record, lending decisions rest on your business plan, your cashflow forecast and your personal credit history.
How do startup loans work?
You submit a business plan and a twelve-month cashflow forecast alongside a personal survival budget showing you can meet repayments.
Under the government scheme the loan is personal, unsecured and fixed at 6% over one to five years, with no arrangement fee, no early repayment charge and twelve months of free mentoring included.
Here's a fictional example:
Meet Chloe, launching a bakery
Chloe needs £18,000 to fit out a small unit, buy an oven and cover three months of running costs before revenue builds.
She takes a Start Up Loan of £18,000 over five years at 6%, giving repayments of about £348 a month and total interest of roughly £2,880.
Her mentor pushes her to cut the opening product range from 30 lines to 12, which halves waste in the first quarter and gets her to breakeven two months earlier than her forecast.
What funding is available for new businesses?
Government-backed Start Up Loan
£500 to £25,000 per founder at a fixed 6%, unsecured and with free mentoring.
Business must be under three years old and based in the UK.
Commercial startup lending
Alternative lenders funding businesses with six to twelve months of trading.
Faster and larger, but rates are higher and a personal guarantee is standard.
Grants
Non-repayable funding from local growth hubs, Innovate UK and sector bodies.
Competitive and slow, but free money is worth the application effort.
Equity and angel investment
Capital in exchange for shares, often alongside SEIS or EIS tax relief for the investor.
No repayments, but you permanently give up part of the business.
Is a startup loan right for me?
It tends to fit founders who:
- 1
Need modest, defined capital
Stock, equipment, a website or the first few months of overheads.
- 2
Have a realistic forecast
A plan showing how repayments are covered even if revenue builds more slowly than hoped.
- 3
Want to keep full ownership
Debt costs interest; equity costs a share of everything you build afterwards.
- 4
Would benefit from mentoring
The free support attached to the government scheme is genuinely valuable for first-time founders.
Am I eligible for a startup loan?
For the government-backed scheme you'll generally need:
UK residency and age 18+: You must have the right to work in the UK and live here.
A business under three years old: Trading for less than 36 months, or not yet trading at all.
A viable business plan: Submitted on the scheme's template, with a twelve-month cashflow forecast.
Ability to afford repayments: A personal survival budget showing the payment is sustainable from day one.
An acceptable credit history: It's a personal loan, so recent defaults, CCJs or bankruptcy usually block an application.
How to compare startup funding
Before signing anything, weigh these up:
- 1
Rate and total cost
The government scheme's fixed 6% with no fees is hard to beat. Commercial startup lending often runs at 12% to 25% or more.
- 2
Personal liability
Most startup lending is personal or personally guaranteed, so the debt follows you if the business fails.
- 3
Speed
The scheme takes four to eight weeks including plan review. Commercial lenders can fund within days.
- 4
Support attached
Mentoring, templates and growth-hub introductions have real value for a first business.
- 5
Flexibility
No early repayment charge means you can clear the loan as soon as cashflow allows.
Startup loan pros and cons
Pros
- Available with no trading history
- Fixed 6% and no fees on the government scheme
- You keep 100% of your equity
- Free mentoring for twelve months
Cons
- Usually a personal, not company, debt
- Caps at £25,000 per founder
- Application takes weeks and needs a full plan
- Declined if personal credit is poor
Startup loan or investment?
Debt is cheaper if the business works. £18,000 at 6% over five years costs under £3,000 in interest; 15% of a business that later turns over £1m costs vastly more.
Investment makes sense where the capital requirement is far beyond what lending will cover, or where the investor brings customers and expertise you can't buy.
Most UK small businesses — shops, trades, agencies, services — are better served by a modest loan and retained ownership.
What if the business doesn't work out?
Start Up Loans are personal borrowing. If the business closes, you still owe the balance personally — company failure does not clear it.
That's the strongest argument for borrowing the minimum viable amount rather than the maximum available, and for keeping the term realistic.
If repayments become unaffordable, contact the lender early and take free advice from StepChange or Business Debtline before missing a payment.
What are the alternatives to a startup loan?
Other ways to fund a new business:
Business grants
Non-repayable and available through local growth hubs and sector schemes. Slow to win, but free.
Bootstrapping
Starting part-time alongside employment keeps risk low and proves demand before you borrow.
Business credit card or overdraft
Useful for small, short-term gaps, though rates are far higher than a startup loan.
Friends and family
Cheap and flexible, but put the terms in writing to protect the relationship.
FAQs
About this guide
Written and reviewed by the Grow Your Business team, and kept up to date as rates, rules and provider terms change.
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