Startup business loans: how new UK businesses can get funding

When a lender looks at an established business, most of its decision comes from the past: bank statements, filed accounts and a record of paying on time. A new business doesn't have that past. So lenders lean on two other things instead: you, and your plan.

That changes what's realistic. This guide is honest about which kinds of finance new businesses can usually get, what lenders will want to see, and how your options widen as you build a trading record.

Why new businesses find it harder

Most business lenders base their decisions on evidence that a business can afford its repayments, and the best evidence is trading history. Many won't consider a business that has traded for less than a year or two, simply because their credit models need that data.

Without it, a lender is relying on forecasts, which are educated guesses, and on you personally. That's why startup funding tends to:

• lean on your personal credit record, because it's the only track record available;
• need a personal guarantee or personal liability, so you're on the hook if the business can't pay;
• be smaller, or secured on an asset, to limit what the lender could lose.

None of this means a new business can't borrow. It means the routes are narrower, and choosing the right one matters.

The Start Up Loans programme

The government-backed Start Up Loans programme is often the most realistic loan for a business at the very beginning. It's delivered by the British Business Bank, and it works differently from an ordinary business loan.

• It's a personal loan, used for business purposes. You borrow as an individual, not through the company, so you're personally responsible for repaying it even if the business doesn't work out. It isn't secured on your home or other assets.
• It's for starting or growing a young business. The business doesn't need to have started trading, but there's a limit on how long it can have been trading.
• Your personal credit is checked. The loan appears on your personal credit file like any other personal loan.
• The rate is fixed and the loan is repaid over a set term.
• You get support as well as money. Applicants get help with their business plan and cash flow forecast, and successful applicants are offered free mentoring.

The loan limits, interest rate, repayment terms and eligibility rules are set by the programme and can change, so check the current details on GOV.UK's Start Up Loan page before you apply. Expect to submit a business plan and cash flow forecast with your application. They are the heart of the assessment.

Where a business has more than one owner, each may be able to apply for their own loan. Again, check the current rules.

Asset finance for new businesses

If what you need is a van, a machine, kitchen equipment or tools, asset finance is often the easiest business finance to get early on. The lender's main security is the asset itself, so a lack of trading history matters less than it would for an unsecured loan.

Expect a new business to be asked for some or all of:

• a larger deposit than an established business would pay;
• a personal guarantee from the directors, if you trade as a limited company;
• a shorter term, or a more conservative valuation of the asset.

Assets with a strong second-hand value, such as vans, lorries and mainstream machinery, are easiest to fund. Specialist kit, IT and shop fit-outs are harder, because the lender would struggle to sell them if things went wrong. Our guide to hire purchase vs leasing explains how the main types work.

Personal guarantees and personal liability

Almost any finance for a new business will come back to you personally, one way or another.

• Sole traders and partners are personally liable for business debts already. There's no legal separation between you and the business.
• Directors of limited companies are usually asked to sign a personal guarantee, a promise to repay from your own money if the company can't. A guarantee can put your savings, and sometimes your home, at risk.

Lending of £25,000 or less to sole traders and small partnerships is regulated by the Financial Conduct Authority (FCA). That gives you more protection, but fewer business lenders offer it. Lending to limited companies is generally unregulated.

Before you sign anything, read our guide to personal guarantees and be sure you could live with the worst case.

What lenders want to see from a startup

Because there's no trading record, the quality of what you put in front of a lender carries much more weight.

• A business plan. What you sell, who buys it, why they'll buy from you, how you'll reach them and what it costs to deliver. Short and specific beats long and vague.
• Cash flow forecasts. Month by month for at least the first year, showing money in, money out and the loan repayments. Lenders look hard at whether the assumptions are realistic: how quickly sales build, how long customers take to pay, and what happens if things are slower than planned.
• A clean personal credit record. Check your file with the main credit reference agencies before you apply, and fix any errors. Missed payments, defaults and county court judgments (CCJs) will count against you.
• Relevant experience. Ten years as an electrician before going it alone is a very different risk from a first venture in an unfamiliar trade. Say so plainly.
• Your own stake. Putting in some of your own money shows you're committed and reduces how much you need to borrow.
• Any early evidence. Signed contracts, letters of intent, pre-orders or a few months of sales all make your forecasts more believable.

An illustration, not a quote. Say you're leaving employment to start a landscaping business as a sole trader. You need a van at around £22,000 and about £8,000 for tools and your first few months' costs, and you have £5,000 of savings.

A realistic plan might be: use your savings for the van deposit, finance the rest of the van on hire purchase, and apply for a Start Up Loan for the tools and working capital, with a business plan and forecasts showing how the repayments fit. Because you're a sole trader, you're personally responsible for both.

After a year of steady trading, with your bank statements to show for it, you'd have far more choice the next time you need finance.

How your options widen as you trade

Every month of trading adds to the evidence lenders can use. In broad terms:

• From the start: Start Up Loans, asset finance (usually with a deposit and a guarantee) and, if you invoice other businesses, some invoice finance providers, which look mainly at how reliable your customers are. See invoice finance vs a business loan.
• After a few months: if you take card payments, some merchant cash advance providers will consider you once they can see a run of card takings.
• After 6 to 12 months: some unsecured business lenders will consider you, often for smaller amounts and with a personal guarantee. Your bank statements are now your strongest evidence.
• After 2 years or more: with filed accounts, most mainstream products are open to you, including larger unsecured loans, overdrafts, revolving credit and secured borrowing.

These are typical patterns, not rules. Some lenders are more flexible, others stricter.

Other ways to fund a new business

Borrowing isn't the only route, and for some businesses it isn't the best one.

• Your own savings. The cheapest money there is, though only put in what you could afford to lose.
• Family and friends. Common and useful, but put any loan or investment in writing, with clear terms, to protect the relationship.
• Equity investment. Angel investors and equity crowdfunding swap money for a share of your business. It suits businesses with high growth potential more than steady local trades. Tax relief schemes, such as the Seed Enterprise Investment Scheme, can make investing in a young company more attractive to investors. The rules are on GOV.UK.
• Grants. Grants exist, but they're limited and competitive. Most target specific sectors, places, innovation or activities, many require you to match the funding with your own money, and few cover general start-up costs. Search GOV.UK's finance and support for your business finder, and be wary of anyone who charges to find you a "guaranteed" grant.

Common mistakes to avoid

• Using personal credit cards to fund the business. It's easy, but it's often expensive, and it can damage your personal credit just when you need it most.
• Optimistic forecasts. Lenders have seen thousands. A forecast that assumes everything goes right is less convincing than one that shows you've planned for things going slowly.
• Borrowing too little. Running out of cash in month four is a common way for new businesses to fail. Build a buffer into your plan.
• Applying to lots of lenders at once. Each hard credit search shows on your personal file, and several close together can make the next lender wary.
• Signing a guarantee without understanding it. Know exactly what you're promising before you sign.

Questions people ask

Can I get a business loan with no trading history?

It's difficult but possible. The main options are a government-backed Start Up Loan, which is a personal loan for business purposes, and asset finance secured on the equipment or vehicle you're buying. Most mainstream unsecured business loans need at least some trading history.

What is a Start Up Loan?

A Start Up Loan is a government-backed personal loan for starting or growing a young business, delivered by the British Business Bank. It has a fixed interest rate and comes with help on your business plan and free mentoring for successful applicants. You're personally responsible for repaying it, and current limits and eligibility are on GOV.UK.

Do I need a business plan to get a startup loan?

Almost always. With no trading history, your business plan and cash flow forecasts are the main evidence a lender has. The Start Up Loans programme asks for both and offers help preparing them.

Will a startup loan affect my personal credit?

Usually, yes. A Start Up Loan is a personal loan, so it appears on your personal credit file. Business finance for a new company usually involves a personal guarantee, and lenders will check your personal credit when you apply.

Are there government grants for starting a business?

Some, but they're limited and competitive. Most target particular sectors, regions or innovation, and many require match funding. GOV.UK has a finder for government-backed finance and support.