How do start-up loans work?
If you’re starting a new business and need some funds to get up and running, a start-up loan could be the solution you’re looking for. Our handy guide will help you find out everything you need to know.
Key takeaways
You can apply for a start-up loan if your business has been running for less than two years
There are several different ways in which you can get a start-up loan (e.g., the government ‘Start Up Loan’, SME loans or bank and lenders)
New businesses are perceived as riskier borrowers resulting in higher interest rates
You can typically borrow from £500 up to £500,000
What are start-up loans?
A start-up loan is a type of finance aimed at businesses in their early stages. Whether you're launching or have been trading for under two years, these loans provide capital to help cover set-up costs, equipment, marketing, or hiring.
While most start-up loans are unsecured, some lenders may require a personal guarantee, which is a promise that you’ll repay the loan personally if your business can’t.
What is considered a start-up?
You’re considered a start-up if your business has been trading for less than two years. You don’t need to apply from day one, but once you're approaching two years of trading, you may need to look at other loan options instead.
How can I get a start-up loan?
There are several different ways in which you can get a start-up loan for your company:
Government Start Up Loan
The government-backed Start Up Loan offers UK residents aged 18+ with businesses trading for fewer than 36 months an unsecured personal loan of £500 to £25,000 (up to £100,000 per business if multiple founders apply).
It comes with a fixed 6% interest rate, no application or early repayment fees, and flexible repayment over 1 to 5 years. Successful applicants also receive 12 months of free one‑to‑one mentoring and business support, and guidance to develop your business plan, cash flow forecast, and personal budgeting documents.
As of February 2025, the scheme has provided over 118,000 loans amounting to over £1.1 billion in funding.
SME loans
These are offered by private lenders to newer businesses. You can usually borrow between £1,000 and £500,000, often with quicker decisions than banks, while repayment terms are typically shorter at around 1 to 3 years.
Bank or lender start-up loans
Some banks offer start-up-specific products, though they may require collateral or a guarantor. You could borrow up to £100,000, depending on your credit history and business plan.
What are the pros and cons of start-up loans?
Here’s our summary of the advantages and disadvantages of taking out a start-up loan for your business:
Pros | Cons |
|---|---|
You’ll have access to funding early on | Can come with stricter eligibility criteria |
You won’t usually need collateral | You might face higher interest rates |
Government schemes are available, and include mentoring | Loan amounts are usually smaller than standard business loans |
How is a start-up loan different to a typical business loan?
Start-up loans work similarly to other loans: you apply, borrow a fixed amount, and repay over time. But there are key differences:
Smaller loan amounts due to limited business history
Higher interest rates as start-ups are riskier
Personal finances may be assessed, so your own credit history matters
Some lenders may hesitate without strong forecasts or collateral
How much can I borrow with a start-up loan?
You can typically borrow between £500 and £500,000, but it depends on several factors. Bigger loans usually require a minimum level of turnover and lenders are likely to ask for a greater level of security.
How long can I borrow for?
Repayment terms vary from 3 months to 10 years, depending on the lender and product. Some start-up loans are short-term (under 1 year), while others offer longer repayment windows.
Once you've built a trading history, you may be eligible to refinance at better rates through a standard business loan.
What fees should I look out for?
There are two key charges to check before applying:
Arrangement fee: Also called an application or initial fee, this is usually up to 5% of the loan - it’s often added to repayments.
Early repayment charge: Some lenders charge a penalty if you repay the loan early, but the government Start Up Loan doesn’t.
How does the government-backed start-up loan work?
With the government’s Start Up Loan scheme you can borrow between £500 and £25,000. There are no early repayment fees, no application fee, and a fixed interest rate of 6%.
To be eligible for this loan, you must live in the UK, be over 18, and your company will have been trading for less than 36 months.
This loan is an unsecured personal loan, so the company will undergo a credit check during the application process. If you’re approved for the loan, you will be obliged to repay it over a period of one to five years.
What other funding options are available to start-ups?
A start-up loan isn’t the only way to get your business off the ground. Here are some alternatives:
Business grants
The positives of funding your company with a business grant is you don’t have to pay the money back. Check with your local council to find out if they provide small business grant.
Crowdfunding
You can get a wide range of people to finance your business through crowdfunding. The drawback of funding your business this way is that it can be a slower process and you’ll need to galvanise a lot of people to part with their money.
Business loans
If your business has been operating for three years, then you could consider a standard business loan. You’re likely to get more money to borrow this way.
Author
Mehdi Punjwani
Insurance specialist
Mehdi is a financial writer and editor with over six years of experience in personal finance. He has written for organisations and publications including Equifax, The AA, and USAToday, covering a...
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Collette Shackleton
Content Writer
Collette Shackleton is a highly skilled Content Writer who has over nine years’ experience creating helpful and engaging personal finance content for consumers. Collette shares her experience as a...
