Business Knowledge Hub

How Can I Get a Startup Business loan?

Starting a business from scratch is a noble endeavour, and there’s no set formula to success. It’s about ingenuity, hard graft, determination, tenacity—and some funding helps, too.

There are numerous financial options open to you to get your business off the ground, each with its own unique benefits and potential pitfalls.

You need a good understanding of your startup’s financial health and your projections for the next few years. Only then will you be able to identify which course of action will best suit your business in your search for funding.

Decide how much funding you need

Your business is unique. By calculating the startup costs for your small business, you will be in a better position to source funding, attract investors, and estimate when you’ll make a profit. Read our guide on ‘steps to create a cash flow forecast’ for more information.

Common startup costs include:

Once you have a list of the costs for your startup, you will then need to associate an accurate cost for each of these individual expenses. This should give you a full picture of how much funding you’ll need.

It's advisable to present your startup costs in a formal document. This allows easy access when presenting it to potential investors or when you’re ready to apply for funding. So what startup funding options are available? Read on to find out more about your options.

What is a startup business loan?

Most traditional business loan lenders are unable to lend to startups as they have no trading history or assets on which they can assess their credit worthiness.

The ‘Startup Loans Scheme’ was created and funded by the Government through the British Business Bank and its subsidiary Start-Up Loans Company to try and bridge that gap.

As well as mentoring and other support the scheme provides personal loans to business founders.

Traditionally many business founders may take out a personal loan to fund the launch of their business or look to relatives and friends to provide financial support.

The Government scheme is intended to provide a targeted option and increase the chances of those businesses succeeding.

How can I get a startup business loan?

Taking out a startup loan could be an attractive option for startups who wish to retain complete control of their business but who don’t have the funds to effectively launch.

As with any business loan application in order to prepare your business loan application, you will need an expense sheet, business plan and financial projections for the next five years if you want to increase your chance of securing a startup business loan.

Accruing this information will help you understand how large a loan you need to ask for, as well as demonstrate to the prospective provider that you are serious and fully understand your financial circumstances and obligations.

Once you have your materials prepared, you’re ready to contact credit unions and banks to request a small business loan. You’d be well advised to compare offers and ensure you’re acquiring a loan on the best possible terms.

If you are considering taking out a small business loan, read our guide on the pros and cons of small business loans for more information.

What other startup funding options are there?

Establish a credit line

A lot of banks and credit institutions offer startups a credit line, a form of borrowing that can help with growth in the early stages of a business.

A line of credit is a type of loan that doesn't just give one lump sum of funds as a traditional loan does. Just like with a credit card, you can use credit when you need to pay for something that is financially out of reach. Just make sure you keep purchases to a minimum during this time, or you’ll risk becoming bogged down in debt.

Venture capital

You could look to find an investor to provide you with venture capital for your startup. This is generally invested in exchange for an active role in the business or a share of ownership.

Most venture capitalists, also known as angel investors, will want a seat on your board of directors at the very least. You therefore need to weigh up whether you’re prepared to relinquish some of your ownership and control in exchange for funding.

Venture capital diverges from traditional financing in a number of ways. It is not a loan, so it is invested in return for equity, not debt. It has a longer investment horizon and is generally targeted at companies that demonstrate high growth potential. Venture capital is also generally associated with higher-risk investments—for potentially even higher returns.

If you bring on an investor, they will review your business plan to ensure it aligns with their own investment criteria. They will consider the market you’re looking to launch in and, if they wish to continue, both parties will need to agree on the terms and conditions of the fund.

Once the term sheet has been finalised, venture funds generally come in successively larger amounts, called rounds, as the business meets milestones.

Crowdfunding

Crowdfunding involves many people each contributing a small amount to your startup. They are not investors in the technical sense as they neither expect any return on their money nor receive a share of ownership.

What crowd-funders generally do expect is a gift by way of thanks. This may take the form of one of your products, being credited in some way or meeting the business owner.

Crowdfunding is low-risk because you retain full control of your company and, if your plans fall through, you’re under no obligation to repay your crowd-funders. That being said, crowdfunding platforms do differ in their terms and conditions, so be sure to read the small print and understand your legal and financial obligations before signing up.

Startup business grants

Startup business grants are non-repayable sums of money that are normally given for a specific purpose or project, such as training, employment, expansion, research, property improvements or the revitalisation of a local area.

Grants are amongst the most sought-after forms of business funding because they do not need to be paid back. Every grant comes with different eligibility criteria, and many entail a lengthy application process to account for the intense competition.

To help small businesses understand the grants they may be eligible for, we created a guide on the top small business grants in the UK.

Self-funding

Self-funding, otherwise known as bootstrapping, involves utilising your personal finances to support the launch of your startup. Perhaps family and friends can help you with capital. Alternatively, you may need to look at dipping into one of your savings accounts or ISAs. Read our guide on how to start a business with no money for more information.

Self-funding allows you to retain control over your startup. The flipside is that all responsibility for the financial prosperity of the business is placed on your shoulders.

You need to be savvy with your money and not spend more than the business can afford. You’ll need to exercise even greater caution if you choose to tap into your pension for capital, as you could face a hefty penalty or fee and jeopardise your ability to retire when you want to.

Liaise with a personal financial advisor and check in regularly with whoever is administering your startup’s financial strategy.

Start funding your business today

There is no one-size-fits-all solution to your startup’s financial needs, so you need to work out exactly how much money you’ll need to launch the business and how much you’ll need to maintain it. Only then can you begin to consider how to fund it—and the choices you make may have implications for how you run and structure your company.

Our concise and impartial comparison resources can help you find the startup loan that’s right for you. Check out our Ultimate Business Loan Guide and together we can help your startup find the funding it needs to get off the ground.

Written by Nic Redfern

    Published on 05-06-2020

    Updated on 25-06-2020

Finance Director at KnowYourMoney.co.uk and business adviser to SME's Nic is spokesperson for small and growing businesses with a strong understanding of the financial needs of business

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