Great ideas come for free, but turning those ideas into reality costs money. You could have the most innovative and life-changing new business idea, but if you don’t have the money to get it off the ground, the world will never know about it. Most entrepreneurs don’t have tens of thousands of pounds laying around that they can use to invest in initial inventory, operational costs, and founding team members, which means they need to look elsewhere for funding. In this guide, we’ll discuss business start up loans, types of financing for start up businesses and more.
Start up loans are a common method of financing various aspects of a company where there is little to no capital available, but start up businesses do not qualify for the majority of loans out there. Instead, specific start up loans are required, but knowing what options are available and which one to go for can be tricky. After all, if you make the wrong financing decisions at the beginning of your journey, your business could and likely will fail.
At Aurora Capital, we are experts in business finance and loans and work to match businesses of all sizes, including start ups, to the most suitable lenders. To help you navigate the rough waters of start up financing, we’ve put together this complete guide to business start up loans, with the aim of putting you at ease and helping you to make the right choices that get your business off the ground.
Determining the financial needs of your start up
Before you can look at specific start up loans from lenders, you need to first establish your exact financial needs. Every lender will expect you to have a bulletproof business plan drawn up before you approach them to apply for a start up business loan. They want to see that you’ve done your research and you know exactly how much you will need and when it’ll be needed, as opposed to vague estimates based on nothing more than a hunch.
With this in mind, some of the key factors you’ll need to consider include:
Budget
Estimate how much money you will need to borrow based on sales forecasts and outgoings, detailing monthly financial estimates. Make sure to include all expenses in your budget, and don’t overshoot it – most businesses don’t break even for a few years, so don’t assume you’ll hit the ground running.
Time
Your business may have expected high and low periods that will affect the time at which you need finance. An example would be a chocolate business – Valentine’s Day, Easter, and Christmas are likely going to be high periods of inflated sales, but help may be needed to get through the quieter months in summer.
Contingency
Every business needs a contingency plan in case things go wrong. Ideally, you’ll have enough contingency to cover unexpected events such as losing a client, replacing equipment, or unforeseen periods of commercial downtime. This should be factored into your budget.
Start up loan application:
It’s important that you apply for finance in good time instead of on a whim. It’s also a good idea to be upfront about your borrowing needs and ask to stagger the financing if needed. Applying for multiple loans in succession may be cause for concern for your bank or lender, whereas asking for more money upfront to be staggered is a better plan.
You’ll need to do some hard digging to determine an accurate financial/cash flow forecast, but once you have an idea of how much you’ll need and over what terms, you can begin to look at your options and find an appropriate start up loans company.
Types of start up business loan
To help you understand more about applying for a start up business loan, we’ll cover the different types of financing available as well as what each option can be used for.
For more information on this topic, you can read our guide to types of small business funding.
Unsecured business loan
Unsecured business loans offer you a bit more flexibility when it comes to what you can use them for. The general eligibility criteria for unsecured business loans is largely the same as the government backed loan, but with a few minor differences:
- Business must have been trading longer than six months
- Monthly turnover must exceed £5,000
- Good credit score
- Borrow up to £500,000 over one to five years
You can use unsecured loans for more than you can the government loan; for example, you can use it to refinance existing debt, buy stock, pay staff, and bridge cash flow issues. It should be kept in mind, however, that unsecured loans tend to come with much higher interest rates. This is because the debt isn’t secured, so the higher interest rates act as collateral for the lender should you default on payments.
It is typically faster for a small business to get approved for an unsecured business loan than it is to apply for the government loan because you won’t necessarily need to present a comprehensive business growth plan and in-depth financial forecasts.
Secured business loans
Another option is a secured business loan. This will only be an option if you, a director of the company, owns property or has assets equal in value to the loan amount you’d like to borrow. If you do, you can secure those assets, or personal/commercial property, as collateral for the loan. This brings the interest rate down compared to unsecured loans, making it a more affordable option in the long run. Of course, though, the risk is that if you default on payments, the lender may call on your collateral to pay off what you owe.
Due to the financial fragility of start up businesses, this can be off-putting for some business owners; however, it can work if you have a solid business plan in place and continue to make your payments.
British Business Bank Loan
One of the first choices for a start up loan is often to go to the British Business Bank. They provide government start up loans. The terms of British Business Bank loans are:
- Borrow up to £25,000 over one to five years
- 6% fixed interest rate (annual)
- Free mentoring for 12 months
If you go down this route, you’ll also be entitled to discounts on business related products from suppliers such as Experian and O2. On top of this, there are no early resettlement fees or arrangement fees, and you’ll get access to support with business planning.
The eligibility criteria for a government-backed loan is as follows:
- The person applying for the start up loan is over 18 years old and is a UK resident
- You must have a new business that has been trading for 36 months or less
- No other types of finance are available
- The business is UK based
- You are able to pass a personal credit check
This type of start up loan is unsecured which means you don’t need to secure it against your personal assets, property, or guarantors. Under the rules, partners of the business can each make individual applications up to £25,000, with no more than £100,000 being lent to any one business.
Not all business ideas can be supported by this type of business start up loan. For example, companies operating in:
- Property investment
- Gambling
- Weapon manufacturing
- Chemical manufacturing
- Charities
The above sectors cannot apply for the government-back loan and instead need to either use their own money, peer to peer lending, or apply for other types of start up business loans from different lenders. When applying, eligible businesses must use the loan for specific business purposes; the following cannot be funded by the loan:
- Repaying existing debts
- Training staff
- Enrolling in educational programmes
- Investment opportunities
If you’ve recently purchased a business, you can still apply for a government-backed start up loan, as long as you haven’t owned it for three or more years. Franchises can also apply for the loan.
Accessing business start up loans
Once you’ve identified the right type of business loan for you, you need to know where to access it. Traditionally, banks were the sole lenders of business loans, but nowadays, there are a lot more options available. This gives you the benefit of being able to shop around to find the best deal in terms of interest rates and repayment terms. We’ve also created a handy guide on how to apply for a small business loan.
Business start up loans with Aurora Capital
At Aurora Capital, we specialise in matching businesses with their ideal lenders. We can help you find the right type of loan for you, be it a short term borrowing plan or a long term start up loan, and help you find the lender that best matches your needs. The application process is easy and decisions are typically made within just a couple of days, so if you need money for your start up quickly, this is a good option to help you get off the ground.
To find out more about how we can help you, please contact us.
