5 different kinds of start up loans : what’s right for you?


If you have recently gone into business for the first time, it is important to know that not all start-up loans are created equal. Borrowing a start up loan will pay off in the long run only if you choose the right type for your situation. Remember, there are fixed or variable interest loans, structured or unstructured loans, and long term or short-term loans. You just have to compare your conditions and business nature alongside the terms and conditions of the loans before settling for the ideal option.

Traditional Bank Loans

Traditional bank loans are some of the commonest loan options you can consider but they also remain some of the toughest to qualify for. Bank loans are structured and secured loans that attract high interest in the UK. You may be asked to apply with lots of paperwork which also makes it time-consuming.

The traditional bank loan is not an ideal option for a start-up loan unless you have a property you can borrow against and must be prepared to lose such property if you default on repayment. If your credit rating is bad, and you don’t have a solid business strategy that will guarantee consistent profit over the repayment term for this loan, it will be better for you to seek an alternative.

If you are looking at expanding an existing business, perhaps a bank startup loan will be your ideal choice.

Government Startup Loans

The commonest start-up loan in the UK today is the government startup loan for small businesses. At a rate of 6% per annum, this is one of the best options because of its fixed and low-interest rate. If you think you can repay a startup loan between 1 and 5 years, then this will be the ideal option for you.

Government startup loans are available for agencies, manufacturers and new business owners who can convince the government through a detailed business plan that their businesses are sustainable and profit-oriented. The startup loan can be used in getting your business off the ground and the government will assign a mentor to you. Loans typically vary from £500 to £25,000.

Government loans are the best options for you if you are looking for low-cost and flexible start-up finance.

Line of Credit

Line of credit is offered by most banks and it is different from the traditional loans because your business will have access to this money when required but you don’t have to pay interest or borrow a large sum of money right away.

The line of credit is most suitable for entrepreneurs who want to have some financial protection for their business operations. It is a short-term loan that can help your business stay afloat and also fund your working capital, especially when you are waiting for improved cash flow.

Line of credit is not useful for long term business needs such as expansion or procurement of new equipment. Similarly, there is a revolving line of credit, which is a version of this type of loan offered to business owners on a revolving basis.

Since this type of loan is offered to fill short-term gaps in your business funding, it should only be taken if you have a temporary financial problem and you are sure of repaying the loan once your financial capital flow is restored within a short period.

The Friends and Family Loans

Loans from friends and family are usually the last resort for many entrepreneurs but smart ones usually begin their search for startup loans by approaching their friends and family.

While friends and family members can give you some loans to start a business, they don’t want to risk borrowing you too much hence you should only consider this type of loan when you are starting a business small or when you run into a temporary hitch that requires little capital funding.

Family and friends’ loans can be cheaper and more flexible but you stand the risks of running an age-long relationship when you fail to repay such loans. For this reason, you should only take loans from family members or friends who can handle the loss of such capital.

The Special Category Loans

Special category loans are not available for everyone but often made available to vulnerable members of the society, these are the older women, disabled entrepreneurs and those with bad credits. These loans come with special features that come in the form of grants for small business startups. The interest rates may vary and sometimes, some of these grants don’t come with interest rates but the amount you can borrow is usually low, as compared to any other type of start-up loan.

You should only consider this type of loan if you have bad credit, or fall into any other qualifying categories otherwise your application may be rejected.


There are several considerations you need to make before applying for a start-up loan. The most important consideration is that your business must be viable and sustainable on a long-term, with a reasonable profit. You need to keep in mind that loans may restrict your cash flow because you have to keep up with repayments, otherwise you may have to face the penalty. You have to consider the possibility of losing part or the entire ownership of your business if you take loans such as equity or investor-oriented loans, and you need to also consider the fact that you can lose your property if you take a secured loan from the bank for instance.

One long-term benefit of loan repayment is that it builds your credit, which is an opportunity to take a larger loan in the near future. If possible, you should consider saving personally for a while before you take a startup loan, this will help you maintain a healthy running capital for the operation of your business and before your loan is eventually processed. Some types of loans like secured and structured bank loans can take a long time to finalize, hence you must be prepared for all paper-works before applying.

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