Bank lending for startup businesses in the UK

Learn about the lending options available to your business including overdrafts and loans.

The traditional way to borrow money for your business has always been to ask your bank for a loan or overdraft. Over the years, however, banks have become increasingly reluctant to lend to startups and small businesses. Currently, only around 20% of startups are funded by bank lending, with a much smaller percentage of these being first timers.

Related: Open a business bank account

As a result, bank lending for startup businesses in the UK can be a pretty difficult field to navigate. Here’s what you need to know to make it easier on yourself and your new company:

How it works

Bank lending can take the form of a loan or an overdraft or a combination of both. You can apply to a bank for a loan or overdraft by filling in an application form, either in person at a local branch or online.

The bank will then ask for supporting documents such as a business plan, cashflow analysis and profit and loss forecast, and is likely to want to meet you in person before deciding whether or not to grant you the loan.

Who can borrow?

In theory, anyone with a viable business and a clear plan on how to repay the money can borrow from banks.

In practice, however, banks prefer lending to existing businesses with a strong track record and established property or assets to act as security for a loan.

How much can you borrow?

As much as the bank is prepared to lend you. This will be determined by your ability to pay it back and how much security you’re able to put up against the loan.

Advantages of bank lending

Bank loans are a relatively inexpensive way of borrowing money.

The Royal Bank of Scotland, for example, claims that it charges less than 4% (excluding fees) for its loans to small businesses – and you don’t have to give up business equity to get the funding.

Overdrafts are a particularly flexible way of borrowing money to cover a variety of short-term needs, as you only pay interest on the money if you’re actually using it.

Disadvantages of bank lending

Nowadays, local bank managers only have the power to approve small loans. All substantial loans need to be referred to the bank’s central credit control department, which can take weeks or even months to make a decision.

The bank may also require you to put up personal property as security for a loan. This means that if you find yourself unable to make the monthly loan repayments, you risk losing your home. The bank has the power to terminate or “call in” a loan if it feels that the borrower is at risk of defaulting on it. This could also send your business under.

Things to consider

British high-street banks also offer an Enterprise Finance Guarantee scheme – replacing the old Small Business Loans Guarantee Scheme – for those with insufficient security of their own.

Under this scheme, the government guarantees 75% of the loan, which can be for any amount between £1,000 and £1.2 million.

The practicalities

Make sure you are aware of all the fees and charges that will be levied on a loan or overdraft in addition to the interest charge. These charges can sometimes be very substantial – they might include an arrangement fee, transaction fee, renewal fee, management fee, etc.

Case Study

Jane and Rob Salvidge managed to borrow £125,000 from the Royal Bank of Scotland through the Enterprise Finance Guarantee (EFG) scheme. They are the owners of the Bristol Ferry Boat company, which runs a commercial service and tourist trips in Bristol harbour, a business that has suffered from poor weather over the past two summers.

Without any assets in the business, they were unable to take out a conventional bank loan. They plan to use the money to restructure the business and develop a café that also serves as a shop front for the business.

Jane Salvidge said: “Our problem was that we don’t have any assets we could use to get a normal loan. Getting the money through the EFG has meant that we can invest in this café and sell more trips and tickets.”

Top tip

Don’t just focus on the well-known high-street banks. New entrants to the small business banking sector such as Handelsbanken, Aldermore and Metrobank may be keen to compete for your business with the offer of loans at more attractive rates than the big names – and possibly a more personal service too.

Most UK banks offer a variety of account options for both startups and small businesses. For specifics, check out our complete list of the leading business bank accounts in the UK. For more information on business banking in the UK, check out our complete guide on how to open a business bank account