Launching a startup in the UK almost always involves the founder seeking loans for startups at some stage. Just under half of UK start-ups make it through the critical three-year initial survival period, so acquiring the appropriate funding from day one is vital. Most founders will use initial funds from personal finance, with around 85% of new business founders using their own funds as a launchpad.
However, financing from external sources is typically required in order to scale effectively. Thankfully, UK start-ups today have a tremendous choice in the financing options available, ranging from loans (the topic discussed in this guide) through to equity investing or grant aid. Throughout this guide, we will examine each of the main funding routes used by startups in the UK.
Traditional overdrafts and bank loans
Established banks (high-street and challenger banks) will provide business loans and overdraft facilities, often with stringent requirements. For newly-established enterprises, traditional lenders usually require a workable business plan, as well as some history of trading or collateral. To be blunt, very few newly established startups in the UK manage to acquire a bank loan at launch. UK-wide, only 13% of new start-ups acquired a loan from traditional methods as their initial financing. Instead, many new startups begin with an overdraft or with business credit cards.
Data shows that 17% of small UK firms use credit cards (and some 13% use bank overdrafts) as short-term finance. Overdrafts and credit cards are quicker to arrange at short notice but typically demand higher interest rates, requiring disciplined use. Despite the costs, traditional bank loans are an important option for when the business is more established: they offer the possibility of accessing larger amounts (up to £50k+), a longer duration (a year or so), as well as helping to build a credit record.
Government-backed startup loans
In order to stimulate entrepreneurship, the UK Government (through the British Business Bank) launched the Start Up Loans programme in 2012. This is a publicly-backed loan programme offering up to £25,000 per borrower at a fixed low interest rate (at present 6%) with no fees, along with free mentoring advice.
Such schemes represent a combination of bank and public finance – the Government guarantees the loans and contributes the capital, whilst the lending is offered through accredited partners. Since the programme was launched in 2012, it’s had a strong effect: more than £1.2 billion of financing has been approved to over 118,000 new British businesses. The typical loan is under £10,000, indicating the early-stage focus.
Since launch, Start Up Loan-backed companies have survived the five-year milestone at the rate of 69%, compared with 43% among similar businesses that weren’t with the scheme.
The programme is also supportive of diversity: 41% of loan recipients have been female, for example. Other UK schemes like the Growth Guarantee Scheme (for loans over £250k, with Government guarantee) or local-region “Lloyds Bank Start-Up Loans”, function similarly. These Government-backed loans are particularly worthwhile if you have no collateral or lack a long history of trading, as the support combined with reduced interest can make repayments more manageable in the difficult early period.
Peer-to-peer and alternative lenders
Fintech-driven lenders have grown rapidly in recent years. Online business lenders and peer-to-peer (P2P) platforms match entrepreneurs with private investors or use automated underwriting to fund loans that banks might decline. Globally, peer-to-peer lending has expanded fast – for example, Asia-Pacific accounts for over 50% of the world’s P2P market, with Europe (with the UK as a leader) being the second-largest region.
In the UK, P2P business lending reached roughly £4.1 billion in 2023, a 12% increase on the previous year. These platforms offer loans or lines of credit with minimal paperwork and quick decisions. The downside can be higher interest rates than traditional bank loans (since risk is higher), and borrowers should watch for arrangement or servicing fees. Nonetheless, P2P loans often accept younger businesses and can lend to companies without large assets. Many start-ups use this route for medium-sized loans (e.g. £10k–£100k) or short-term cash needs.
Asset finance and invoice finance
Other types of borrowing involve using business assets as security. Asset finance involves borrowing against vehicles or other gear. Equipment leasing or hire-purchase allows you to spread the purchasing cost (machines, PCs, vans, etc.) over a certain period. Unlike an ordinary loan, the purchased item secures the transaction, perhaps allowing the finance company to be more lenient with new business. Invoice finance (factoring or discounting) is another helpful tool in terms of cash flow: you can borrow up to a high percentage (usually 80-90) of the value of an unpaid invoice, and get the cash instantly instead of waiting 30-90 days. This isn’t to be considered a long-term “growth” loan but rather a “working-capital” loan related to your sales. Both asset finance and invoice finance usually come with their own fees and interest rates, but are useful for filling gaps, without the need for personal guarantees or equity dilution. New businesses in manufacturing, trades, or other equipment-based industries may find asset finance particularly useful, in order to avoid large initial costs.
Equity funding and crowdfunding
Other than taking on debt, some start-ups finance themselves through the sale of equity or future products. Crowdfunding (like the equity-based Crowdcube, Seedrs, or reward-based Kickstarter) means large amounts of investors or customers contribute relatively small sums. Whilst not considered loans, these are a popular means of financing growth. However, in 2024 equity crowdfunding deals plunged to just 297 (from 569 in 2021), and the total invested fell to £324 million (from £773 million in 2021), in line with broader market caution. For rapidly growing start-ups, venture capital and angel investment are significant sources of funds in exchange for equity.
The UK is amongst the world’s leading VC markets, with British startups raising some £9 billion from VC funds in 2024, supporting over 9,000 companies. If you’re in the tech industry and desire rapid scale, seeking out the angel investors or institutional VCs is potentially worthwhile. Take note, though, that VC remains relatively competitive and often requires meeting key requirements (strong growth prospects, scale, as well as demonstrating prior achievements or a prototype). The Seed Enterprise Investment Scheme (SEIS) and Enterprise Investment Scheme (EIS) tax breaks may sweeten a deal with such investors. Overall, choosing the equity route involves the trade-off between receiving a large sum, and giving up control and ownership.
Government aid and grants
The UK government and related authorities offer various grants, competitions and tax relief schemes for startups, especially in the field of innovation. Innovate UK, as an example, holds contests with grants available to businesses developing new technology or conducting R&D. Devolved governments (Scotland, Wales, Northern Ireland) and local enterprise partnerships also offer business grants or seed finance. Tax reliefs like R&D tax credit, or regional business rate reliefs, can be effective boosts in funds.
Without the structure of loans, no repayments are required – but the grants typically have stringent eligibility requirements and lengthy application processes. Often, these grants are for highly specific niches, enhancing competition – only a few startups will qualify. Founders should research sector-related grants (creative sectors, green tech, etc.) and take advantage of the government portals (UK Research & Innovation, grants.gov.uk) to make the most of these lucrative opportunities.
Bootstrapping and personal funding
A much simpler solution is just bootstrapping – financing the business from the founder’s own resources. As mentioned earlier, 85% of new UK companies initially used the founder’s personal capital, whilst another 20% were derived from family and friends. Starting without financing (by using the owner’s savings, credit cards, or tapping into prior income) allows the owner to maintain complete control and steer clear of debt. For instance, founders typically forego salary, work part-time outside the company, or repurpose initial revenues slowly in order to grow. This strategy sidesteps interest expenses and banks’ approval processes, but in return, growth is limited.
Over-reliance on personal funding risks burning through the cash prior to the business becoming sustainable. In practice, most startups use a hybrid approach: the founders invest some cash, perhaps topping up the amount using some small loan or grant, then pursue bigger loans or investors after they gain proof of concept. Family and friends’ loans (dubbed the “F&F” round) can bridge the gap, but clear agreements are recommended in order to prevent personal misunderstandings.
Getting a loan for your startup
In the UK, there are more routes for start-up founders to achieve financing than ever before. Classic high-street bank loans and credit lines are still an option for those who are eligible, whilst public initiatives like the government’s Start Up Loans scheme bridge the gap for those at the early stage. Online lenders and P2P sites offer financing to more early-stage businesses, whilst asset/invoice finance offers specialist solutions for bridging cash gaps.
Equity crowdfunding and venture capital can be employed when big growth capital is required, with grants or tax breaks available as top-ups. Both kinds of options have advantages and disadvantages: loans will obviously have to be repaid with interest, but allow you to keep ownership; equity weakens control. Grants are another option, with no payback, but are notoriously difficult to acquire.
Therefore, founders should be considering a hybrid strategy. Rise Funding’s experts have access to a wide variety of funding options, in order to match UK startups with the most suitable loan or finance products, giving founders peace of mind.
