Business Loans

Government loans: A guarantee of help when facing a lack of security

What to look out for

  • Red Government loans require information and checks before approval – all of which take time
  • Amber Government loans are designed for new businesses, either in the planning stage or first year of trading
  • Green Start-up loans can be used to finance building or redevelopment projects

Is a lack of security stopping you securing finance for your start-up? Learn more about how government loans and guarantee schemes can help you secure funding for your new business.

Why would you use a government loan?

There are many reasons to consider a government loan. You may need funding to start a business and this could include securing finance for a property development project.

You may want to grow your existing business, expanding operations or diversifying into new products or services.

The other main reason for exploring government-approved loans is if you’ve been unable to access finance from other sources due to a lack of security.

How do government loans work?

The Start Up Loans initiative provides government-backed personal loans for UK entrepreneurs to start a business. These government-funded loans are designed for new businesses, either in the planning stage or in the first 12 months of trading.

Government-funded start-up loans range from £500 to £25,000, with an average of £7,200. The government-backed loans are unsecured personal loans with a fixed interest rate and a typical repayment term of between one and five years.

Start-up loans can also be used to finance building or redevelopment projects. In England, small builders and community land trusts can access finance via the Home Building Fund. Loans of between £250,000 to £250 million are available with smaller sums for innovative housing projects. Similar schemes are available in other parts of the UK. Government redevelopment loans may be available for projects in designated redevelopment areas with loan terms of typically five years.

These shouldn’t be confused with government-guaranteed loans, in which the government provides guarantees to UK lenders. If you’re looking to grow your business, an Enterprise Finance Guarantee (EFG) government loan could be a good option.

The EFG scheme encourages lending to viable UK businesses that lack sufficient security but otherwise qualify for a loan. The scheme covers new term loans for working capital or investment purposes, asset finance, debt consolidation and refinancing.

This government loan guarantee scheme provides accredited lenders with a government-backed guarantee for 75 per cent of the loan value. Loans of £1,000 to £1.2 million are available, with a minimum term of three months and a maximum of ten years for loans under £600,000, and five years for larger loans.

What are the costs of a government loan?

For start-up loans there are no application or early repayment fees. They also have a fixed annual interest rate of six per cent, making it easier to plan repayments. Home Building Fund loans must be repaid with interest set at a pre-agreed variable rate.

For EFG loans, there will be the loan sum, interest payments and any fees to the lender. There is also a guarantee fee equivalent to two per cent per annum on the outstanding balance, collected quarterly throughout the loan term.
The cost of loans secured via the British Business Bank or the various regional schemes will vary. Check programme details to determine the full cost.

How long does it take to secure a government loan?

For a start-up loan, a personal credit check is carried out, along with a series of other checks to validate personal information and bank account details. The overall loan assessment will take into account the strength and viability of the business, demonstrated through a business plan and cash flow forecast.

If you are well prepared, with a draft business plan or cash flow forecast available, the application can take as little as two to three weeks. Those requiring more support to complete the application may wait several months.

For EFG loans, applicants will need to provide the information normally required by business lenders, including a business plan, the purpose of the loan, historic trading figures, management accounts and financial projections. As a result, it can be several months for the application process to be completed.

Applications for other government-backed loans can vary in how long they take but will all require sufficient information and checks before they are approved – all of which take time.

What type of security do I need for a government loan?

Often, not much security is needed, as many government-backed loans are offered to help businesses that don’t have access to the security more traditional loan providers require. Start-up loans are unsecured, while the EFG schemes sees the government provide the security to the lender.

Other loans will vary, but the British Business Bank is a good place to find out more. The bank aims to increase the supply of finance available to smaller businesses where markets don’t work well.

There are services for businesses in the “start-up”, “scale-up” and “stay ahead” stages, to help with the sourcing of the right kind of finance.

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