Using a personal loan to fund your business

Why personal loans are powering UK start-ups now

Using a personal loan to fund your business is not a shortcut. It is a structured way to unlock momentum when traditional business finance is slow or out of reach. In the UK, approval rates for standard SME bank loans remain mixed, with around 44% approved and 56% rejected, so early-stage founders often need another route. Personal loans - notably through the government-backed Start Up Loans scheme - can bridge that gap with fixed rates, clear terms and mentoring.

The Start Up Loans programme, run via the British Business Bank, has already delivered over £1.2 billion to more than 125,000 UK entrepreneurs since 2012. In summer 2025 alone, it provided over £35 million - up 10% year on year - at a fixed 6% interest rate, and the government plans an expansion to 69,000 further loans. The intent is simple: combine capital with guidance to increase survival, confidence and performance.

Evidence points to impact. A 2024 evaluation found recipients generated an estimated £44.7 million in aggregate net turnover among a sample of 804 businesses, averaging roughly £50-60k additional turnover per loan, alongside improvements in survival and employment. Earlier research also linked mentoring to better skills, higher confidence and more resilient trading. In short, money plus advice is outperforming money alone.

Market conditions also help. UK retail banks increased gross SME lending by 14% in Q1 2025 to nearly £4.6 billion. The Bank of England reported net lending growth in April 2025, with borrowing by SMEs rising while household lending softened. This suggests lenders are more open to viable business cases, including personal loans used for business purposes. Meanwhile, consumer finance new business rose 13% in March 2025, indicating wider credit availability.

For founders, the backdrop matters. The UK business population dipped slightly in 2024 to around 5.5 million, while larger businesses grew. Competition is real, and access to finance is a differentiator. Employers are more likely to seek larger sums, with nearly a quarter applying for more than £100,000 in 2024. Personal loans rarely cover all needs, but they can be the catalyst that funds stock, tooling, marketing or cash flow to reach the next milestone.

Understanding APR is not just about percentages - it is about the pounds and pence you will pay over time. Fixed-rate personal loans provide predictability, and when paired with structured mentoring, they can reduce costly missteps. As a UK-based retail finance broker, Kandoo helps borrowers compare options across trusted lenders so you can match loan size, term and affordability to your business plan.

A well-timed personal loan can turn a viable plan into an operating business, especially when guidance is built in.

Who should consider this route

If you are pre-trading or trading under two years, lack collateral, or have limited trading history, a personal loan can provide a pragmatic starting point. It suits sole traders, side hustlers ready to go full time, and limited companies led by founders willing to borrow personally. It is also appropriate if you need modest, quick capital for equipment, initial stock, marketing or early payroll, and you value fixed repayments you can plan around. Founders seeking rapid decisioning and mentoring support often find Start Up Loans compelling, especially if bank business loans are unlikely right now.

If you are aiming for large-scale funding, a personal loan can be part of a stack with grants, asset finance or invoice funding. The key is to keep the borrowing proportionate to your forecast cash flow, with a plan to refinance into business facilities as revenues scale and your credit profile strengthens.

Jargon decoded

• APR - The annual percentage rate showing the yearly cost of borrowing, including interest and certain fees. Helps compare products on a like-for-like basis.

• Fixed rate - Interest stays the same for the loan term, so monthly repayments are predictable.

• Unsecured loan - No asset is pledged as security. Approval relies on credit checks and affordability.

• Start Up Loans - Government-backed personal loans up to £25,000 per individual at a fixed 6% rate, plus mentoring.

• Affordability assessment - Lender evaluation of your income, outgoings and credit to judge if repayments are manageable.

• Credit profile - Your credit history and score. Stronger profiles typically access better rates and higher limits.

• Early repayment - Paying off some or all of the balance before term. Check for fees or interest adjustments.

• Debt stacking - Combining multiple finance types, commonly personal loan plus asset or invoice finance as the business grows.

Your funding avenues at a glance

1. Start Up Loans (British Business Bank)

   • Personal loans up to £25,000 per individual at a fixed 6% rate, with free mentoring and support. Designed for new businesses across the UK. Evidenced to improve survival and turnover.

2. Standard personal loans via lenders or brokers

   • Fixed-rate, unsecured borrowing based on personal credit. Useful for quick access to £1,000-£25,000 or more. Terms and rates vary by profile.

3. Business loans from banks and challengers

   • Suitable as you grow with trading history. Approval rates vary, with around 44% approvals noted for SMEs. May offer larger limits with security.

4. Asset finance and leasing

   • Finance equipment or vehicles secured on the asset. Aligns cost with usage, often easier to approve than unsecured loans for tangible assets.

5. Invoice finance

   • Release cash tied up in invoices. Flexible as revenues expand. Works well alongside a personal loan used for start-up costs.

6. Grants and local growth funds

   • Non-repayable support for innovation, regional growth or specific sectors. Competitive but valuable when combined with modest borrowing.

Pounds and pence - what it could mean

Can I qualify

Eligibility depends on lender criteria and affordability. For Start Up Loans, applicants must be 18+, based in the UK, with a viable business idea or trading under three years. You will be asked for a business plan, cash flow forecast and personal details for credit checks. The fixed 6% rate applies if approved, and you will be connected to mentoring as part of the programme.

For standard personal loans, lenders assess credit history, income stability and existing commitments. Unsecured decisions turn on your ability to repay, not on business collateral. If you have thin credit, consider improving your profile before applying, or apply for a smaller amount and build up. For larger sums or longer terms, business facilities may be more suitable once you have trading history.

From idea to funds in simple steps

1. Define the purpose and exact loan amount needed.

2. Build a concise plan and 12-month cash flow.

3. Check your credit files and fix obvious errors.

4. Compare Start Up Loans and personal loan offers.

5. Confirm affordability using realistic revenue assumptions.

6. Apply with accurate documents and bank statements.

7. Accept terms only after reading repayment schedule.

8. Allocate funds to growth-critical tasks first.

The trade-offs at a glance

Avoid surprises before you sign

Treat your projections like a safety-critical document. Stress test repayments against slower sales, seasonal dips and margin compression. If the plan only works in a perfect month, reduce the loan size or extend your term to create headroom. Read early repayment terms carefully to keep flexibility. Clarify whether the personal loan will be used to buy assets, fund marketing or stabilise cash flow, and track outcomes monthly. If a bank business loan is likely later, ensure your personal borrowing will not hinder future underwriting by inflating your debt-to-income ratio.

If not this, then what

1. Apply for a business overdraft once trading stabilises - flexible but variable cost.

2. Consider asset finance for equipment or vehicles - secured against the asset.

3. Explore invoice finance to release working capital from sales.

4. Look for grants and local growth funds to reduce borrowing need.

5. Use equity or friends and family with clear agreements to avoid disputes.

Your questions, answered

Q: Is using a personal loan for business allowed in the UK? A: Yes. Many lenders permit business use, and Start Up Loans are designed for it. Always check permitted purposes in the terms.

Q: How much can I borrow through Start Up Loans? A: Up to £25,000 per individual at a fixed 6% rate, with mentoring. Teams can apply individually, subject to assessment.

Q: Will this affect my personal credit score? A: Yes. It is personal borrowing. Timely repayments help build your profile. Missed payments will harm it.

Q: How quickly can I get funds? A: Standard personal loans can fund within days. Start Up Loans involve planning support, so timelines vary but are typically weeks, not months.

Q: What if I need more than £25,000? A: Combine funding. Use a personal loan for launch items, then layer asset finance, invoice finance or a business loan as trading evidence grows.

Q: Are approval rates improving? A: SME lending grew in early 2025, but only around 44% of SME bank loan applications are approved. Personal loans can be a practical alternative.

Q: Why do mentoring and support matter? A: Research shows recipients with mentoring report higher confidence, skills and better outcomes, contributing to improved survival and turnover.

Ready to move

If a personal loan fits your plan, document the spend, set clear milestones and monitor cash flow weekly. Compare offers from reputable lenders, including Start Up Loans if eligible, and keep your options open for refinancing as you grow. Kandoo can help you review rates, terms and affordability so you borrow with confidence.

Borrow with a plan, not a hunch.

Important information

This guide provides general information only and is not financial advice. Eligibility, rates and terms vary by lender and your circumstances. Consider independent advice before borrowing. Your credit rating may be affected if you miss repayments.