Government-Backed Business Loans for UK SMEs

If you’re a new or small business seeking financial support, government backed business loans can seem like an attractive option. The government has schemes and lending options designed to help businesses grow or recover from tough periods, which can make a real difference for your business. However, they also come with specific considerations.

In this article, we look at what government-backed business loans are available to UK SMEs, who can qualify and how these solutions differ from traditional business loans.

What are government-backed business loans, and how do they work?

The government understands the importance of small businesses to the British economy. Therefore, it has financial schemes to help start-ups get off the ground and support companies struggling against adversity or unforeseen events.

Government-backed loans for businesses are available to a range of organisations, not just those who’ve suffered a big loss of revenue due to significant economic change or global events like the pandemic. Tech start-ups, SMEs seeking capital for growth, companies with sustainable initiatives and social enterprises are all well supported.

Some government-backed business loans can be arranged directly with the government and managed through HMRC accounts, others are managed by the British Business Bank, which has partnerships with high street banks, each offering favourable terms and rates.

Ongoing and recently revoked government-backed loans and schemes in the UK

While the Recovery Loan Scheme, which was created to help businesses impacted by COVID-19, officially ended in 2024, it has since been succeeded by the Growth Guarantee Scheme. 

Other recent schemes that have come and gone are the Bounce Back Loan Scheme (BBLS) and Coronavirus Business Interruption Loan Scheme (CBILS). 

The BBLS was a government-backed loan scheme designed to help businesses get faster access to finance during the pandemic. It provided financial support to UK companies that were losing revenue and suffering major cash flow issues during various lockdown periods. They could get loans from lenders of up to £50,000 with the government covering 100% of the loan’s guarantee.

The CBILS had a greater scope, supporting businesses in major financial difficulties due to coronavirus that needed finance to survive during the pandemic and recover for a significant time afterwards. Companies could get up to £5 million in various forms of finance from accredited lenders and partners, with the government guaranteeing up to 80% of the loan amount. 

In all these schemes, the businesses remained fully liable for repaying the loans.

What government-backed loans are available for small businesses in the UK?

There are several government-backed loans for small business needs, including loans using the Growth Guarantee Scheme (GGS), start-up loans, innovation loans and the UK Export Finance (UKEF) system. 

Let’s look at each of these government-backed business loans for UK start-ups and SMEs in more detail:

GGS-supported loans 

The Growth Guarantee Scheme was launched in July 2024 and covers a range of finance products supported by banks and commercial lenders, including term loans, business overdrafts, asset finance and invoice finance. Lenders offering loans through the scheme give companies access to finance facilities of up to £2 million, backed by up to 70% guarantees from the government. 

Start-up loans 

The British Business Bank offers start-up loans of up to £25,000 to help new businesses get up and running and invest in key assets and operational needs. The loans have a fixed interest rate (currently 6%) and can be repaid over periods of 1 and 5 years. Plus, there are no arrangement fees or charges for repaying the loan early.

Innovation loans 

These are loans provided by Innovate UK, the UK’s innovation agency, backed by the government. The initiative was launched to help UK companies that want to grow and scale through innovation, developing new and improved products or services. Innovation loans range from £100,000 to £2 million for businesses beyond the early stages of development, looking to make the next step to reach their ambitions. 

The loans are issued in competition rounds and are in high demand, with applicants required to provide compelling proposals while demonstrating that they can’t secure the required funds via traditional funding routes.

UK Export Finance (UKEF)

The UKEF is a ministerial department and the UK’s export credit agency, providing finance facilities for companies exporting goods from the UK. Around 80% of the businesses UKEF supports are SMEs. The agency offers a range of solutions to help them manage cash flow and payment risks through finance facilities, working capital guarantees and insurance policies. 

Learn more about export Finance in our dedicated article: What Is Export Finance and How Does It Help UK Businesses?

Regional funding solutions

The British Business Bank also offers various regional funding solutions to spark business innovation and growth in key areas in the UK, including the Northern Powerhouse Investment Fund and other funds for UK regions, such as Wales, Scotland, Northern Ireland and the South West. 

These funds offer localised finance solutions to help businesses thrive, including debt finance from £25,000 to £2 million and equity investment up to £5 million.

Government-backed loans vs traditional business loans: What’s the difference?

Before we look at the eligibility criteria for loans supported by the UK government and how your business may qualify, let’s consider the key differences between government-backed loans and traditional business loans.

Government-backed business loans 

As mentioned, government-backed loans help to spark new business growth or support companies that have been through tough periods, but there are also drawbacks to consider. 

Here are the main advantages and disadvantages of using government-backed  small business loans:

Pros

• Reduced risks and peace of mind from getting government-backed guarantees.
• Access to finance for businesses unable to source other funding due to a lack of assets to secure capital or a limited trading history.
• Dedicated loans with clear conditions of use, such as working capital, investment or acquiring assets.
• Unlocking a range of finance options from lenders using government schemes.
• Low costs and interest rates.

Cons

• Certain schemes have strict eligibility criteria and restrictions for particular industries, such as the banking and insurance sectors.
• There are misconceptions about loan conditions – remember, government loans are not grants, and businesses are fully liable for repayments.
• The application and approval process can take a lot longer than with traditional loans and finance provided by digital lenders, and the release of funds can take weeks, in some cases.
• Interest and certain loan fees still apply, even though the government aims to keep them competitive.
• There are time limits on some schemes – for example, the GGS is currently set to run until March 2026, while innovation loans are available in set windows.

Suitability considerations for small businesses

If you’re a new or small business needing funds to invest in future growth but lacking assets or a long trading history, government-backed business loans are a good option. They offer access to significant capital without needing to put up security. 

Also, your business may be looked upon favourably if you’ve been significantly impacted by key socioeconomic events.

Traditional business loans and finance from private lenders

Now, let’s look at the pros and cons of using traditional loans or business finance solutions from private lenders, including when and where they’re suitable or viable. 

Pros

• A wider range of loan solutions from banks and private lenders, offering fixed- and variable-rate options and secured and unsecured loans.
• Quick and easy online loan applications and less stringent criteria.
• Certain options are available for businesses with adverse credit.
• Faster access to funds, in most cases, due to slick online applications.
• More flexible terms and use of funds, depending on the lender.

Cons

• Typically higher interest rates (due to higher risk appetite and margins).
• You may need to provide collateral or guarantees as security, depending on your circumstances and preferred loan type.
• Some lenders charge additional fees that government-backed loans don’t – look out for hidden charges and APR to understand the total cost of borrowing.

Suitability considerations for small businesses

While recent government-backed loan schemes supported businesses impacted by the pandemic, providing significant guarantees, there are limitations for companies with prior credit issues or previous financial difficulties. 

Small business loans from a wider pool of lenders can offer greater access to those in that bracket. Plus, businesses needing greater flexibility and faster access to funds are well suited to business loans outside of government schemes.

Who qualifies for a government-backed business loan in the UK?

It depends on the type of loan you need and your industry and financial situation, but various factors influence approvals for a government-backed business loan. 

Below, we outline the main eligibility criteria, what factors lenders evaluate when reviewing applications and business/industries in scope:

Eligibility criteria

• Location – you must be a UK-registered business, and based in the stipulated region for localised investment schemes.
• Time in operation – for example, if you’re applying for a start-up loan, you must have been trading for fewer than three years.
• Industry – most businesses are in scope for some form of government-backed loan, but sectors that commonly qualify are hospitality, retail, manufacturing, construction, creative industries, professional services and tech start-ups, plus green-focused businesses and organisations. 
• Purpose – while most government-backed schemes aim to inject working capital into SMEs, innovation loans and export finance require demonstration of more specific funding needs.
• Turnover – there are restrictions and thresholds on business turnover for different loans, such as the GGS, which states companies must have a turnover of less than £45 million.
• Financial health – while government-backed schemes look to help businesses recover, thrive and grow, those with previous defaults may not be eligible.

What lenders assess during the approval process

• Business plans, viability and value proposition.
• Bank statements, financial records and revenue forecasting.
• Creditworthiness, risk level and affordability.
• Funding need, purpose and legitimacy, based on the scope of the scheme 
• Industries and associated third parties for compliance with the scheme conditions.
• Trading length, history and performance.

How to increase your chances of approval for a government-backed business loan

• Use eligibility checklists to save time and effort on applications and steer you toward the most suitable options. For example, here is the British Business Bank’s start-up loan eligibility checker.
• Self-assess using the criteria mentioned above or loan calculators to determine affordability and thresholds.
• Build your business credit, using various short- and long-term strategies
• Create a compelling/viable business plan with clear financials and forecasts.
• Use your accounting software to demonstrate real-time performance, cash flow and trading history.

Steps involved in applying for a government-backed loan in the UK

So, if you tick the aforementioned eligibility criteria boxes and think you’ll qualify for a government-backed business loan, how do you get started? Let’s look at how to apply and the key steps involved.

How do I apply for a government-backed business loan?

You can apply for a government-backed loan via several routes. Either go through HMRC or head to the British Business Bank website to explore your options and apply via the relevant path. Alternatively, speak to your bank, as most provide government-backed business loans through their partnerships. 

If you want to apply for an innovation loan, review the Innovate UK website’s application guidance or apply via HMRC’s innovation funding application process.

However, if you need finance for your exporting activities, explore the UK Export Finance products and services pages, which have contact forms for different options.

Typical steps to follow

• Choose the right scheme and lender for your particular financial needs – do your research and proactively check eligibility considerations.
• Craft a robust and well-presented business plan backed by data and context.
• Gather all required documents, such as recent financials, business information and verification-related details.
• Begin your application, providing detailed/accurate responses and supporting documentation.
• Await your application’s assessment and approval.

Note: Timelines for approval and release of funds vary depending on which scheme you use, the accuracy of your application and demand levels. Approvals can take several weeks, with funds released after a few days, in most cases. For innovation loans, it can take longer, due to the competition windows.

What are the risks of taking a government-backed business loan?

Like all financial borrowing, there are risks to consider. When using a government-backed business loan, the main risks are taking on more debt than you can manage, missing repayment deadlines (leading to fines and impact on your credit score) and issues with flexibility of use, if your business runs into unexpected costs.

It’s important to understand that while the government may provide a significant percentage of the guarantee to secure the loan, your business must repay the entire amount, plus interest and other fees.

Common mistakes to avoid

• Choosing an unsuitable scheme – this can result in unwanted restrictions or failed applications.
• Incomplete documentation during applications – again, this could result in you being rejected.
• Not putting enough time into preparing a valid and viable business plan.
• Seeking more finance than you need and being tied into long-term repayments. that can impact your regular commitments, operations and liabilities.
• Overlooking other suitable finance options from alternative and digital lenders, like iwoca, which can provide faster access to critical funds, more tailored loan conditions and greater flexibility of use.

Alternatives to government-backed business loans

If you don’t think you’re eligible for a government-backed loan or want faster and more flexible funding solutions, various business finance options may be a better fit.

Business finance options available to small businesses

• Working capital loans – solutions to cover everyday business expenses, including boosting inventory or ensuring payroll runs smoothly.
• Small business loans – short-term loans designed to meet the needs of small businesses, such as cash flow management and investment in new talent, assets and promotional activities.
• Asset finance – finance solutions to acquire and hire key equipment, vehicles and machinery to get business moving without huge upfront costs. 
• Business lines of credit – a flexible form of financing that enables companies to draw down funds, as and when required, for various business purposes.
• Invoice finance – a quick and easy way to unlock funds tied up in pending client invoice payments to plug cash flow gaps to meet other liabilities.

These alternatives to government-backed business loans offer short-term finance options to overcome seasonal dips in revenue, cash flow gaps or the impact of key events on business fortunes. They give businesses of all kinds, even those with poorer credit, fast access to working capital when they need it most.

Exploring iwoca Flexi-Loans

Our Flexi-Loans are designed specifically for the needs of UK SMEs and new businesses, offering flexible solutions, quick and easy applications (with minimal documentation required) and manageable monthly repayments, aligned with your cash flow.

You can borrow from as little as £1,000 up to £1 million between a few days and 60 months, depending on your circumstances. The great thing is that you only pay interest on funds you draw down, you can use the money for whatever business purposes you need, and we don’t charge early repayment fees.

Discover how to get a business loan with iwoca or use our business loan calculator to see your likely repayment costs using our Flexi-Loan solutions.

Sources:

• Press Release: British Business Bank launches Growth Guarantee Scheme [The British Business Bank]
• Growth Guarantee Scheme (GGS) [The British Business Bank]
• British Business Bank Finance Options [The British Business Bank]
• Innovation Loans [Innovate UK]
• UK Export Finance: Products and Services [UKEF]
• What Is Export Finance and How Does It Help UK Businesses? [iwoca]
• Start-Up Loans [The British Business Bank]
• Finance for Your Business [Help to Grow Campaign]

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