Are you a budding entrepreneur that needs cash to start or grow a new business? If so, then a Start Up Loan might be a great solution. It’s a government-backed loan scheme that’s designed for new businesses. If you’re a sole trader you can apply for between £500 to £25,000. If your business has several owners you may be able to borrow up to £100,000.
In this guide we explain how Start Up Loans work and the pros and cons of using one. We also answer common questions like “who is eligible for a Start Up Loan?” and “how much can I borrow with a Start Up Loan?”
Table of Contents
- What is a Start Up Loan?
- What are the pros & cons of using a Start Up Loan?
- How do I apply for a Start Up Loan?
- Frequently asked questions?
If you're reading this article, you may also be interested in our article on how to get funding for a new business.
What is a Start Up Loan?
Start Up Loans can be a great way to finance your new business. They’re backed by the Government and are designed for businesses that have been trading less than 24 months. Start Up Loans are only available if you can’t get funding elsewhere and you will need to self-declare that you’ve already been refused finance from other lenders.
Start Up Loans are essentially a type of unsecured personal loan that is repaid over 1-5 years. Because they are government-backed, lenders fix interest rates at a very reasonable 6%. They are much cheaper than some forms of finance and there are no application fees or early repayment penalties. Many lenders also offer borrowers 12 months of free mentoring and access to a business helpline. This is great if you need some advice to help you grow your business.
- Backed by the Government
- For young businesses trading less than 24 months
- Only available if you have not been able to get funding elsewhere
- Startup loans are essentially unsecured personal loans
- Repayment is over 1 to 5 years
- Interest rates are reasonable (6%)
- No application fees or early repayment penalties
- May get access to mentoring or business helplines
- There are many providers of Start Up Loans in the UK
How does a Start Up Loan work?
Start-up loans work like a personal loan. You can apply for up to £25,000 as a sole trader. If your business has several owners then each individual owner can borrow up to £25,000 each, up to a maximum of £100,000 in total.
The lender will assess your application based on your personal credit rating and whether you can afford repayments. They will also look at how you intend to use the loan, your business plan and your cash flow records.
Once a lender has agreed a Start Up Loan, interest is charged on the loan at a fixed rate of 6%. Your business repays the loan over 1-5 years, depending on the terms of your agreement. If you want to repay the loan early, your lender won’t charge any early repayment fees.
How is interest calculated on a Start Up Loan?
Interest on Start Up Loans is calculated in the same way as a personal loan. You will owe interest on the outstanding balance. Because this is a government-backed scheme, interest is fixed at 6% per year.
What are the fees on a Start Up Loan?
There are no arrangement fees or early repayment fees on Start Up Loans. You will pay interest of 6% on your outstanding loan balance.
What can I use a Start Up Loan for?
Your business can use a Start Up Loan for any short-term funding needs. You might use it to help with the following:
- Buying stock - new businesses often need to buy stock before they have started to get cash from customers. A Start Up Loan can help to bridge this gap and help with cash flow problems.
- Paying a rent deposit - your business may need to pay a rent deposit on a property before you start trading.
- Paying wages - you may need to hire staff before you have enough income to pay them.
- Buying equipment - a Start Up Loan can help fund the purchase of equipment for your business.
- Buying a vehicle - if you need a vehicle for your new business then a Start Up Loan might be suitable. Bear in mind that you will only be able to borrow up to £25,000 if you are a sole trader.
Because Start Up Loans are government-backed there are strict eligibility criteria. Loans aren’t available for certain excluded business activities. These include debt repayment, training programmes and investment opportunities outside your core business.
Start Up Loans also aren’t suitable for larger-scale or long term borrowing. This is because you can only borrow up to £25,000 as a sole trader and you will need to repay the loan in 5 years or less.
What are the pros & cons of using a Start Up Loan?
Here are the main pros and cons of using a Start Up Loan.
- Designed for new businesses - Start Up Loans are a type of personal loan. This means they’re assessed on the owner’s personal credit rating rather than the business. It’s therefore often easier for new businesses without a credit history to get a start-up loan compared with other types of business finance.
- Unsecured - you won’t risk losing your assets if you can’t repay the loan.
- Not personally guaranteed - Start Up Loans don’t need a personal guarantee.
- Low interest rates - interest rates are fixed at 6% which is relatively low for a small business loan.
- Business mentoring - many lenders provide free business mentoring for 12 months.
- Strict eligibility criteria - Start Up Loans are designed for new businesses. You won’t be eligible if your business is over 24 months old or you have already secured a loan elsewhere. You also can’t get a Start Up Loan if you have an excluded business type or you need the loan for an excluded activity (see the Start Up Loan website for more details).
- Lending capped at £25,000 - if you’re a sole trader then lending is limited to £25,000. You can apply for up to £100,000 if you have several business owners or partners.
- Short loan period - Start Up Loans are only available for a maximum of 5 years so they may not be suitable if you need a longer lending period.
- Affects credit score - a Start Up Loan is a personal loan so any problems repaying the loan will affect your personal credit rating.
How do I apply for a Start Up Loan?
Applying for a Start Up Loan is similar to applying for a personal loan. Lenders will perform credit checks to see if you are likely to be a reliable borrower. They will also need to see evidence of the following:
- Personal information on your identity and address.
- Details of how much you want to borrow over what period.
- Information on what you will use the Start Up Loan for. It needs to be for business use and not used for an excluded activity like debt repayment.
- Self-declaration that you can’t get finance from elsewhere.
- Financial statements including a business plan, cashflow forecast and personal survival budget. Most lenders provide templates to help complete these.
Where can I get a Start Up Loan?
Here are some Start Up Loan providers:
Frequently asked questions
Lenders assess Start Up Loans on an individual basis so there is no set timeframe for being approved. Most loans will take a minimum of 3 weeks to be assessed. It’s important to get back to lenders as quickly as possible to answer any queries as this will speed up the application process.
Lenders will look at your personal credit rating as part of their application process. It’s worth getting hold of your credit report from a credit reporting agency like Experian before you apply for credit. If you have a bad credit rating then you can start to take steps to improve it before applying for a Start Up Loan.
You will not be eligible for a Start Up Loan if you’re filing for or currently bankrupt, have an outstanding Individual Voluntary Agreement or you’re on a Debt Relief Order.
Just like a personal loan, you’ll need to start repaying your Start Up Loan straight away. Your loan agreement will set out when repayments are due.
Start Up Loans attract interest of 6% per year. This means you'll pay £600 per year on a £10,000 loan. There are no extra fees or charges.
Start Up Loans don’t require collateral because they’re an unsecured loan.
If you’re a sole trader you’ll be able to borrow between £500 to £25,000 using a Start Up Loan. If your business has several owners then each individual owner can borrow up to £25,000 each, up to a total maximum of £100,000.
Start Up Loans are available if your business meets the following criteria:
- The business owner is over 18 years old.
- You are a UK citizen or have a work permit to work in the UK.
- You have been operating for less than 24 months.
- Your business hasn’t received a previous Start Up Loan.
- The business isn’t eligible for other finance.
- The business owner isn’t filing for or currently bankrupt and doesn’t have a Individual Voluntary Agreement or Debt Relief Order.
- You aren’t using the loan for an excluded loan purpose, including debt repayment and training programmes.
- Your business isn’t an excluded business type. These include businesses selling banking services, property investment companies, gambling services and charities.
Some lenders will consider second Start Up Loan applications. You’ll only be able to borrow a maximum of £25,000 at any one time as a sole trader. You’ll still need to go through a full application process for the second Start Up Loan.
If a Start Up Loan isn't suitable, you can learn more about alternative funding options in our articles about the following alternatives:
- Invoice financing – this is a type of business loan that’s secured against unpaid invoices due from your customers.
- Asset financing – this allows you to rent or gradually buy equipment for your business.
- Equity finance – find other investors to inject cash into your business without charging interest. The downside is that you might need to give up some control in your business.** (insert link)**
- Unsecured short-term loan - a simple type of small business loan that is usually repaid over 3 months – 3 years.
- Unsecured long-term loan - similar to a short-term loan but the term of the loan is more than 3 years. Some lenders only accept applications from business with at least two years’ trading history.
- Working capital loan - a short-term business loan to finance day-to-day operations.
- Line of credit - this type of working capital loan works a bit like a bank overdraft. The lender agrees an upper lending limit and your business can borrow and repay amounts up to this amount. You don’t have to borrow the full loan amount and there are no early repayment penalties.
- Commercial mortgage – a long-term secured loan to purchase your own business premises or a commercial rental property. Short-term loans are also available for property developers.
- Merchant cash advance - a type of short term loan for businesses that use a card terminal for customer payments. Your business repays the loan with customers’ card payments.
- Recovery loan scheme - a Government-backed loan scheme for businesses that have been affected by Coronavirus.