Your complete guide to Start Up Loans

Starting out in business is an exciting but busy time. You’ll find you’re pulled in all sorts of directions and it can be difficult to know where to begin sometimes. Financing your new business idea is no different. But as a startup, you’re in the unique position of being able to take advantage of Start Up Loans. Let’s explore what they are and why you might want one.

Key takeaways

With a government-backed Start Up Loan, you can expect:

• A fixed interest rate that remains at 6% for the duration of the loan

• No fees, so you won’t pay any set-up or application fees

• The ability to borrow between £500 and £25,000, with the average amount borrowed being £9,295

What is a Start Up Loan?

A Start Up Loan is a specific type of loan backed by the government that’s designed to help new startup businesses fund their ideas.

Don’t confuse them with the types of business loans or startup loans traditional and challenger banks offer. This type of borrowing is different, with the Start Up Loans Company, which is part of the British Business Bank, managing the scheme. 

With a Start-up Loan, as long as your business has been trading for less than 36 months, you can borrow up to £25,000 with a one-to-five-year repayment term. 

How do Start Up Loans work?

Start Up loans work much like other business loans in that you borrow a sum of money and repay it, with interest, over a period of time. 

A Start Up Loan is an unsecured loan, and allows your business to borrow between £500 and £25,000. Unlike commercial startup business loans, the government-backed Start Up Loan has a fixed interest rate of 6%, and there are no application or set-up fees, meaning it could be a good way to start your business if you have no money.

If your business has several owners or partners, each individual can make a loan application, although the maximum amount available for any single business is £100,000.

What’s more, if you’re approved for a Start Up Loan, you can access 12 months of free business mentoring, which is particularly useful if you’re just starting out. 

Who is eligible for a Start Up Loan?

Many business loan lenders have their own eligibility criteria when it comes to lending. But Start Up Loans have the following standardised eligibility criteria:

• You need to be aged 18 or over and a UK resident

• You must be starting a new business (or have a business that’s been trading for no more than 36 months) 

• Your business must be UK-based, and you must have the right to work in the country

• You must pass a credit check and be able to afford to repay the loan

• You must declare that you’ve been unable to secure finance elsewhere

There is also a list of excluded business types, so make sure your business isn’t on it before applying. Excluded types include businesses involved with weapons, drugs, gambling and betting, charities, banking and money transfer services, and property investment.

Read more: Who is eligible for a Start Up loan?

How much can you borrow with a Start Up Loan?

You can borrow between £500 and £25,000 with a Start Up Loan.

If your business has more than one owner or partner, each can apply for a loan of up to £25,000. For example, if you and two partners operate the business, you could potentially borrow up to £75,000 between you. The maximum any single business can borrow is £100,000. Each partner needs to complete their own loan application.

Start Up Loan interest rates and fees

When you apply for a traditional business loan, there are often set-up and application fees, plus different lenders offer different interest rates, making it important to shop around. But with a Start Up Loan, it’s much simpler.

There are no set-up or application fees and the loan comes with a fixed interest rate of 6% per annum. Having the interest rate set and no other fees to worry about makes financial planning much easier. There’s also a loan repayment calculator which can help work out monthly amounts. 

What can Start Up Loans be used for?

Start Up Loans can support anything you might need to get your business up and running, or to help it grow if you’re still within the first three years of trading. Some common uses include:

• Covering day-to-day expenses - such as rent, utilities or other bills, wages or settling invoices

• New stock - the materials and products your business needs to trade

• Advertising - such as promotional opportunities, online advertising and marketing campaigns

• Equipment and tech - this could include buying new equipment or repairing existing apparatus. Or you could invest in new technology or software to improve your business 

Unlike other business loans, some restrictions apply regarding how you use a Start Up Loan. You cannot use a Start Up Loan for:

• Debt repayment

• Training, qualifications or education programmes

• Investment opportunities that do not form part of an ongoing sustainable business

Other restrictions may also apply.

Advantages and disadvantages of Start Up Loans

As with all borrowing options it’s important to weigh up the pros and cons of the product. So let’s take a look at some of the advantages and disadvantages of getting a government-backed Start Up Loan.

Pros

• Fixed interest rate - Knowing that the interest rate remains at 6% for the duration of the loan offers peace of mind

• No set-up or application fees - with no additional fees attached to the loan, you can keep the overall cost of borrowing down

• Unsecured - you don’t need to offer up any of your business’ assets as collateral

• Free mentoring and support - you get 12 months of free mentoring along with valuable expertise and advice on starting and managing a business 

Cons

• Limited loan amounts - the maximum amount you can borrow is £25,000 (or up to £100,000 if you have additional owners and/or directors that each submit their own applications)

• Strict eligibility criteria - while the criteria are clearly set out, not every type of business fits the model. And some types of businesses aren’t eligible at all

• Personal liability - if you fall behind with loan repayments, you may be personally liable - and this could have a negative impact on your personal credit score

• Lengthy application process - you need to approach the application process armed with a clear business plan, including financial forecasts. These are important for any new business but are still time-consuming to put together

How long does it take to get a Start Up Loan?

Some commercial loan providers advertise quick application and approval times, but the Start Up Loan process can take quite a bit longer. 

The length of time it ultimately takes depends on whether you can provide the information the Start Up Loan Company needs to approve the loan. If you’re well organised and have everything ready then it may only take two or three weeks. But if you need additional support or you haven’t quite got everything together, the process could take months. 

What do you need to get a Start Up Loan?

Getting a business loan requires preparation, and a Start Up Loan is no different. So before you start your application, here’s a handy checklist of some of the things you need to have to hand in order to make a Start Up Loan application.

Step one

• Check you’re eligible. Before you start, it’s important to check the eligibility criteria thoroughly, as this can save you time and effort in the long run. Once you’re happy you’re eligible, prepare the necessary documents to prove it

• Complete an application form. Next, complete the application form. This includes details about your business, how much you want to borrow and why you need the loan

• Pass a credit check. During the application process, you need to pass a credit check. Since your business is new, lenders will look at your personal circumstances, so be prepared to show up to three months of personal bank statements.

Step two

• Discover what documents you need to provide. At this stage, a Business Support Partner will guide you on what documents you need to provide to continue your application

• Business plan and cash flow forecasts. The required documentation includes a business plan setting out why you need the loan, along with cash flow forecasts. These are crucial documents for your business – so make sure you take the necessary time and care when putting them together

• Don’t lose track of time. Once you get a Business Support Partner, you have just 90 days to complete your application

How to apply for a Start Up Loan

Once you’re happy that you have everything in place to begin your application, you can go over to the Start Up Loan Company’s website and begin your application. You should hear from them within two working days after you submit your form.

Alternative funding options for new businesses

A Start Up Loan isn’t the only way to get funding for your new business. Let’s take a look at some other options.

Business credit cards

A business credit card works in a similar way to a personal credit card. If the lender approves your application, it will provide you with credit up to a set limit. Any balance remaining at the end of the statement period will incur interest. Business credit cards can be a handy way to plug cash flow gaps when unexpected bills come along. They can also earn you rewards on day-to-day business spending. 

Overdrafts

A business overdraft is a facility you usually access through your business bank account (subject to status and approval). The lender sets a specific limit that you can spend in the event of going overdrawn. Note that interest is charged if you go overdrawn, so this faciity is not ideal for long-term borrowing.

Startup loans

A traditional startup loan tends to be unsecured and, as with a government-backed Start Up Loan, only available to businesses that have been trading for under 36 months. You might find you can access more money than the government-backed version, but startup loans from banks usually come with higher interest rates. You may also find they offer less favourable terms because of the risk lenders face when offering credit to startups.

Unsecured loans

If wish to increase your borrowing amount and look beyond standard startup options, an unsecured loan may be worth considering. You might not be able to borrow as much as you could with a secured loan, but you may find you can borrow more than with a Start Up Loan. Unsecured loans can also offer slightly more flexibility than the government-backed loans.