Starting a business is rewarding, but it comes with its challenges, whether personal, logistical or financial. Most start ups will need some sort of finance at some point, whether that’s to get the business up and running in the first place or to fund growth a little later on.

For new companies that need to access funding quickly, business start up loans could offer a solution.

Business finance experts, Bionic have taken a look at what exactly small business start up loans are, how they work, and how you can apply.

Key points: 

• Have a business plan ready to go to get any business funding
• You do not need a business bank account to get a business start up loan
• Start up loan are actually made with an individual rather than businesses
• Lending criteria may not be as strict with a start up loan
• To apply for a business start up loan you need to be at least 18 years old, live in the UK and have a business that is less than 2 years old or a plan to start one.
• Business start up loans can be government backed or other lenders
• Any individual can borrow up to £25,000 under the government backed start up loans scheme
• Several directors of the same company can apply for individual loans, with the maximum available to a single business set at £100,000.
• If you default on repayment, this will affect your personal credit score

What is a start up loan?

Start up business loans are unsecured UK government backed personal loans of up to £25,000 that are used to help start a new enterprise or grow an existing one, as long as it has been trading for less than 24 months. This means they’re available for new business owners during their first two years of operating, not just available to those who are yet to start trading.

These loans can be spent on a wide range of things related to your business, such as equipment and stock, a business premises, or marketing and promotional expenses.

To access a start up business loan in the UK, you’ll need to show your lender a business plan that explains what you’ll use the loan for. You’ll also need to provide a cash flow forecast outlining how the loan would help you set up and/or grow your business.

How do start up business loans work?

Start up loans work much like other types of business loans – you’ll borrow money from a lender, which then needs to be repaid, along with interest, over a specified period of time. But there is a key difference – unlike other types of business loans, start up loan agreements are actually made with an individual, rather than a business.

Furthermore, they are also guaranteed by the government, meaning that lenders have more assurance that they will get their money back, which means the lending criteria might not be quite as strict as other types of loan, but this will all depend on individual circumstances.

Are start up loans available for home and micro businesses?

There is no restriction on the type or size of your business when it comes to start up loans. As long as you meet the lending criteria set out by the government, you can apply for funding. This means a home or microbusiness could apply.

However, there are other types of new business loans available in the UK specifically for smaller businesses. For example, the Northern Powerhouse Investment Fund offers micro loans for start ups specifically in the north of England.

Other private lenders also offer micro lending, or start up business loans for borrowers with bad credit ratings. These are distinct from the UK government backed scheme described above.

Do you need a business bank account to get a business start up loan?

No, you do not need a business bank account to get a start up loan, as these are essentially personal loans to be used for business purposes. But if you’re planning for your business to be a success, it is a good idea to get a business account as soon as possible and to keep your business finances separate from your personal finances.

Do you need a business plan for a start up loan?

Start up loan providers in the UK will require you to present a viable business plan before you can apply for funding. If you are a new business looking to secure any kind of finance, a business plan is probably a good idea anyway.

Who can apply for a start up loan?

To apply for a government backed start up business loan in the UK, you need to live in the UK, be at least 18 years old, and have a business that has been operational for less than two years – or have plans to start one (including a business plan).

There are some activities that can’t be funded with a start up loan, such as debt repayment, training qualification and education programmes, and investment opportunities that are not core to your business.

The government works with a number of providers to fund small businesses in this way, and some of these lenders will have different criteria.

Furthermore, there are other types of start up business funding that are separate from the government backed start up loans scheme. Again, lenders will have different criteria around who can apply for these, but you would normally need a viable business plan before you can get started.

How much can you borrow with a start up loan?

Any individual can borrow up to £25,000 under the government backed start up loans scheme. However, several directors of the same company can apply for individual loans, with the maximum available to a single business set at £100,000.

It may be possible to borrow more from lenders offering different forms of start up business funding outside of the government-backed scheme.

What types of start up business loans are available?

If you need funding, the government-backed start up scheme is the first type of new business loan you should look into. If your business qualifies, the government guarantee means that your application might have a better chance of acceptance than if you look for a comparable loan that’s not included in the scheme.

But remember, the government guarantee is only to cover any losses to the lender, and if you default on repayment, this will affect your personal credit score and could cause you problems when applying for future credit. Your lender might also take measures to recover the debt, which could see you issued with a County Court Judgement (CCJ) and lead to your business being wound up.

Besides the government scheme, there are also other types of small business start up loans available, each with different terms, pricing and limits. Most of these are offered by private lenders. Although they are distinct from the government’s guarantee scheme, they may still be described by lenders as a form of start up business funding as they are specifically tailored for new businesses.

Some of these are start up business loans that can be taken out without a personal guarantee or security. However, there’s a chance you will have to pay more in interest, certainly compared to the government-backed loans.

How to choose the right start up loan for your business

Taking out the right start up loan for your business is critical. To choose the right one, you need to consider how much you want to borrow, and what terms you are prepared to accept.

You also have to take into account your own circumstances. For example, do you have a poor credit rating? If so, you might need to look for start up business loans for people with bad credit.

Perhaps you don’t qualify for the government’s start up loan scheme, in which case you might have to look to private lenders that offer loans for new limited companies.

Where to get a start up business loan

The place to begin when looking for a start up business loan in the UK is the government’s own website – https://www.gov.uk/apply-start-up-loan. From here, you can check if you are eligible to borrow up to £25,000 from one of its lending partners.

If you need to borrow more money or if you do not qualify for the government scheme, there are many other lenders in the private market that can help out with funding for your business. These range from high street banks to specialist ‘peer-to-peer’ lenders.

Is there any other financial help available for starting a business?

Besides start up loans, there is plenty of other financial help available for new businesses in the UK. Of course, you could look to the commercial lending market – i.e. banks – to see what financing is on offer. However, there are also plenty of government and non-government grants for new businesses available.

For example, a grant. This is money given to support businesses that doesn’t need to be paid back. You won’t be offered millions of pounds through a grant, but a little bit of financing that does not need to be repaid can go a long way to helping you set up your business.