Start up loan

How does a start up loan Work?

Start up loans differ from small-business bank loans in that they are personal loans designed for business purposes. The loan is usually unsecured, which means you don’t need to use your home or any other asset as collateral to access the funds.

You can generally borrow amounts between £500 and £25,000, repayable over a term of one to five years, with a fixed annual interest rate agreed with the lender. Since these are personal loan-based products, each partner in a business can apply individually for funding. For example, lenders operating on behalf of the government-backed Start Up Loan programme allows each partner to apply for up to £25,000. The maximum total funding a single business can receive through this scheme is £100,000. Terms and limits may vary depending on the lender.

What are the benefits?

There are a number of possible advantages for smaller businesses that take out a start up loan:

• No need for collateral: A start up loan is usually unsecured, meaning you won’t need to offer up a business or personal asset as collateral.
• Flexibility: A start up loan is offered with flexible repayment terms, generally anywhere from 1 to 5 years for an unsecured loan.
• Support: Application support may be available from experienced business advisors, depending on whether the lender offers this service. 
• Mentoring: start up loan operators may offer free one-to-one business mentoring for 12 months, as part of the loan offering.

What are the potential drawbacks?

As with all finance types, there are some potential drawbacks that business owners need to be aware of:

• Small loan amount: Because start up loans are intended for new and early-stage businesses, the loan amounts available are typically smaller than those offered to established businesses through traditional lending.
• Credit checks: As a start up loan is a personal loan, a credit check will be carried out as part of the application process. This could impact your personal credit report
• Consequences of default: If you fail to make your loan repayments, it could affect your personal credit report. The finance provider might also issue charges that you would be personally liable for. Failing to make your loan repayments could also result in a County Court Judgement (CCJ) or your case being referred to an approved debt collection agent.

How do I get a start up loan?

There are various start up loan providers in the UK including high-street banks, challenger banks, Community Development Finance Institutions, and online providers. Typically, when you apply for a start up loan, this can often be done either online or in person at a provider’s branch if available. The application process includes a personal credit check and the assessment of key business documentation, including your business plan and cash flow forecast.