Early-stage companies are notoriously risky – investors and commercial banks have no evidence that you’ll succeed, making it tricky to secure finance. Fortunately, the government offers several schemes to make it easier for entrepreneurs to secure funds to launch a start up in the UK.
The Start Up loan scheme is one of these. It’s a way for budding entrepreneurs to pitch their business ideas or early stage businesses and secure initial of finance. The scheme comprises two loans, an initial start-up loan for new entrepreneurs and a second loan for those who successfully secure the first.
This guide runs you through the start up loans scheme, including how it works, how to apply and more in the following sections:
- What is the start up loans scheme?
- How does it work?
- How much funding is available?
- Am I eligible for a Start Up loan?
- How do I apply for a Start Up loan?
- Preparing supporting documents
- How are applications assessed?
- Applying for a 2nd Start Up loan
- Final thoughts & FAQs.
What is the Start Up loans scheme?
In 2012, the government launched their start up loan scheme, pledging £151 million to help entrepreneurs set up businesses in the UK. The scheme’s mission is to provide entrepreneurs with the necessary tools, resources and finance to create thriving businesses in all sectors of the UK economy. The initial target of the scheme when it launched in 2012 was to introduce 30,000 new businesses by 2016, but owing to the success of the programme, it continues today.
How does it work?
The scheme is delivered by a network of ‘Delivery Partners’ across the country, who work in partnership with The Start-Up Loans Company, a subsidiary of the British Business Bank, who administer the scheme.
The loans offered as part of this initiative are government-backed and currently charge a fixed interest rate of 6% per year. The critical thing to note is that the start up loan is not a business loan. Instead, it is an unsecured personal loan, assigned to the individual looking to set up, or who has recently set up, a business.
Like other business loans, the loan must be paid back typically over a period of one to five years. As it is a personal loan, liability to pay back the funds lies with the loan recipient, which means even if your business fails, it’s down to you to pay back your funds.
How much funding is available?
The loan can be any amount between £500 and £25,000 for each applicant (up to £10,000 for the first loan). If there are other business owners or partners in the business, they too can apply for a start up loan, as these are granted on an individual basis. However, there is a maximum limit of £100,000 available per business.
Alongside the finance, successful applicants receive free support, advice and guidance to run their business, which can include up to a year’s worth of one-to-one mentoring to guide them in the venture’s early stages.
Applicants also receive support putting together a business plan for the application process. This is a beneficial step whether the individual secures funding or not, as having a solid business plan is often crucial to securing funding through other routes later down the line.
How can I spend the money?
Successful applicants can put the money towards a wide range of uses. The loan exists to help entrepreneurs start a business or grow an existing business that’s in its early stages. You can, therefore, spend the loan on things like equipment, stock, premises, promotion and marketing, and more. You must be able to describe how you intend to use the loan within your business plan and use your cash flow forecast to back up your claims. You must be able to show how spending the funds in this way will help you start or grow your business.
While there are innumerable ways you can spend the loan, there are a few notable exceptions. You cannot use the loan for debt repayment or to fund training qualifications or other education programmes. You cannot use the loan for investment opportunities either, where these do not form part of continued, sustainable business.
How long do I have to return the loan?
You must repay your loan within one to five years. Within this bracket, you have the option to choose a loan term that suits you, depending on your affordability.
Whatever loan term you decide on, you will have to make monthly repayments to pay back the borrowed funds. The handy Loan Calculator on the Start Up Loans website can show you what you can expect to pay monthly to pay back your loan based on different loan terms.
Am I eligible for a Start Up loan?
The scheme is open to anybody who fulfils the application requirements. To be eligible for a loan, applicants must:
- be 18 or over
- live in the UK
- have the right to work in the UK
- be able to pass the administrating company’s credit checks
- be able to show that they can afford to repay the loan
- have a UK-based business that’s been fully trading for less than 24 months, or plan to start a UK-based firm.
While most business types are eligible for funding through the initiative, there are some exclusions. The scheme cannot support businesses associated with the following:
- chemical manufacture
- drugs, pornography or illegal activities
- banking and money transfer services
- private investigators that do not hold the appropriate licence
- gambling or betting activities
- property investment
- agents for thirds parties, where a third party earns the majority of the revenue, if you would only earn a commission (note that franchise businesses are eligible to apply).
How do I apply for a Start Up loan?
You can apply via the government website, which will take you directly to the Start Up Loans company’s page, who administer the scheme. There, you will be able to start the applications process. There are no application fees or set-up fees, and you can go through the process entirely online.
Step 1: Registration
Firstly, you are required to register your details by filling out the online registration form. As an applicant, you can either choose a Delivery Partner yourself or let the Start Up Loans company decide on a partner for you, based on who they feel can best support your application.
Once you have been assigned a Delivery Partner, the partner will assign you a Business Adviser, an experienced professional who will review your loan request and help you finalise it before it’s submitted and assessed.
Step 2: Application form
The second step is to complete an application form. Here, you will need to provide details about your business or your idea and provide information on your personal information so that they can ascertain how much money you are applying for and how you plan to use the money.
You will then be asked to consent to a credit check, which they run through a Credit Reference Agency (CRA) to validate your personal information and determine your eligibility, by seeing if you can afford the loan.
Step 3: Supporting documents
The third and final step is to finalise your business documents. You will need to provide a business plan, a cash flow forecast and personal survival budget with your application. Your assigned business adviser will be able to help you put together these documents, and the Start Up Loans website also provides a range of templates you can use to complete these documents.
Step 4: Assessment
Once your full application is submitted along with all the necessary supporting documents, the partner then reviews the documents. It carries out a loan assessment to determine whether your business or business idea is viable and whether you can afford the loan and the repayment terms.
Step 5: Sign and receive the loan
If you are approved for the loan, you will receive a loan agreement to sign. Once you have returned your signed agreement, typically in a matter of days you will receive your credit and can begin the 12-months of business mentoring, if you choose.
Supporting documents for your loan application
As mentioned, you must provide several documents for review with your application, which play a big part in determining whether you are eligible to secure funding. These are your business plan, a cash flow forecast and a personal survival budget.
How to write a business plan
You need a clear and structured business plan to show how your business model works and how you plan to grow it, we won’t go into much detail as you can find a detailed guide to creating a business plan here.
How to draw up a personal survival budget
This document is a critical part of any successful start-up loan application. Government-backed lenders are also responsible lenders, meaning they want to be sure that you can survive financially while meeting these payments.
This is why the personal survival budget is so important when your application is being assessed, it is made up of three main sections.
Money coming in
This section is for you to list all the sources of personal income you have coming in each month. This might include your salary from an employer, benefits payments, returns from investments or your personal savings. Typically, applicants list three to six items in the personal income section. You then add all of these sources of income together to provide your total personal monthly income.
Money going out
This section refers to your personal expenses in an average month, which might include rent or mortgage payments, utility bills, council tax, personal loan repayments, school fees, groceries or childcare. A typical personal expenses section features 10 to 20 items. The sum of all these sources is your total monthly personal expenses.
Total surplus or deficit – the balance
This final section is the difference between your total personal income and your total personal expenses: take the second figure away from the first figure. If the resulting value is negative, your personal expenses exceed your personal income. If this is the case, you should consider how you can bring in new income or cut down on your expenditure. If the figure is positive, you’re earning more than you spend.
Your total surplus or deficit should show you how much you can afford extra per month, and whether it will be feasible for you to pay back your loan in monthly instalments.
How to create a cash flow forecast
Applicants to the Start Up Loan scheme must provide a 12-month cash flow forecast. The Start Up Loans company’s business advisers will assess the sustainability of an applicant’s business venture using this information.
A cash flow forecast is an essential document for businesses to plan their finances. It is an estimation of the money your company expects to bring in and pay out over a given period.
The cash in should include all revenue sources, and the money out should consist of all the business expenses you expect to incur, from supplier payments and tax payments to premises rental and employee wages.
Comparing these two figures gives you an idea of how much you will make or lose on an ongoing basis (typically updated monthly, quarterly or yearly), allowing you to make sensible decisions for your company. Similarly, to the personal survival budget, the cash flow forecast constitutes three primary sections and should enable you to manage your cash flow.
Here you should list all the sources of money coming into the business. This might include product sales, service sales, equity, investments, as well as your Start Up loan. The sum of all of these provides your business’ total income.
This section shows all the expenses your business incurs. Things to include are rent payments, staff wages, council tax, supplier costs, marketing costs, licensing fees, etc. Don’t forget the costs that come around less regularly, such as VAT payments which only come around every quarter. The sum of all of these figures gives your total business expenses.
Net cash flow
This is the balance, which is your total income less your total expenses. If this figure is negative, you are expecting your expenses to be higher than your revenue. If it’s positive, you are anticipating your revenue to exceed your expenses, giving you a profit.
What the SLC expect to see in a cashflow forecast
For a robust application, business advisers recommend the following:
- Remain realistic. Entrepreneurs are ambitious by nature, but it’s essential to be realistic when you predict your sales. In the beginning, your focus will be on marketing and building a brand, which might mean you aren’t able to make as many sales as you expect to. It’s better to make modest estimates and exceed them than to miss your targets consistently.
- Remember to bear seasonality in mind. Some companies are particularly affected by quiet and busy periods. This might be the case for an ice cream shop that gets most of its customers in summer. Businesses in highly touristic areas may see a spike in sales around Christmas but a drop in January. Your forecasted sales and expected costs should reflect these fluctuations in business.
- Factor in the promotional activity you have planned. If you’re launching a huge marketing campaign to promote your business in March which you expect to boost your sales, factor these increased sales into your numbers for the months to follow. Similarly, if there are periods where you cut back on your marketing, acknowledge the impact this may have on sales in this period.
- Don’t forget to include your salary! Many entrepreneurs fail to remember to factor in their own pay in their estimations. If you aren’t going to be earning from any other sources while you start your business, you are going to have to take out your living costs from your business earnings.
- Don’t forget to include your Start Up Loan repayments. You will have to make your first monthly repayment shortly after receiving your Start Up Loan if you are successful. Make sure that your forecast reflects these payments.
You can produce these documents through the help of the templates provided on the Start Up Loans company website. These templates use an Excel sheet for you to fill in your anticipated earnings and expenses, and will calculate the totals for each section automatically.
How are applications assessed?
Loan applications are accepted at each business adviser’s discretion, though there are three main areas that they take into consideration. These are how creditworthy you are, whether you can afford to take out the loan and repay it, and whether or not your business is viable.
To proceed through the application, you must consent to a credit check. This check dives into your financial history to determine your financial behaviour. That said, poor credit history will not necessarily block your application. The company commits to responsible lending, which is why they have to carry out the credit check, as they don’t want applicants to take out more money than they can afford to repay.
A start up loan is a personal loan intended for business purposes, rather than a business loan. This means the recipient is liable for its repayment, whatever happens to the business or whatever they decide to do. The loans are non-secured, which means you don’t have to put up any security or collateral to guarantee the loan.
However, you will still have to fully repay the loan, as well as any interest due, over the loan term agreed with the Start Up Loans company. When reviewing your application, the business adviser will consult the personal survival budget that you submitted as part of your application. The survival budget declares your sources of personal income and the expenses you have each month, allowing the business adviser to determine whether or not you can afford the loan.
Of course, a principal consideration for the business adviser is whether they consider your venture viable. The company wants to ensure that your business will be successful and generate enough income for you to meet your monthly loan repayments. Your business plan and cash flow forecast is crucial here to demonstrate that your product or service is in demand and to evidence how you intend to meet your goals. Fortunately, the Start Up Loans company can provide extensive support putting together these documents, to maximise your chances of securing a loan.
Applying for a 2nd Start Up loan
The Start Up Loans scheme allows Start Up Loan recipients to apply for a Second Loan. This second loan comprises additional business finance, charged with the same, fixed interest rate per year and a repayment term of one to five years.
Are you eligible for the loan?
To apply for the Second Loan, you must complete a new application process. You must also have already made at least six months of full loan repayments for your start up loan before you apply. On top of this, your total outstanding loan balance must not exceed £25,000 at any time.
Only recipients of the first Start Up loan are eligible to apply for the Second Loan. On top of this, applicants must fulfil the following requirements:
- your business must have been trading for at least three months, but for no more than two years
- the additional finance must be for the same company as your first loan
- the total outstanding Start Up Loans balance must be no more than £25,000 at any one time, per individual
- the total amount of funds lent to any single business cannot exceed £100,000, including all individual business partners
- you must have made at least three full repayments on your first Start Up Loan
- the repayments on your first Start Up loan must be fully up to date when you submit your application for the Second Loan
- in the last six months, you cannot have had any late or missed repayments on your first Start Up Loan
- you must not have been on a reduced payment plan or Interest Only period (capital repayment holiday) within the last six months
- you must still meet all of the Start Up Loan criteria.
Before you apply and are assigned a business adviser for your second loan application, you need to prepare a series of documents. These are:
- a summary of your business
- a breakdown of how you intend to use the second loan
- an overview of how the company has performed since you received the first loan
- an updated personal survival budget.
Application process step by step
As with the first start up loan, a second loan is a personal loan used for business purposes, not a business loan. The application process therefore takes your personal circumstances into account, including things such as your repayment history for your first loan, the trading history of your business as well as your future business plans. There are four application stages to apply for the Second Loan:
Stage 1: Application form
Here you will have to provide your personal and business information, including your bank account details, to enable the loan provider to run a credit check to determine your suitability for a second loan. This application form should take no longer than fifteen minutes to complete. You will receive notification within two working days of whether you are eligible to proceed with your application.
Stage 2: Your key documents
If you are found eligible, you may proceed to stage 2 of the application process. For this stage, you will need to provide a range of documents to give an overview of your personal situation and the progress that your business has made since you accepted your first Start Up loan. These documents include a personal survival budget, six months actual business cash flows, a 12-month cash flow forecast and three months’ consecutive business-related bank statements. You can find templates for all of these documents on the website.
Stage 3: Business adviser review
Once you’ve submitted all the necessary documents, your application moves on to the Delivery Partner that handled your first loan application. They will assign you a business adviser who, as with the first loan, will offer you support and guidance in finalising your application for assessment.
Stage 4: Assessment
To ensure that all applications are handled fairly, your application will be reviewed twice – once by your business adviser, once by another qualified individual.
Once you have gone through the application process, your business adviser will contact you to inform you of their decision. If you’re successful, the loan company will assign you a finance partner who will send through your loan agreement by post for you to sign and return, at which point you will receive your loan funding.
Final thoughts & FAQs
Getting a business off the ground is no mean feat, and one thing you’ll need is significant financial backing. Unfortunately, securing finance tends to be an entrepreneur’s nightmare. You might feel like you’re jumping through hoops, just to get rejected again and again.
This government-backed scheme is an excellent option for entrepreneurs, making it easier for entrepreneurs to access the funding they need to get their venture off the ground. Not only does the scheme offer funding, but the free mentoring offers invaluable support, providing new business people with the help and guidance that they need to make the best success of their venture.
If you’ve got an idea for a business and you’ve been rejected from other forms of funding, you might want to consider applying for the Start Up loan scheme. It could be a fantastic way to secure up to £25,000 in funding to break into your market.
Do I need a business account to apply for a loan?
You do not need a business account to apply for a start up loan through the government-backed scheme. However, some lenders require you to have one to qualify for a loan. Still, it is worth asking, as some providers can be flexible.
Can I apply for a start up loan if I’ve recently purchased a new business?
You are still able to apply for a start up loan if you are purchasing an existing business which wasn’t your idea. This applies even if the company in question has been trading for more than two years under different ownership, so long as you haven’t owned the business for more than 24 months.
To apply for a business you are purchasing, you will need a copy of the company’s financial accounts to go alongside your application. If the company is currently operating at a loss or was previously at a loss, you must address this issue in your business plan and how you intend to rectify it.
Can I repay a start up loan early?
Yes. With the Start Up Loan, there are no early repayment fees. However, if you take out a start up loan from another provider, you may receive an interest penalty based on your remaining loan balance for paying your funds back early. Always check with your lender to see if you can afford to repay your loan early.
Can I get a start up business loan for a home business?
Yes, lenders can offer start up loans to entrepreneurs running their business from home. However, you should check with each lender before you apply, to make sure.
Are there alternative sources of funding to a government backed Startup Loan?
The Start Up Loans Company is not the only place you can find a loan for your start up. Many private companies, banks, and charitable organisations offer start up loans for budding entrepreneurs and fledgling businesses. Before you consider applying for the government-back schemes, you might want to check out the other loans for start ups available on the market.
There are a couple of things to watch out for when you are looking to borrow money for your start up. When you compare the different loan providers, search for lenders that offer the loan amount you need. There’s no point applying if their maximum offering won’t be enough to get you off the ground.
Secondly, compare the rates offered by each lender to get an idea of how much interest you will be paying. Some lenders may provide a longer repayment period, but you might have to pay a higher rate of interest.
The advantage of going through a government-backed scheme is that they pay a lot of due diligence to work out how much they believe you can afford, to prevent you taking out a loan you will struggle to pay back. Once you’ve whittled down your options, it’s a good idea to opt for a loan with the lowest Annual Percentage Rate (APR) for the amount that you need to borrow.