Starting a business takes money. Whether you need to buy stock, cover your first few months of costs or invest in equipment, a start-up loan can help you get going when you don't yet have trading history to fall back on.

This guide explains how start-up loans work, what's available in the UK, and what to think about before you apply.

What is a start-up loan?

A start-up loan is a type of business loan designed for businesses that are in their early stages. Most standard business loans require you to have been trading for at least a year or two. Start-up loans are built for businesses that don't have that history yet.

The most well-known option in the UK is the government-backed Start Up Loans scheme, delivered through the British Business Bank. It offers personal loans of up to £25,000 per director, at a fixed interest rate, to people looking to start or grow a business that's been trading for less than three years.

But the government scheme isn't the only option. Some banks and specialist lenders also offer products aimed at early-stage businesses.

How the government Start Up Loans scheme works

The Start Up Loans scheme is run through a network of approved delivery partners. You apply through one of these partners rather than directly to the British Business Bank.

Here's what the scheme offers:

• Loans from £500 to £25,000 per director
• A fixed interest rate of 6% per year
• Repayment terms of one to five years
• No application fee and no early repayment charges
• Free mentoring for 12 months after you receive your loan

If your business has more than one director, each director can apply individually, which means the total available to the business can be higher.

The loan is a personal loan, not a business loan. That means you're personally responsible for repaying it, even if the business doesn't work out.

Who can apply

To apply for a government start-up loan, you need to:

• Be 18 or over
• Live in the UK
• Have a business that has been trading for less than three years, or not yet started
• Be able to show that your business is viable 

Some types of business are not eligible, including businesses involved in property investment, financial services and a few other sectors. Check the current eligibility criteria on the British Business Bank website before applying.

Your credit history will be checked as part of the application. A poor credit history doesn't automatically rule you out, but it will be taken into account.

What you'll need to apply

The application process involves more than just a form. You'll need to put together a business plan and cash flow forecast. This is where most applicants spend the most time.

Your delivery partner will usually help you with this. The free mentoring that comes with the scheme can also be useful at this stage.

Expect to cover:

• What your business does and who your customers are
• How you plan to make money
• What you'll use the loan for
• Your projected income and costs for the first year or two
• Your personal finances, including any existing debts

Other ways to fund a start-up

The government scheme is a good starting point, but it's not the only route.

Business loans from banks and specialist lenders

Some lenders will consider early-stage businesses, particularly if you have a strong business plan, some personal assets or a director with a solid credit history. The rates and terms vary widely, so it's worth comparing options.

Grants

There are grants available for start-ups, particularly in certain sectors, regions or for specific groups like young entrepreneurs or women in business. Grants don't need to be repaid, but they're competitive and often come with conditions attached. The government's Find a Grant service on GOV.UK is a good place to start.

Friends and family

Borrowing from people you know can be quicker and more flexible than a formal loan. But it's worth treating it like a proper loan. Put the terms in writing to protect the relationship if things don't go to plan.

Investors

If your business has high growth potential, you might consider taking on an investor in exchange for a share of the business. This brings in capital without the need to repay a loan, but it does mean giving up some control.

What to think about before borrowing

Taking on debt at the start of a business is a real commitment. A few things worth thinking through before you sign anything.

• Can you afford the repayments if the business takes longer to get going than you expect?
• Have you been realistic in your cash flow forecast?
• Do you understand what happens if you can't repay? For the government scheme, the loan is personal, which means your personal credit rating is at risk.
• Have you explored grants or other non-repayable funding first?

None of this is a reason not to borrow. It's just worth going in with a clear head.