The new enterprise allowance Vs a start up loan

What is the difference between the new enterprise allowance and a start up loan

So, you've decided to take the plunge and leave permanent employment to become a IT contractor.

Both the New Enterprise Allowance (NEA) and the Start-Up Loan scheme were designed to embrace the UK's entrepreneurial spirit, in the hope that there will be a new wave of profit-generating businesses set up as a result. There are, however, big differences between the two. Here, we will explain what each scheme consists of, allowing you to decide which is the best option for you.

What is the NEA?

The NEA is a support scheme aimed at potential entrepreneurs aged 18 and over and is currently linked to the Jobseekers' Allowance. It was created to provide financial support, as well as practical advice, to individuals who wish to set up their own businesses. As of February 18 last year, the NEA is also available to single parents receiving Income Support, as well as Employment and Support Allowance claimants in the Work Related Activity Group. The support comes in the form of business mentoring, a business plan and a weekly allowance.

Once you join the NEA, you will be given a dedicated business mentor who will help you with your business plan and strive to make your dream become a reality. They will provide you with ongoing assistance throughout your first few months of trading. Once your business plan is approved, you will be given access to a weekly allowance. This allowance is £65 a week for the initial 13 weeks, followed by £33 a week for the next 13 weeks. The weekly allowance is paid for a maximum of 26 weeks in total. Meanwhile, the loan available is up to £1,000. The loan is credit scored, but many claim that loan providers have more leeway than usual when it comes to poor credit histories.

You are required to give up your Job Seekers' Allowance before you receive any NEA instalments, so you must make sure that you are fully confident about your business proposal before doing this. You may also find that £1,000 is simply not enough money to start your business. If this is the case, you may want to consider another funding avenue, such as the government's Start-Up Loans scheme.

What is the Start-Up Loan scheme?

This is a scheme backed by the government and created by Lord Young, set up to reduce unemployment amongst the younger generation. The scheme is chaired by Dragons' Den panellist James Caan who believes that mentoring is just as important as the loan itself. Initially, the loan was only available to young people aged 18-30, but the age cap has now been lifted so that any entrepreneur over the age of 18 can apply.

Like the NEA, you will be assigned with an appropriate Delivery Partner who will work closely with you to create a business plan. If you pitch to the panel and are successful, you will receive an unsecured, low-cost loan. There is no allowance received with the Start-Up Loan scheme, but the loan you receive can be far greater than that of the NEA. The average Start-Up loan is said to be around £5,500, which is required to be paid back over the course of five years with a fixed interest rate of 6%. This amount of money can make a huge difference to entrepreneurs wishing to purchase initial equipment or stock.

If you are an entrepreneur with a great business idea, both schemes can help you launch and grow your business while benefitting from low cost borrowing.

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