Finance · 31 August 2016

Government funding initiatives failing to attract interest of new businesses

Government funding schemes are not the most popular route for new firms

A new study from cloud accounting software provider FreeAgent has revealed that only one per cent of the new businesses surveyed were founded upon government funding.

Despite fresh government funding figures showing that the Start Up Loans Company has reached total lending levels of £250m, the study highlighted that eight in ten of the micro businesses surveyed were self-funded without external financial support.

Startup formation hit a record high in 2015 – with 608,100 new businesses were registered, indicating an increase of 4.6 per cent on 2014. However, almost half (44 per cent) of new businesses were able to begin trading without any funding whatsoever.

Ed Molyneux, CEO and co-founder of FreeAgent, said: “The reality is that the majority of UK micro businesses don’t actually require this kind of investment from the outset. We’ve found that most of them are either self-funded through the business owner’s personal savings or simply don’t have any start-up costs.”

The figures released by FreeAgent represent a growing trend of entrepreneurs seeking alternative sources of funding, particularly away from government partnership schemes. One such government funding scheme is the Enterprise Finance Guarantee (EFG), where the government acts as a partial guarantor to small firms on up to 75 per cent of a bank loan up to £1.2m.

In the chancellor’s budget in March, George Osborne announced that the EFG would be extended to 2018. However, the number of participants of this scheme peaked in 2009 at 2,030 loans. In 2015, that figure dropped to just 1,835 small businesses being granted an EFG loan.

Though this drop in EFG participants appears to contradict the record numbers of new business registration in 2015, the findings from FreeAgent support the fact that more and more startups are drifting away from government funding schemes as they seek alternative sources of capital.

Commenting on the trend away from government-backed loan schemes, Jonathan Russell, a partner at law firm ReesRussell, said that there is a general lack of appetite for borrowing, with small businesses put off by unattractive terms. “Professional advice has very much become that these loans were only suitable for individuals who had absolutely no assets, who would not even get over the initial hurdles with the banks.”

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Praseeda Nair is the editorial director of Business Advice, and its sister publication for growing businesses, Real Business. She's an impassioned advocate for women in leadership, and likes to profile business owners, advisors and experts in the field of entrepreneurship and management.

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