Finance · 26 July 2017

Start Up Loans scheme plunging alarming number of entrepreneurs into default and debt

Start Up Loans scheme
Funding from the Start Up Loans scheme is provided in the form of personal loans
New evidence has shown that the government-backed Start Up Loans scheme is leaving nearly a third of the entrepreneurs it supports in unmanageable debt.

In figures seen by Business Advice, produced through a Freedom of Information request, statistics show that, on average, 30.2 per cent of business owners securing finance through the Start Up Loans scheme default on loan repayments.

The funding delivery vehicle was established in 2012, under David Cameron’s coalition government, and provided 1, 820 loans worth 9.6m in its first year. In November 2014 the British Business Bank began overseeing the Start Up Loans scheme, on behalf of the Department for Business, Energy and Industrial Strategy (BEIS), and the two entities officially merged in April 2017.

Since 2012, 48, 000 loans worth 318m have been provided at a rate of 27 a day. According to figures from the Start Up Loans scheme, this has helped create 56, 600 jobs and 20, 300 of the loans were provided to those that were previously unemployed or economically inactive.

However, figures correct as of 28 February 2017 show loans made between 2012 and 2014 have resulted in a default rate of 47.65 per cent. An average taken over the duration of the Start Up Loans scheme’s lifetime shows 30.2 per cent of entrepreneurs who borrowed money are in default.

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RishI Chowdhury, co-founder of IncuBus Ventures, turned to the Start Up Loans scheme as a way of financing the purchase, and renovation, of a double-decker bus to serve as an office for an incubator programme.

Chowdhury told Business Advice he borrowed the maximum available at the time, 10, 000, through a delivery partner (of which there are 26 listed on the official website) he and the business were working with on an event at the time.

we knew the delivery partner well and they were coming to the end of their pot of allocated funds, so the process was expedited, he added.

very little, if any, checks were done which I had also witnessed when funds were offered to entrepreneurs they hadnt known before. It seemed like they had to spend their pot of funds allocated to have a chance of continuing as a delivery partner, so they had the wrong incentives.

Chowdhury and his team were also running a simultaneous crowdfunding campaign, so knew that repaying the loan would not be a problem. The interest-free nature of money from Start Up Loans, in the first year, was an attractive way of getting the cash necessary to buy their bus. Half of the 10, 000 was paid back straight after the crowdfunding campaign closed, with the rest covered off at the end of the interest-free period.

Looking back, Chowdhury was not a fan? of the Start Up Loans scheme, but it suited his needs perfectly. Unfortunately, I don’t think it was good for many others who had no experience running a business and didnt get enough support, he clarified.

having looked at many business plans which were funded, many were nowhere near ready to be given some of the amounts they were looking for, and are probably still stuck to this day paying off those loans.

Securing funding at a very early stage is not something Alan Donegan believes is particularly necessary. Donegan, co-founder of the Pop-Up Business School, told us: “We want to challenge the status quo that it takes money to make money. The Start Up Loans scheme has the right intentions, but it is putting people into debt.

the government’s strategy of issuing loans to businesses before any money has been made, or issuing them to either jobseekers or ex-offenders, is reckless.”

Cash flow problems

Business Advice got in contact with Start Up Loans to find out about interest rates, repayments and default procedures. Loan recipients are required to make monthly repayments over a term of one to five years, depending on affordability and preference. A fixed interest rate of six per cent per annum is set, after the first interest-free year.

Loans of between 500 and 25, 000 are accessible, with money lent to individuals rather than businesses. However, owners and partners of a particular business can borrow individually taking total loans up to the 100, 000 per company mark.

When an individual defaults on loan repayments, classified asthree or more repayments (not necessarily consecutively), finance partners follow “standard market practice” to make a “fair and reasonable approach”. Where possible, efforts are made to work with the loan recipient to help them fulfil their obligations. This is then followed with an email and/or letter stating which repayment(s) have been missed and what can be done to remedy the situation.

If a finance partner is unable to contact the loan recipient after repeated attempts, they may then look to recover the outstanding payments through various means such as applying to issue a County Court Judgment (CCJ) or referring the case to an approved debt collection agent.

Carly Ward is an entrepreneur who borrowed 20, 000 in 2013 after she wasattracted by the low interest rate offered. However, despite it solving short-term cash flow issues, it has provided problems in the long term. Looking back now, Ward believes she was not made fully aware of the future implications the loan might present, and wishes she had borrowed less or not at all.

“What worries me more is the government giving contracts to companies which have no experience working in this area, and then leaving it to each partnerto ‘sell? the loans to people often misleading them, ” she explained.

“I have heard some horror stories of certain providers forcing people to take loans they didnt need, just so they could get the commission on the loan which is obviously totally unethical. Overall, from the outside it seems like a good scheme but I think it has many cracks and has probably wasted millions of taxpayers’ money. Im sure it’s helped many businesses, but I think it has done mine more harm than good.”

Ward cited the government’s due diligence process as something she does not believe wasrigorous enough when it came to appointing providers to allocate funds. Some, she added, just want the commission on the loan and have no interest in whether someone’s business succeeds or not because there are no implications to the provider. “When it comes to taxpayers’ money, I find this totally irresponsible, ” she said.

Official response

Addressing some of these concerns, Joanna Hill, interim CEO at the Start Up Loans Company, said the default rate of each business cohorthas decreased since inception in 2012, in large part down to continually improving, and making more robust, the application process.

Hill took over, on a temporary basis, from previous CEO Tim Sawyer at the end of June. Sawyer, who had been in the role for five years, took up a position at Innovate UK. Hill, meanwhile, was formerly chief commercial officer at Start Up Loans and also used to serve as head of enterprise education and culture for BEIS.



Hunter Ruthven was previously editor of Business Advice. He was also the editor of Real Business, the UK's most-read website for entrepreneurs and business leaders at the helm of growing SMEs.