Start-up Loans expansion: Entrepreneurs and business voices respond

The response from entrepreneurs and business commentators has been mixed following yesterday’s news the fund behind the government’s Start-up Loans scheme has been expanded by £30m and the upper age range raised from 24 to 30.

Chaired by James Caan, the Start-up Loans Company, which is administering the the scheme has been actively attempting to raise the initiative's profile and Caan himself has been quick to defend levels of activity so far. He pointed to the 460 new companies backed so far and said he hopes to see 100 start-ups backed each week.

While most, such as O2 business director Ben Dowd, who described it as a “positive step towards generating future growth” welcomed the news, commentators were also quick to lace any platitudes with sobering reminders that without careful administration and follow-on support it could yet fail to make its mark.

Dowd said “young people’s appetite is undiminished by the recession”, but added “the government alone cannot unlock Britain’s full entrepreneurial potential”. He called for larger organisations – remembering O2 (part of Telefonica) last year launched start-up incubator Wayra in the UK – to help ensure start-ups stay the course through improved mentoring and funding.

George Whitehead, venture partner manager at risk capital investors Octopus Investments, has no direct involvement with the Start-up Loans scheme but chairs the Angel CoFund, a £50m fund where angels invest alongside government funds, and has considerable experience of backing ambitious start-ups.

He outlined his fear that young entrepreneurs bestowed with the £2,500 start-up loans may succumb to poor cashflow management, like so many early-stage companies. “Anyone who has run a start-up will tell you there are points where a little bit of funding, whether it be a bank loan, relying on friends and family or dipping in to their own savings, has been critical to the success of their business.

“Perhaps £2,500 is enough to give young entrepreneurs the confidence to get started or to be a little more ambitious, but for companies with significant growth potential it is unlikely to scratch the surface of their longer term funding needs.”

Whitehead welcomed the existence of a ‘cheap’ loan that first-time entrepreneurs may be able to access easily, but tempered any enthusiasm with a dose of reality. “It could buy important extra time for some companies or allow those without any savings to get started. For the companies that are looking to create something beyond a micro business, however, this loan is just too small to have a significant impact.”

Inevitably, as an investor focused on backing growth companies with potential, micro-business beneficiaries of the scheme are unlikely to pique Whitehead’s interest. He believes though, that the sums may be the reason – along with general low levels of awareness – that take-up has been slower than hoped. “In reality, entrepreneurs are likely to find that £2,500 will not be enough to develop their business and will still need to find alternative sources of funding,” he added.
 
Nick Moore, the managing director of small business marketplace We Trade It, concurs with Whitehead and calls for further support. “To achieve maximum effectiveness the loans should be linked with additional ‘start-up’ benefits to encourage growth and initial cashflow such as rate reductions and changes in corporation tax levels for start-ups.

“Part of the criteria to qualify for the loan should be the completion of government funded online training/support to help equip the recipients for business life and give their business ideas every chance of success. It’s also essential that the government actively promote the scheme to a wide market, including via colleges and universities, making the application process clear and concise.”

With delivery partners for the scheme, including Rockstar Youth and School for Startups, providing pitch and business plan training, plus access to mentors, it seems Moore’s wishes have been factored in.

One voice that argued the £2,500 was plenty to get a sustainable company off the ground was Xenios Thrasyvoulou, founder and CEO of online freelancer marketplace PeoplePerHour.

He said: "Our research found that 73% of 18-30 year olds who start their own small businesses do so with just £1,000 to £2,000 of starting capital, so a small loan through the Start-Up Loans scheme could make the difference between a young entrepreneur being able to realise a dream or falling at the first hurdle.

Like Whitehead, Thrasyvoulou queried how accessible the funds have been so far and whether the infrastructure is in place for young people to be directed to the availability of the loans. "Questions have to be asked as to why only £1.5m of an £82m pot of money has so far been distributed to applicants.

"Equally concerning is why just 3,000 young people have applied for loans since it was announced last May. [It suggests]...young people starting their own businesses don't actually know where to go for help and to apply for this funding."

And also echoing Whitehead's concerns Thrasyvoulou warned the failure rate among this group of start-ups could actually be higher. ""Funding without support and mentoring could leave the government with egg on its face, when the end result could be lots of young business people seeing their businesses fail in the first year because they weren't given the advice they needed to build a business from the ground."

Meanwhile, Paul Aitken, CEO and founder of short-term loans provider borro, called for the government not to forget the financial needs of more established companies. “The Government still has a responsibility to help established businesses, especially those who may be struggling to access liquidity from traditional sources such as the banks and building societies.”

While Start-up Loans and the Seed Enterprise Investment Scheme (SEIS) may suggest otherwise, programmes such as Funding for Lending, GrowthAccelerator, the Angel CoFund and the Business Growth Fund suggest established and companies with growth potential remain on the government agenda too. But as with its efforts to give Start-up Loans a boost, many initiatives remain a work in progress hamstrung in part by the condition of the UK economy.