Entrepreneur Loans: Why We Need to be Planting More Acorns

It’s time for entrepreneurs to hold this government to account on its promise to be the most enterprise friendly in our history. I’m not advocating rioting in the streets or poking royalty with a stick but while students brought the streets of London to a standstill in December 2010, demanding the scrapping of tuition fees, so entrepreneurs should be campaigning for the exact opposite- the introduction of an entrepreneur’s loan scheme for every budding business owner whose ideas make the grade.

Unemployment statistics may be slowly edging in the right direction, down by 51,000 to 2.61 million in the three months to April, but the increase in private sector employment remains worryingly slow, especially amongst those aged 16-30. And that’s where start-ups come in. They’re innovative, flexible and not constrained by expectations of rigid process. There’s a natural synergy between the needs of start-ups those of Generation Y and connecting those with lower salary demands and in need of experience with dynamic businesses who require fresh and motivated talent who are prepared to work outside of the box of traditional employment.

But first we need to support our entrepreneurs to build businesses, something which despite all the rhetoric, we are failing badly at. We need to start planting Acorns today.

The recent announcement of the Start-up Loan Scheme just doesn’t cut it for me I’m afraid. It’s little more than political showmanship.. Don’t get me wrong, I believe wholeheartedly in investing in young people; but why not invest in every entrepreneur who shows the willingness and potential to build a business that could create employment opportunities and pay taxes? The problem is that regardless of what this, or previous governments say, starting a business remains a minefield of state inflicted complexity and extraordinary personal risk and that has to change.

The last Department of Business Innovation and Skills statistics for 2010 showed that there was a net increase of only 94,000 new businesses in the UK that year with an estimated 180,000 new registrants. Worryingly, of the 4.5 million small businesses in the UK, under 30% create any direct employment. There appear to be no hardened statistics tracking the failure rates of the UK’s start-up businesses, but it’s generally accepted that around 50% of new businesses will fail to make it past year one, while 90% cease trading before their second birthday. Experience tells us that the majority of those businesses fail simply because of a lack of Capital & cash flow at critical stages in their growth.

So why then, with banks only interested in lending to those established businesses with healthy order books, is the world obsessed with banks’ lending to SMEs? Banks have never been good at leading to start-ups or small businesses. Start-up’s didn’t meet the banks strict risk profiling even before the global economic crisis, so why on earth would they start lending to them now? We need to get past the concept of George Osborne giving billions to banks and focus of putting cash directly in the hands of those individuals willing to build businesses.

And that is where we need a completely new way of thinking. Most entrepreneurs I know including myself have self-funded or ‘Boot-Strapped’ their start-up at huge personal financial risk. Despite the public perception of men in suits, with vast mansions, fast cars and stacks of £50 notes on the coffee table, many would-be business builders give up paid employment, invest their savings, take out loans against their family homes and rack up credit card debits in order to finance the countries next wave of innovative businesses. I’ve seen time and again, start-up founders with great ideas and with the potential to be highly successful having to return to part-time jobs to support their families while spending every spare moment of their 20 hour days working on their start-up. This may be far removed from good telly but its reality.

If the UK wants to regain a seat at the top-table of innovation, we need to invest in those brave enough to take the risk and who set out to create their own vision of the future. Let’s ditch the bureaucracy and invest directly in entrepreneurs and the return on the taxpayers investment is potentially massive. We need to start planting Acorns!

Currently the contributions based unemployment benefit bill stands at nearly £3.7 billion. Job Centre’s around the UK run workshops for individuals thinking of starting their own businesses. Do you know what is sickening? You have to have been out of work for 6 months before you are allowed a place at one of these workshops. Furthermore if set off to start up your own business you lose your entitlement to the £71 job seekers allowance even if you’re not withdrawing a penny in salary from your start-up! How is this incentivising would-be business owners to get off the sofa and build a business?

So, currently there are 950,000 small businesses in the UK excluding sole proprietorships, each employing an average of 4 staff. With the Government failing in its mission to create jobs, let’s let entrepreneurs help solve some of the problem and here’s how we should do it:

The Government recently unveiled a £100bn package of support aimed at helping banks increase lending levels to SMEs. Forget the brain numbingly insignificant £82.5m Start-Up Loan Scheme, let’s instead put £10bn of that pot into the hands of capable new business owners who make the grade with a university student loans style model direct to entrepreneurs.

The Office for Budget Responsibility estimates that the cost of the student loan book will reach £12bn a year by 2015-16, providing loans to around 1 million young people each year. Let’s replicate the model which provides tuition fee loans of up to £9,000 and maintenance loans to the individual of £6,000 each year for the first three years of a business’s life. But rather than making loans to businesses, we should provide these loans direct to entrepreneurs against future personal earnings from this business or other revenue sources.

Supporting the 180,000 new businesses in the UK to the tune of £15,000 a year for the first three years of life would cost the taxpayer approximately £10bn a year by 2015. Many businesses would still fail, I don’t doubt it. However with the right support network, I can assure you fewer businesses would fail and critically I believe many more would start-up than we currently see.

Of course there will be those who default or who avoid the repayment threshold but unlike financing student loans for those studying degrees in low paid professions such as the performing arts or sciences, the default rate with entrepreneur loans is likely to be far lower. The taxpayer therefore would not be left out of pocket. More businesses mean more employment opportunities, greater taxation for the treasury, falling benefit costs, higher consumer spending and of course interest and capital repayments on the loans.

The rates would mirror the student loan and be fixed for a year on 1 September based on the inflation rate (RPI) in the previous year meaning it would currently be 6.6%. After the final year of the loan payment being made the entrepreneur must repay 9% of everything earned above £21,000 a year. So earn £22,000 and you’ll repay £90 a year; earn £36,000 and its £1,350 a year until such time as the full loan is repaid.

While universities rely on a complicated administration process to decide who qualifies for a university place, so we finally have an opportunity to pull together the myriad of often pointless entrepreneurial groups who accomplish little more than glorified networking. A new body representing entrepreneurs could offer professional development, skills and mentoring in a way that quite frankly the thousands of existing bodies have failed to deliver. We would finally have a national drive for small business which is purposeful

An Entrepreneur Loans Scheme, would mean far more than Banks lending to small businesses; it would be the UK investing in its best and brightest. It would be an act of faith in those building the next generation of cutting edge businesses and in young people who stand so much to gain from the increased employment opportunities. Of course it won’t be for every entrepreneur but for those risking crippling debt it would literally business changing.

Let’s start planting more Acorns!

Pete Boswell
Pete Boswell is a prolific serial technology entrepreneur who started his working life in the Royal Marines, serving in The Falklands Conflict, Northern Ireland and Africa before entering the technology sector in 2005. He has designed and delivered a number of award-winning software applications including PowerPressed and BluBox. His latest venture, Photo Legacy is a rapidly expanding digital photography service, with a host of global partners across Europe, Africa and Australia including Tesco and Jessops. www.photolegacy.com