According to recent statistics on entrepreneurs receiving financial support from Start Up Loans program, a third have defaulted the loans. Since its inception in 2012, the program has issued about 48,000 loans valued at £318 million. Besides creating more than 56,000 jobs, about half of all loans issued were given to individuals who had been economically inactive or unemployed.
Despite the overall all-positive image of the project, statistics compiled in 2017 indicate there has been a significant rate of defaults. Between 2012 and 2014 there has been a default rate of 47.65%. However, if you calculate the average from program inception to date, you realize that at least 30.2% of the business owners who borrowed money from the scheme have defaulted payments.
How it has worked out for some beneficiaries
One beneficiary of the loan is Rishi Chowdhury who is a founder of IncuBus Ventures. He used the loan to procure and furnish a mobile office which the business was going to use for its incubator program. According to Chowdhury, the loan was accessed through one of the 26 official delivery partners and he was able to get the maximum amount which is £10,000.
Because the delivery partner was approaching the end of their allocated funds, they hurried the process and the checks made were insufficient. Chowdhury had previously witnessed businesses unfamiliar to the partner receive funds. It is likely that the delivery partner wanted to issue the allocated funds and retain their position; therefore, they were using the wrong incentives.
The team at IncuBus was actively managing a crowd funding campaign and they knew payments wouldn’t pose difficulties. StartUp Loans offers are interest-free and almost guaranteed approval for cash for the first year and this was perfect for Chowdhury. He managed to pay the first half of the money after the crowd funding ended and the remaining amount was settled at the end of the interest-free year.
Today, Chowdhury confesses that he is not amused by the program although it solved his problem. His main worry is that not all entrepreneurs are experiencing success with the loans due to lack of support and experience. When he looked at several business plans from funded entrepreneurs, most were not ready to get the money and are still struggling with repayments.
Donegan, a PopUp Business School founder, believes that startups should not access funds when in their early development stages. In addition, he takes on the adage that “it takes money to make money”. Although the program is backed by a brilliant idea of funding startups, it is getting entrepreneurs into debt. To sum it up, the government should be careful when lending to businesses that haven’t made money yet or run by job seekers and ex-offenders.
The loan terms
If you receive the loan, you are expected to make monthly payments for 1-5 years which depends on your preferences. After the first year which is interest-free, the loan attracts an interest of 6% per year. The funds are not lent to the business but to the individual and the amounts can be anywhere between £500 and £25,000. Nevertheless, if a company has several partners each can take an individual loan and the maximum for a single company is £100,000.
If a borrower has defaulted on the scheduled payments, which is normally more than three payments; standard market practices are followed in a bid to make a fair approach. Initially, the lender will try working with the loan recipient and see if they can uphold the loan agreement. A written communication soon follows and it is specific about the loan default and suggests corrective measures. But if the communication efforts are not effective, the lender resorts to recover the money through several channels like seeking a court judgment or turning over the delinquent account to certified collectors.
In 2013, an entrepreneur named Cary Ward borrowed 20,000 for her business when she was enticed by the competitive interest rates. Although she confirms that short-term financial issues were solved, the business has suffered long-term effects of the loan. She is quick to admit that she wasn’t briefed on the long-term implications of the loan and regrets taking the money. Today, she wonders why the government would allow inexperienced partners to handle the loans. Their lack of familiarity in the industry is the main reason behind misleading most borrowers.
The CEO for StartUp Loans Company has insisted that the default rate has significantly reduced over time. He also confirmed that all delivery partners undergo a rigorous training especially on assessing loan recipients.
It is agreeable that the government has done a good job by trying to support entrepreneurs. However, it is evident that the funds are not being used towards businesses and individuals that are ready and experienced to run successful businesses. Among the businesses that receive these loans, only 50% survive beyond four years. Given the current situation, the StartUp Loans scheme ought to have a thorough vetting process as well as disclose all implications of the loan.