Dear Prime Minister: Create a student-loan-style scheme for start-ups

Entrepreneur Pete Boswell believes his idea for the government would help start-ups survive. Do you agree?

Dear Prime Minister is a new series inviting our readers to share your views on how to make Britain’s businesses and economy stronger. Had a lightbulb moment? Email sophie.hobson@londonlovesbusiness.com

 

The Right Honourable David Cameron
Prime Minister
10 Downing Street
London SW1A 2AA

21 June 2012

Dear Prime Minister,

My proposal to create an Entrepreneur Loans Scheme

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 students managed to bring the streets of London to a standstill in December 2010, demanding the scrapping of tuition fees.

Entrepreneurs should be campaigning with as much vigour for the exact opposite – a way to revive and accelerate the economy through their own businesses.

Why? Unemployment statistics may be slowly edging in the right direction, down by 51,00, 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. Currently the contributions-based unemployment benefit bill stands at nearly £3.bn.

This is 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. Start-ups can connect those with lower salary demands and in need of experience with dynamic businesses who require fresh and motivated talent, prepared to work outside of the box of traditional employment.

Worryingly, of the 4.5 million small businesses in the UK, less than 30% create any direct employment. There appear to be no hard 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 within the next few years.  The majority of those businesses fail simply because of a lack of capital and cash flow at critical stages in their growth.

The government recently unveiled a £100bn package of support aimed at helping banks increase lending levels to SMEs. But banks have never been good at leading to start-ups or small businesses. Start-ups 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 instead on putting cash directly in the hands of those individuals willing to build businesses.

That is where we need a completely new way of thinking – and I have an idea just for that.

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 it’s 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.  

Forget the brain-numbingly insignificant £82.5m Start-Up Loan Scheme, which 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?

My idea is to instead put £10bn, taken from the £100bn government package to increase bank lending to SMES, directly into the hands of capable new business owners who make the grade. The money would come through a student loans-style-model.

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’ life. 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.

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.

Many businesses would still fail, I don’t doubt it. But with the right support network, I can assure you fewer businesses would fail – and, critically, I believe many more people would start-up businesses.

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.

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.

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 be business changing.

Yours sincerely,

Pete Boswell

 

What do you think of Pete’s idea? Leave your comments below

Dear Prime Ministeris a new series inviting our readers to share your views on how to make Britain’s businesses and economy stronger. Had a lightbulb moment? Email sophie.hobson@londonlovesbusiness.com.

Pete Boswell is a prolific serial technology entrepreneur who 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 including Tesco and Jessops

Readers' comments (3)

  • Pete Boswell has hit the nail on the head. I and others that I know have all encountered the same restrictive and unsupportive issues with most if not all the high street banks.

    Getting the banks to act or think differently is absolutely essential if we're to lift our economy out of the doldroms. The Banks behaviour (whatever it's driven by) is a positive barrier to start-ups and small businesses, not an aid.

    It's not just me who believes that, I've now heard that directly from employees within three different banks. Their belts and braces approach to risk is throttling recovery and expansion. It's a shame they didn't take this view with their own asset purchase risks, because if they did, chances are we wouldn't be in this mess with them.

    The idea of pumping more cheap money into these banks without mechanisms to institutionally bring about an embedded different approach will be almost pointless.

    Local Banking employees seem devoid of understanding of how small or start up business work, which isn't surprising when you examine how they get into the positions they do, especially when you consider that they don't even make decisions, as the decisions are made by faceless 'credit' departments with absolutely no contact with the businesses concerned.

    As you can guess I'm convinced that without schemes like Pete suggests above, the chances of reinvigorating our economy are small to non-existant.

    I hope someone in Government is doing something other than looking at the Banks as a means of channeling funds to start-ups and small businesses. If they're not, then I'll confidently predict the impact of more cheap money will produce little galvanising effect that this Government seems to be looking for.

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  • This is absolutely spot on! When explaining how the student loan scheme works to my daughter, who is about to start at university, I said to her that if this kind of funding was available to business it would be a lifeline for the economy and be immensely popular. The problem with student loans is that 90%of the population do not understand how the system works or why they even exist (largely because it has been hijacked for political gain); if a business loan scheme were set up in the same way, it could broaden that understanding as a side effect!

    If ever there was a logical, common sense way to kick start the economy, this is it. The UK has always led in innovation through small businesses in spite of successive government attempts to thwart them . This is a perfect opportunity for the Coalition to get something right....

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  • Students are quite being depressed with the debt of loan and that’s really a question for every student regarding their future. And it’s quite good to see that government is showing the keen interest and taking those measurable steps to defeat debt by giving subsidy to students.
    http://www.flexcredit.co.uk

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