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Government-backed Start Up Loan default rates reach 50%

  1. Start Up Loan
    iStock/AlexBrylov
    ChrisGoodfellow

    ChrisGoodfellow Editor Staff Member

    Posts: 137 Likes: 38
    8 |

    Default rates on the government’s flagship Start Up Loan programme have reached as high as 50%, as business owners fail to make payments on the personally secured loans.

    Data obtained from the British Business Bank via a Freedom of Information (FOI) request shows that 49.6% of loans generated in the 2013-14 financial year are in default (this means three or more payments have been missed). 

      Origination  

      Number  

      Value of loans  

      Share in default  

     2012-13

     1,820

     £9,631,751

     45.70%

     2013-14

     12,628

     £69,840,358

     49.60%

     2014-15

     13,488

     £66,525,878

     32.80%

     2015-16

     9,141

     £64,111,534

     18.90%

     2016-17*

     8,541

     £81,979,030

     4.00%

    *Figures for 2016-17 are latest to 28 February 2017 

    Joanna Hill, interim CEO at The Start Up Loans Company, told UK Business Forums the organisation offers support options to customers who experience financial difficulties.

    “The default rate of each cohort of businesses that we have supported has decreased since our inception in 2012, and this is in a large part a result of our continually improving, robust application processes,” said Hill.

    However, due to the difficulty of establishing a sustainable business and the support of the loan itself, it can take time for a borrower to default, meaning the share of loans in default for more recent years is likely to increase.

    Hill added that 48,000 loans have been provided since the scheme was launched in 2012, with 20,300 or 42% going to people who were previously unemployed or economically inactive.

    Alan Donegan, founder of entrepreneur support programme PopUp Business School, who made the FOI request, told UKBF that the programme has the right intention, but may be harming vulnerable people by putting them further into debt.

    “The default rates are really high and they don’t even show the real picture of what is going on out there. They don’t even include the people whose businesses fail but then they take a job to pay back the loan,” he said.

    Donegan added that targeting ex-offenders for loans sounds like a “dreadful” idea and that in many cases the School is able to help people start a business with no money at all.

    Hill argues that the positive impact the loans make outweighs the issues with those unable to meet their obligations: “While a small number of customers may find themselves unable to repay their loans, the value of this loss is significantly outweighed by the positive social and economic impact created by the scheme, independently calculated as delivering a return of £3.30 for every £1.00 invested.”

    Start Up Loans offer a fixed interest rate of 6% per annum and the ability to borrow between £500 and £25,000, and are repaid over a one-five year loan term.

    Do you think the Start Up Loans programme is a good idea? Have you used the scheme to start a business? Log in to leave a comment below.

    #0
  2. consultant

    consultant I Can Help Your Business Staff Member

    Posts: 5,222 Likes: 723
    The scheme is great and has helped a lot of businesses, but these figures shouldn't be a surprise. Too many people start a business either for the wrong reasons or that simply will not work. Also, most people do not realise the work and effort required to get things going.

    For every one who has applied for a loan, there are 10/20/30 times more people who have not and have made it work.

    Sometimes, not having access to these funds sorts the wheat from the chaff quickly, making some people realise this isn't for them quicker, allowing them to find other routes to being paid!
     
    Posted: Jul 26, 2017 By: consultant Member since: Jan 21, 2008
    #2
  3. ChrisGoodfellow

    ChrisGoodfellow Editor Staff Member

    Posts: 137 Likes: 38
    @consultant I agree. It's been really helpful and I've spoken to lots of entrepreneurs that have used it in a positive way.

    The main thing for me is whether the application process is robust enough to make sure people aren't taking risks unnecessarily and whether those applying have examined how far they could get by bootstrapping. At the end of the day, if you're targeting those that are economically inactive and trying to support those that would find it difficult to raise other funding the default rate is going to be relatively high.
     
    Posted: Jul 26, 2017 By: ChrisGoodfellow Member since: Jul 10, 2014
    #3
  4. miketombs

    miketombs UKBF Enthusiast Free Member

    Posts: 536 Likes: 29
    What proportion of student loans are expected to be written off? I'm sure I read a figure of 45% somewhere which sounds high but if I read it then it must be right. Helping businesses get off the ground has to be the right thing for the government to invest in, although it should be linked to the presentation of a decent business plan. The trouble is that start-ups often don't have the expertise to prepare meaningful business plans nor the funds to pay for professional help. The result will be either loans being rejected due to inadequate proposals or high write-offs due to the lenders having to accept very sketchy plans.
     
    Posted: Jul 26, 2017 By: miketombs Member since: Jan 13, 2007
    #4
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  5. webgeek

    webgeek UKBF Big Shot Full Member - Verified Business

    Posts: 3,707 Likes: 1,379
    Good stuff Chris, thanks for this!

    What's interesting is that new business starts are down significantly, as employment rates rise, there's less need for people to start a business as a way of making themselves a job.
     
    Posted: Jul 26, 2017 By: webgeek Member since: May 19, 2009
    #5
    ChrisGoodfellow likes this.
  6. Mark T Jones

    Mark T Jones UKBF Enthusiast Free Member

    Posts: 988 Likes: 236
    Those figures are roughly in line with the predictions at the start of the scheme.

    The point being, that if you are looking to minimise risk (keeping bad debt to say 5%) then you are no different to a commercial lender, which renders the scheme meaningless.

    There is of course the political debate as the whether it is job figure manipulation; but if the goal is to encourage start ups, this is the sort of bad debt you have to accept
     
    Posted: Jul 27, 2017 By: Mark T Jones Member since: Nov 4, 2015
    #6
  7. ChrisGoodfellow

    ChrisGoodfellow Editor Staff Member

    Posts: 137 Likes: 38
    I've just asked the Start Up Loan press officer for the amount that has been written off (the default numbers above don't mean that the loan won't be re-paid, just that it's in distress/ three payments have been missed). I'll post them here when I get them.

    @webgeek Thanks! @Francois Badenhorst is just writing something about the number of new startups, which has started to drop for the first time in years. We'll post it later today. There's probably a bit of a debate as to the degree employment rates and confidence impact the number of new startups, I suspect both are having an impact.

    @Mark T Jones Agreed. These loans are supposed to plug a gap in the availability of funding. I guess the question now is accurately measuring the tax and societal benefits from the scheme; are the write downs worth the investment?
     
    Posted: Jul 27, 2017 By: ChrisGoodfellow Member since: Jul 10, 2014
    #7
  8. webgeek

    webgeek UKBF Big Shot Full Member - Verified Business

    Posts: 3,707 Likes: 1,379
    I think you'll find that new business startups have been declining for several years and are inversely related to the unemployment rate, at least in Scotland anyway.

    What's also really interesting is the shift in demographics, with more startups being run by women and minorities, while the traditional white, male, segments have dropped off significantly.

    I find all this fascinating, especially the explanation for why it's occurring, and not just the fact that it has happened.

    ONS, Scottish Government, Improvement Service, Councils and more, share a lot of info - it just takes some doing to coalesce it all so as to paint a colourful picture of what's transpiring.
     
    Posted: Jul 27, 2017 By: webgeek Member since: May 19, 2009
    #8
  9. ChrisGoodfellow

    ChrisGoodfellow Editor Staff Member

    Posts: 137 Likes: 38
    @webgeek The number of new company incorporations has actually been increasing year on year since the 2009-10 financial year, according to Companies House data (see @Francois Badenhorst's story from yesterday).

    The demographic changes are really interesting, there's some great data from the Global Entrepreneurship Monitor - http://www.gemconsortium.org/about/news/54


    Going back to the Start Up Loans, I just got the following from their press department.
    Of those businesses which have defaulted on their loans:
    • how many have had their total debt written off – 427 (3.2% of defaulted loans; 0.88% of all loans by volume)
    • partial debt written-off? – 0, we do not do partial debt write-offs
    • what is the total monetary value of the written-off debt? – £2,304,002 (0.7% of total lending)
     
    Posted: Jul 28, 2017 By: ChrisGoodfellow Member since: Jul 10, 2014
    #9