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Start-up Loans

Volume 749: debated on Wednesday 20 November 2013


With the leave of the House, I will repeat a Statement made in the other place today by my honourable friend the Minister of State for Business, Innovation and Skills.

“Across this House, since the great recession of 2008, concern has been repeatedly raised about access to finance, particularly for the smallest companies. The contraction in support for small and medium-sized business lending following the financial crisis led to a sharp drop in the growth of lending to and support for small businesses to finance growth.

All Members will recognise the story of the constraints facing aspiring entrepreneurs when it comes to accessing finance. These problems were a consequence of an overreliance on bank finance compared to international competitors, a hollowing out of business lending units in the big banks, too much concentration in our banking system, followed by the biggest banking bust ever faced in this country and the biggest bank failure in the world in 2008.

A calamity of this scale cannot be addressed by a single policy, so we have engaged since 2010 on a comprehensive programme of bank reform: splitting retail from investment banking; requiring greater capital; introducing a tax on leverage; introducing much stronger requirements to check that the people running banks are fit and proper persons, so we do not get the likes of Fred Goodwin and Reverend Flowers sitting atop our banks in the future; and we are introducing criminal charges for those who behave negligently in charge of big banks.

Those changes are part of a wider drive to change the culture of banking so that our banks serve the economy, rather than the other way around, but these reforms alone are not enough. To help companies access finance, we have introduced the first British business bank, have doubled the seed enterprise investment scheme and are expanding the enterprise finance guarantee schemes. Last year, we introduced start-up loans of up to £25,000 per founder, although more typically about £6,000, to help budding entrepreneurs access the seed capital to make their idea a reality.

Britain has for too long been a home of great ideas that are then commercialised and developed elsewhere. We want British business men and women to take brilliant British ideas and turn them into blossoming British businesses. The first start-up loan was made in September 2012, and from the start, growth exceeded expectations. More than a third of loans go to BME entrepreneurs, and more than a third to people previously unemployed.

In June this year, the Prime Minister announced that start-up loans would no longer be restricted to young people, so the age cap has been removed altogether. We are now seeing strong growth in the number of people over the age of 30 being helped to realise their full entrepreneurial potential with the mentoring and financial support of the programme. In August, we introduced specialised support to finance ex-military service personnel who want to start their own business within the start-up loans scheme.

I am pleased to announce that today we have made the 10,000th start-up loan. Mr Allen Martin, a Royal Navy engineer from Truro, is the 10,000th loan recipient of the programme. Allen joined the Royal Navy in 1991 as an engineer and mechanic. Working with helicopters, search and rescue, and commando forces, he served for 22 years in Bosnia, Kosovo, Iraq and Afghanistan. Having been medically discharged, Allen knew that he wanted to start his own business, so he applied for a start-up loan and founded Eclipse Property Cornwall. It will manage properties on behalf of landlords, renting them out and offering part or full management. Allen Martin has benefited from both the extension of start-up loans to all ages and the specialised support for our ex-service personnel.

Given the success of this targeted approach within the full age range, we are now going even further. I can tell the House that we are committing a total of £151 million to the scheme this year and next, with a goal of backing 30,000 new businesses by 2015. From 1 January, the Start Up Loans Company will specifically target priority groups: entrepreneurs over 50, NEETs and new mothers ready to return to the workplace, seeking the ability to manage their own time and commitments on their own terms.

Age UK estimates that one in five of those over 50 now work for themselves—a growing trend that accounts for the fact that 70% of the businesses that they start will last more than five years, compared with 28% of those started by young entrepreneurs. With the added support of mentors who understand modern media and marketing, new retail platforms and communications channels, start-up loans can help bring even more of those in that age group success. That is why I am tasking them to find the specialist providers who will make start-up loans a perfect fit for the older entrepreneur.

For NEETs, I know that Members across the House have seen just how valuable and popular these loans are proving in tackling youth unemployment. Working with the new enterprise allowance, start-up loans will now give specialist support to those who have been away from the workplace for a long time, who need strong and committed mentors with an understanding of what it is to start from a very low base. The Prince’s Trust has already demonstrated just how effective this approach can be, and much more can be done to create a targeted offer that creates the right conditions for those businesses to survive and thrive within the safe environment of start-up loans.

Finally, new mothers are also turning increasingly to self-employment. According to Mumpreneurs UK, self-employment for women is rising at three times the rate for men. So far, 37% of start-up loans have gone to women, and we want to do more to increase this. We will introduce specialised support for mothers seeking to start their businesses, juggling childcare and seeking flexible ways to turn business ideas into reality.

With a record business creation of 400,000 new businesses each year, record jobs, and a record 4.9 million companies in the UK, Britain is once again becoming an entrepreneurial beacon of the world. Our future prosperity rests on the entrepreneurial aspirations of the British people. This Government will not rest in our drive to support those who want to work hard and get on”.

My Lords, I commend the Statement to the House.

My Lords, I thank the Minister for repeating the Statement made in the other place. I would also like to place on record the thanks of the House for the work that has been done by James Caan and the Start Up Loans Company to support people in setting up their businesses. It would be good also to record our congratulations to Allen Martin, the 10,000th recipient of start-up loans. Mr Allen is one of the first ex-servicemen to benefit from the Start Up Loans Company and we wish him well with his new venture.

Small businesses are the lifeblood of our economy. The £50 million that has been lent to 10,000 new entrepreneurs is an important token of that enterprise spirit that we know runs deep in this country. However, as we examine the performance of start-up loans in the context of the broader picture for the economy and small businesses, and the support available to start up, we agree with Mr Caan that there is still much work to be done. A key lesson from the start-up loans programme in so far as we have the results is that access to finance schemes is only as good as the infrastructure that supports them, and relies on a wider system of business support, mentoring and signposting. This is the very fabric of support now lacking in so many parts of our country in the absence of Business Link, after the abolition of the RDAs and with the deliberate impoverishing of local government, which had a good record on this issue under the previous Government.

This is borne out by the statistics that we are welcoming today. In every recession, there has been an increase in business start-ups. People faced with a flat job market and low demand for their skills will often look to create their own job by setting up a business. Desperation is not a bad motive for launching a firm, but does the Minister agree that where business support networks are strongest, as they are in London, it is noticeable that that is where there have been far and away the most loans to date? The statistics on the start-up loans scheme that the Government have released today suggest that some regions are missing out. Some 15% of the population live in London while 36% of the loans issued have been in London, and almost half in London and the south-east. Only 5% of the start-up loans have been issued in the north-east and 5% per cent in the south-west.

Can the Minister explain to your Lordships’ House why the scheme has not been delivered in a more consistent way across the country? What will he do to boost business support in the areas that are receiving the least of the start-up loans money? Will he comment on the fact that the successful Business Link scheme has not been replaced by anything meaningful to provide support not just for start-ups but for developing small firms around the country?

Is the Minister aware that James Caan is on record as saying that the support and mentoring available under the scheme was a more important part of the success of the programme than the loan itself? While providing finance to start-ups is important, mentoring also plays a crucial role in helping businesses get off the ground. Does the Minister share my concern that just 17% of those contacting the Government’s new mentoring portal did so in order to find a mentor? Can he do more in this area?

Start-up businesses need to have affordable premises. Given that many businesses now pay more in business rates than on their rent and that business rates have gone up by £1,500 on average in this Parliament, will the Minister say whether the Government will back Labour’s plans to cut and freeze business rates to help start-ups and save 1.5 million businesses across the country an average of £450? A cost that places burdens on new start-ups is rising energy costs. Under Labour’s energy price freeze, start-ups and other businesses will save over £5,000. Why do the Government refuse to take action to help reduce the crippling costs that start-up businesses face?

Alongside the start-up loans scheme, the Government announced the start-up spaces scheme to great fanfare almost two years ago. We were told then that over 300 government offices would be available for start-up businesses to use as premises, but to date just one has opened. Can the Minister explain why the scheme has not been delivered? Is it because the Government have not kept their promise to make the spaces available to start-ups? According to the statistics released by the Government today, almost two-thirds of start-up loans have gone to men. Given the failings that we have seen under this Government with the Aspire Fund that was set up to help women entrepreneurs and that made only five investments in 2011-12 compared to 127 in 2009-10, what steps are Ministers taking to ensure that there is more support available to women entrepreneurs?

Finally, providing help and support for start-ups is important, but thousands more small businesses across the country are struggling to get the finance that they need after the failure of the Government’s Project Merlin, credit easing and funding for lending schemes. According to the Bank of England, net funding to businesses has fallen by £14 billion in the past 12 months. While the £50 million that has been provided through the Start Up Loans scheme is welcome, it is but a drop in the ocean compared with the Government’s failure to get banks lending.

I failed to get an answer to the question I put to the Minister yesterday, so I encourage him to answer it now. It was about the British Business Bank, not RBS. My main point was that last week we learnt that the bank, announced in September 2012, had finally made its first investment of £45 million to two financial institutions: Praesidian Capital Europe and BMS Finance. I asked the Minister: when we will see funding flowing to the small and medium-sized businesses that need it, and when do the Government expect the British Business Bank to reach its target of £10 billion?

My Lords, the noble Lord asked about lending 37% or 40% to London and not throughout the whole region. A large number of SMEs are based down south and up north, but it is for the whole region. To address this issue, we started a marketing campaign at the beginning of this month to make people aware of the different schemes available under the guarantee scheme. LEPs are now playing an important role in the regions in helping SMEs and making them aware of the different schemes available.

With regard to the business rate, it is currently frozen until April 2014 and the noble Lord must wait for the Autumn Statement in two weeks’ time to hear what the Chancellor has to say about it. We accept that it is a major issue for a large number of SMEs. Energy costs are being looked into by the Government at the moment. The British Business Bank has started. It consolidates a number of schemes within the Government. It will play a major role in lending new money. So far within those schemes we have private sector money and government money to the tune of £2.4 billion. The Government have injected a further £1 billion to do more lending to SMEs. The British Business Bank will play a vital role in helping SMEs and making businesses aware of the different schemes available within the Government. I hope I have covered all the questions asked by the noble Lord. If I have not, I will be very happy to write to him.

My Lords, I remind the House of the benefit of short questions to the Minister in order that he can answer as many as possible.

My Lords, the shortfall in business investment is the biggest problem facing the economic recovery. I welcome this announcement of increased support for small business loans but recognise that it is one of many channels required to stimulate investment in small business. I have three questions. Are the Government sure that enough is being done to mentor, support and help networking for business people to take full advantage of these schemes and are they doing their best to make these schemes as simple as possible? Are technical and further education colleges being made the focus for small business development and for courses on how these loans can be used and how specific small businesses can take advantage of them? As well as technical and further education colleges, universities should be involved in this as well. Are the banks, particularly the state-regulated banks, being pressurised to redevelop their local and regional systems and get back to their historic original role of helping local businesses?

My Lords, on business investment, I am pleased to say that there is a return of consumer and business confidence in the economy. Bank lending to businesses is going up. In fact we had a large increase in gross domestic lending to businesses in the past 12 months, a lot more than we had in the early part of 2012. Although net lending has dropped compared with the peak of 2008, it has just started to increase, so there is some business confidence and that will help business investment, which will help our growth. As I mentioned yesterday, our growth forecast has gone up from 0.6% to 1.4%, which is good news. With regard to bank lending, we have a large number of schemes. Once again, we are marketing very strongly awareness of these schemes, which will enable a number of businesses to borrow money and grow further.

My Lords, I speak as someone who started a business with exactly the same sum of money as Mr Martin raised so I am aware of the great difficulty in raising money for start-ups. To have a scheme such as this, which facilitates a new business, is really encouraging. I understand that 30 new businesses a day are being created by this scheme. Does my noble friend agree that not only is this wonderful for new businesses but the success of the business growth fund means that, as these businesses flourish, it is not just relief from debt and loans but equity injection which are being provided to enable these businesses to flourish and succeed?

My Lords, it is pleasure to answer my noble friend’s question. He brings with him a wealth of experience both in business and in corporate finance. The business growth fund is a welcome initiative, with five or six clearing banks putting together some £2.5 billion to lend money to new and growing businesses. I imagine that it will do a very good job for special and medium-sized businesses, which can borrow money on the basis of venture capital. Therefore, we welcome the initiative. The good news is that not a penny of taxpayers’ money is involved in the growth fund.

My Lords, perhaps I may bring the Minister back to the third point made by the noble Lord, Lord Stoneham. Is it not the case that, the way that banks have been operating in recent years, the pendulum has swung from golf course lending to computer program lending and there is no balance between the two? Surely there has to be a regional and more local focus to understand the persons and the nature of the business for which funding is being sought. Is it not the case that the standard approach of banks of using the same computer system, whichever bank you go to, has to be broken up? The banks should focus more on localised issues, including pension funds such as local government officers’ superannuation funds. They should be encouraged to use locally collected money to benefit local business.

The noble Lord makes a very important point. When I ran an SME I had easy access to my branch manager. To borrow money was not that difficult and the turnaround of applications was very quick. I agree with the noble Lord that we need to focus at regional as well as at local level. What is now happening is that a large number of clearing banks have a central office which does underwriting through computers. I am sure that servicing the customer at a local level will become more important. The good news is that we have brought competition into the banking world. Aldermore, Metro Bank and Cambridge & Counties all have branch managers, so a large number of SMEs can deal directly with the branch manager rather than having an application going to the central level. With the demand for money and banks hungry to lend more, I am sure that, given time, banks will surely set up a branch manager network. That was a successful model in the 1970s and 1980s.

My Lords, I congratulate the Government on the start-up loans scheme. It is an excellent initiative and I am delighted that the Minister, a fellow entrepreneur himself, is answering these questions from personal knowledge. I started a business from scratch. I know how difficult it was to raise those first few thousand pounds. To get my first overdraft of £7,500 was amazing. I see that the sums involve an average of £6,000. The average start-up loan is up to £25,000. I hope that the Government will increase that figure because the bigger it is, the better the start-up. I notice that the Prince’s Trust is one of the delivery partners. Can the Minister confirm what the effect of this scheme has been on the Prince’s Trust, which has done excellent work in this area over the years? Is it actually giving out more money as a result of start-up funds in the scheme or less? Secondly, what are the Government doing to help the people who get these loans go on to get the further funding that they need? This is only the start. The Government’s small firms loan guarantee scheme is excellent. How many of these start-up loan recipients have gone on to government-guaranteed schemes, which are absolutely essential? Finally, are the Government encouraging this group of entrepreneurs to network in the future, creating environments and events that these people can attend so that they become a community and the Government can identify the high-growth companies which will be creating the jobs that will power this economy ahead?

My Lords, we will remove the age limit. The limit on lending is £25,000 for a period of five years, at a 6% interest rate. We will look at this over a period of time once we have looked at the success of the scheme. The scheme is proving to be successful. There are a few examples, which I have in my folder here, of people who have traded very successfully, done well and gone to the clearing banks to borrow more money to make sure that their businesses grow. The people who participate in the Prince’s Trust are actively encouraged and are quite often mentored free of charge to help them set up their own businesses.

My Lords, the noble Lord expressed a hope that banks may be persuaded to return to their former glory, when they operated at local level and were very much available for local businesses. Will he tell us what the Government intend to do to make that a reality? The reality is that in many areas the banks have loads of money to shell out. I recently purchased a new kitchen. At the end of the exercise, after having decided how much I was going to spend, I was asked, “But aren’t you going to take the interest-free loan?”. I had no intention of taking the interest-free loan for 12 months, but it was offered to me, so I took it. Therefore, Barclays has stumped up all the cash, which has immediately gone to the German manufacturer that produced the kitchen. There had been no question at all about any difficulty in paying. Interest-free loans are being offered all over the place. Perhaps we should have a look at what is happening with interest-free loans, where the money that comes through interest-free loans goes, who the beneficiaries are, and why the banks are not lending it to our SMEs and to our real start-up people, who we need.

My Lords, it is not under the Government’s control to insist that banks have branch networks or branch managers at branches throughout the country. However, given time, with competition being put in place, this will happen—they will have no choice. If they really want to lend money and understand the local business and local businessmen, they will have to have a local branch network. On interest-free loans, I do not have information in my briefing but I will be very happy to write to the noble Lord on where that money comes from and how someone is able to give interest-free loans. Perhaps the people who sold those goods to the noble Lord are offering the loan themselves from the profit they made from the goods that were sold. However, I will certainly write to the noble Lord.

My Lords, I applaud these steps that are being taken to encourage new businesses. I hope that some of them might go into making kitchens so that the noble Lord opposite might be able to buy British in the future. However, other noble Lords have remarked that it is important that companies should have access to advice as well as to money. Does the Minister agree that the Government inherited so many different advice schemes that the forest is impenetrable and that no entrepreneur has time to wade through it? Surely the sensible thing to do is what I believe the Minister is doing, which is first of all to simplify the advice schemes that are available.

I thank the noble Baroness for her question. Yes, we inherited a large number of different schemes and advice schemes from the previous Government. We have looked at them and have come up with new ones as well. However, these schemes are all being consolidated under the new British Business Bank. I hope that it will be able to deliver good advice to its customers.

My Lords, does the Minister agree that while loans are quite a good way to start a business, what you really need is some equity? With all the money borrowed it is hard work starting a business, and very few of us do that. This is an area where I know he agrees with me. Would he like to describe what steps we are taking to encourage equity investment in some of these small start-up businesses? We used to have something called 3i, which was a very potent and useful source for small businesses, and there are various government schemes. However, they have more or less lost themselves. When we both sat on the committee on small businesses and exporting we discovered that we are unique in Europe in that so many of our small businesses—indeed, businesses of any size—are financed by bank lending. Businesses in most other countries are financed much more largely by equity investment. Can the Minister describe what, if anything, is being done to encourage this?

My Lords, equity finance becomes very attractive and desirable to a large number of medium-sized businesses, but equally to small businesses that want to grow. We have a number of government schemes on equity finance but we also have a new set-up called equity growth funding run by HSBC and four other clearing banks. That is really helping. In fact, they had their first case up north under that scheme. That £2.5 billion available to lend on an equity basis will make a huge difference to a number of SMEs, but we have government- backed schemes as well on equity finance.