UK government-backed start-up loans: Tackling disadvantage and credit rationing of new entrepreneurs

Abstract

In 2012, the UK government made the decision to offer loans to new entrepreneurs who were excluded from the credit market through the start-up loan (SUL) scheme. By 2021, loans totalling £759 million have been issued to 85,809 new start-ups. A disproportionate share of these SULs was issued to previously unemployed people to support their transition into self-employment. This paper questions whether those who started with the fewest resources achieved better or worse outcomes than those who started from a more beneficial position. Our findings show that previously unemployed start-ups had smaller loans and that they had a higher default hazard on their loans than entrants from waged employment, but more educated and older unemployed entrants survived longer. More generally, SULs to unemployed start-ups were cost-effective for the government in a loan portfolio sense, but once the benefits of supported entry into self-employment were fully accounted for, the overall contribution was very positive. This highlights the potential more comprehensive societal benefits of removing capital constraints by supporting the transition from unemployment to self-employment. Furthermore, we propose testing the effect of replacement start-up subsidies by soft loans in those countries, offering only direct grants, to increase the efficiency of public financial resources.

Dynamic capabilities and employment during COVID-19: The moderating effect of government support

“…The findings show an overall positive impact of government support on employment during the first lockdown of the COVID-19 pandemic. These findings thus contribute to the insights from other studies that focused on individual support schemes (Bartik et al, 2020b; Calabrese et al, 2022; Cowling and Dvouletý, 2022; Cowling et al, 2022; Doniger and Kay, 2021) by capturing the impact of the quantity of support schemes that SMEs received on employment change. We also see that the support, at least to some extent, benefited the economy by sustaining and creating employment, as such policies typically intend to do (Cowling and Dvouletý, 2022; Kersten et al, 2017).…”

“…Although other COVID-19 support instruments, such as BRH , are less directly related to employment, they should also trigger positive effects, similarly to other tax incentives (Liu et al, 2019; Sterlacchini and Venturini, 2019; Venâncio et al, 2022). We typically assume that public resources spent on support instruments will return to the economy through overall regional economic development by increasing competitiveness and creating employment (Cowling and Dvouletý, 2022; Kersten et al, 2017). The support should relieve businesses of cashflow problems, amplified by the shock in demand or operations and, in this way, enable them to sustain employment during an external shock (Biggs et al, 2012; Khan and Sayem, 2013), such as the COVID-19 pandemic.…”

“…This encourages us to reason with the second hypothesis that government assistance is likely to positively contribute to employment in the initial stages of the COVID-19 pandemic directly through furlough schemes ( CJRS and SEISS ) and also through less direct support ( VATD, TtP and BRH ) by promptly closing the resource gaps that are particularly pronounced among small businesses (Calabrese et al, 2022; Cowling et al, 2020; Cowling and Dvouletý, 2022; Eggers, 2020):…”

Who is brave enough to start a new business during the Covid-19 pandemic?

“…The only research paper explicitly on the SUL was a recent paper by Cowling and Dvouletý (2022), which considered unemployment pathways into business start-ups via the SUL scheme. However, the scholarly community has not yet provided more complex insights into the SUL, which justifies the novelty of the present study.…”

“…No fees are charged for loan arrangements or early repayments (British Business Bank, 2020). This is important particularly because the arrangement fees of the UK Enterprise Finance Guarantee (EFG) scheme were a significant component of the overall cost of capital, as noted by Cowling and Dvoulet y (2022).…”