START-UP LOANS IN WALES
As a result, I recommended that the Welsh Government should develop an appropriate mechanism for this type of support based on the Start-Up Loans programme operating, at the time, in England only.
Fortunately, the Economy Minister saw the merit in this immediately and pushed forward with this recommendation. As a result, Wales launched its own version of the Start-Up Loans programme four months later.
Funded through the UK Government’s Business Innovation and Skills Department, it is aimed at those entrepreneurs whose business is under 12 months old and offers low cost, unsecured loans of between £1,000 and £25,000 at a fixed interest rate of 6 per cent. The loans are to be paid back within five years and capital repayment holidays are available for those participating. Most importantly, on-going mentoring and access to various types of business support is also available as part of the initiative.
So how has this new programme performed during the last nine months?
The signs are extremely encouraging and according to Welsh Government data released this week, £2.2 million in loans has been drawn down by 291 new businesses across Wales. That is an incredible achievement given that such initiatives normally take some time to be on the radar of the business community.
This success is probably down to the fact that it is being managed by existing enterprise bodies across Wales. As a result, these organisations, some of which also help to manage the Welsh Government’s business support programme Business Wales, are able to identify the right candidates through their client base. This principle of marrying business and financial support is at the heart of the proposal for a new Development Bank for Wales.
Indeed, research has shown that there are advantages in having a joined up approach to business and financial support so that a company can evolve as it grows towards different services being provided by such an organisation. There could also be benefits in terms of reduction in costs but also a stronger relationship with the beneficiary, which leads to better access to information on the business and therefore a reduction in risk when lending.
There are various best practice examples where this has proven to be a successful approach.
In the USA, the Small Business Administration provides grants and loans alongside its counselling and training programmes for small business. The Swedish funding agency Almi provides advisory services to customers at all stages of development from ideas to successful companies through both its own internal advisers and external sub-consultants.
Another example of how finance and business support can lead to benefits for business can be found in Canada.
The BDC is Canada’s business development bank and promotes entrepreneurship by providing highly tailored financing, venture capital and consulting services to entrepreneurs. A recent review of its services showed that whilst sales growth among BDC financing clients was up to 14 per cent higher than that of non-clients, those firms that used both the financing and consulting services performed better with sales growth of up to 25 per cent greater than that of non-clients. Given this, it will be interesting to see how the mentoring services offered by the Start-Up Loans programme add real value to new Welsh firms.
It has also not gone unnoticed that the low cost of borrowing for Start-Up Loans is almost half of that currently being offered by Finance Wales’ microloans fund. Indeed, established small firms in Wales would be right to ask the question why they are paying twice as much for loans when riskier start-ups are getting their finance at a cheaper rate from the same source, namely the Welsh Government.
One of the areas currently under review by the Development Bank Task and Finish Group is whether the Start Up Loans scheme - both in its cost of borrowing and mentoring support - could be extended from servicing new firms to other small businesses. Indeed, there is a strong case to be made for all loan funding below £25,000 to be devolved to the existing business support network in Wales, potentially under the Development Bank of Wales brand, to provide funding to those local businesses they support. As Business Wales providers work closely with these firms to develop their potential and, as such, have a detailed understanding of the firm and their funding needs, this would result in a streamlining of the current process and create an effective and efficient means by which affordable funding is distributed to smaller firms across Wales.
The success of the Start Up Loans programme has shown that there is real demand for affordable loans by new businesses in Wales. However, as the latest Bank of England Agents’ summary of business conditions shows, whilst credit availability has continued to improve gradually conditions remained tight for the smallest businesses.
Given this, it could be transformational if Wales, unlike other parts of the UK, ensures that it not only start-ups that are supported by such a funding programme and that established Welsh firms that need small amounts of finance to develop their business also get access to affordable funding and mentoring to grow their business.