Start-up loans criticised for offering poor return

It may have last week received the chancellor’s all-clear to help an extra 50,000 aspiring traders, but the state’s start-up loans scheme presents a poor risk-reward ratio to taxpayers.

Issuing the criticism, an investment expert said start-up loans offer a firm only 3% over base rate and that, even with successful mentoring, “bad debts will be 16% of its loan book.”

Simon Culhane, chief executive of the Chartered Institute for Securities & Investment made the calculations for users of the Start-Up Loans Company last week, in CISI’s journal.

Fronted by former Dragons’ Den judge, James Caan, the company’s scheme supports would-be entrepreneurs by providing mentoring and unsecured ‘soft’ loans from £2,500 to £20,000.

“Although the financier is providing risky, soft-loan capital, its return is priced at only 3% over base rate and there is a capital repayment holiday for 12 months,” said Mr Culhane.

“This isn’t the sort of deal that James Caan or his fellow Dragons would contemplate, yet it’s in exactly the same high-risk category for which they would expect a potential high-reward return.”

However, unlike the Dragons or a bank-lending proposition, the institute points out that there is no requirement for the appointed mentors to track how the businesses they back are faring.

There is also no onus on the provided mentors to explore how the funds are actually being spent, although there is now some move to request quarterly reports.

“But commonsense start-up lending says that these untried start-ups need monthly financial cash flow and forecast monitoring, from suitably experienced mentors, for the first six months, then quarterly thereafter,” the CISI said.

“This is to spot the early warning signs to guide those inexperienced borrowers from failing either to repay taxpayers’ money or to prove they are ready for second-round funding.”

Mr Culhane added that the UK does need to support start-ups and has clarified that he regards the idea of helping such nascent businesses as “an excellent one.”

“But it’s questionable whether rushing into it without the proper risk-management process is acceptable, “ he said, “thereby risking taxpayers’ money for unsecured borrowers who cannot get funding from anywhere else.”

Dec 10, 2013
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