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.