More than a third of the £150m in public funds being lent to individuals to start their own business – ranging from gluten-free pet food to a magazine about Croydon – could be lost,

September 17, 2013 4:21 pm

Up to 40% of start-up loans unlikely to be repaid

By Andrew Bounds, Enterprise Editor

More than a third of the £150m in public funds being lent to individuals to start their own business – ranging from gluten-free pet food to a magazine about Croydon – could be lost, according to official projections. David Cameron last week increased funding for the Start-Up loan scheme – intended to spur entrepreneurship and promote economic growth – and extended eligibility from under-30s to all adults.But documents seen by the Financial Times show that up to 40 per cent of loans are unlikely to be repaid with £549,000 already in arrears.

They also show that 5 per cent of the money – £7.5m – will be paid to the Start Up Loans Company as a fee for running the scheme. James Caan, the high-profile entrepreneur, chairs the company without pay.

A further £12.5m will be paid to “delivery partners”, including chambers of commerce, charities and the Prince’s Trust.

The scheme, launched last year, was championed by Sir Richard Branson, the Virgin founder, and Lord Young, the prime minister’s enterprise adviser. It was initially intended to provide the equivalent of a student loan for young people who preferred to start a business instead of going to university.

The loans carry an APR of 6.2 per cent, with interest payments used to fund future loans. The average loan is £4,500 over a period of up to five years.

So far, £44.4m has been lent to more than 7,600 people and Mr Cameron said the scheme was on course to hit its targets before the next election of 1,000 businesses a month starting with government help.

But some critics have questioned the value for money. A report in April into the pilot stage seen by the FT is just four pages long with no performance information. Matt Smith, who helped market the loans as head of a national association of university enterprise societies, said: “There is a worrying lack of transparency”.

The department for business said it received a monthly performance report on the scheme and had received an annual report which would be published once audited in February. It expected the default rate to stabilise below the initial 40 per cent “indicative ceiling”, based on the experience of the Prince’s Trust enterprise programme.

The Start-up Loans company said it expected the default rate to “peak over the next six months around 30-35 per cent, before coming down” as risk management was strengthened.

It said it hoped to take less than its 5 per cent administration fee and lend any money saved. In addition to involvement with the Start-up loans scheme, Mr Caan is a former investor on the BBC’s Dragons’ Den programme and a government adviser on social mobility.

This article has been amended to reflect the fact that the administration fee was paid to The Start Up Loans Company, which is not connected to Hamilton Bradshaw, the private equity company founded by James Caan.

Health and beauty are most popular start-ups

Britain is becoming a nation of preeners as well as shopkeepers, judging by its young business population.

The pilot study of the first 1,519 loans granted under the government’s Start-up Loans scheme shows health and beauty was the most popular business area, followed by fashion and retail.

Some 7.7 per cent of businesses started were in health and beauty and 5.4 per cent in other personal services. Fashion accounted for 7.4 per cent and food and drink 5.7 per cent.

Only 2 per cent were internet-based, and 5.1 per cent in information technology, though ecommerce accounted for an additional 4.1 per cent.

Manufacturing made up only 1.4 per cent while just five businesses – 0.3 per cent – were in engineering despite government efforts to diversify the economy towards production and exports.

The figures also point to a more diverse business ownership: a third of recipients were female, and a third non-white. After London, with 30 per cent of loans, the northwest, with 17 per cent, and Yorkshire, with 10 per cent, received the most.