Interviews

Meeting the conditions for startups to grow

4 min read

20 February 2013

Fast growing SMEs are vital for the future of the UK economy, however, the right conditions must exist for them to prosper.

But there are five key areas in the UK that, left unchanged, will hinder UK startups in 2013:

1. Startup lending

Despite the mild success of the £76bn “Project Merlin,” lending to the banking sector just isn’t working, as the Bank of England’s 2012 report highlighted. Lending growth has been negative for all SMEs since late 2009. The UK needs a student loan style model of investment for startups – lending directly to the entrepreneurs (not the banks) for the first three years of a startup’s life, set against future personal earnings from either the business or other revenue sources. Replicating the current student loan system, post third year, the entrepreneur would repay the loan at income contingentrates. The cost? Funding 180,000 new businesses for the first the years with £15,000 a year would cost the taxpayer approximately £9bn a year by 2015.

2. Workforce flexibility

The youth of today work for themselves – the notion of a “job for life” is becoming increasingly outdated. The average expected tenure of under 25s in the UK has dropped to as low as two and a half years. Further reforms are needed by business minister Michael Fallon to reduce frictional unemployment in the UK workforce. Employment red tape needs to be further cut in order to allow businesses to hire workers on a short-term basis, with no-fault dismissals occurring if a hire just doesn’t work out.

3. Seed funding incentives

Currently, only four per cent of UK investment goes towards early-stage businesses. Seed funding represents a crucial step for providing vital fuel to some of the UK’s most ambitious and talented entrepreneurs, regularly backing ideas that often lack sufficient track records for consideration by banks and are too small to access the capital markets. 

The series of tax reliefs offered by the Enterprise Investment Scheme (EIS) has been successful to date, with the chancellor’s Autumn Statement indicating further improvements. However, further developments of the EIS are still required – the investment allowance needs to increase to from its previous £500,000 to one million pounds, and the tax offset must increase from 30 per cent to 40 per cent.

4. Tax incentives for entrepreneurs

Young businesses should be treated fundamentally different from older businesses, not the other way around, as the numerous 2012 corporate tax scandals would have us believe. 75 per cent of the current tax liability needs to be lifted for young businesses, with statutory PAYE and NI contributions being removed for companies under two years.

5. Liquidity in the startup investment market

Since 2008, there has been a wave of innovative lending solutions, such as SEEDRS, Funding Circle, indiegogo.com and kickstarter.com, as the private sector attempts to fill the funding gap in the UK startup market. The FSA needs to work closely with these networks to increase transparency, liquidity and investment responsibility. A separate FSA category should be created for these platforms – the current application process lacks sufficient differentiation of these startup investment platforms from other financial services agents, such as brokers, advisors and introducers.

Britain needs to foster and put power into the hands of our entrepreneurs. Remember that every business, no matter how large or small, began its life as a mere business plan.