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Supporting start-ups during the COVID-19 crisis

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Unemployment in the UK is set to rise to as high as 9% later this year when the UK Government’s furloughing scheme comes to an end. Currently the government is paying 80% of the wages of over nine million British workers, and forecasts by the Office for Budget Responsibility indicate that 15% of workers currently on furlough will be made redundant when the Chancellor’s scheme ends. Some 750,000 workers have already lost their jobs despite the furloughing scheme and projections suggest that the jobless total could reach up to four million.

Some of the newly unemployed may seek to start their own businesses, adding to the host of SMEs that together make up 99% of all businesses. But where do they look for start-up finance, and is the government doing enough to encourage start-ups - and not just those with high-growth potential - in the current climate?

Much of the emphasis in the recent past has been on so-called patient capital to enable often high tech companies to scale and grow. The foundation of British Patient Capital by the British Business Bank for long-term investment in innovative companies, and the current Future Fund which provides convertible loans of between £125,000 and £5 million that is matched by private investment, are certainly welcomed. But these are not realistically available to the typical SME start-up, which will most likely be seeking to provide a recurring and hopefully sustainable income for its recently unemployed founder and perhaps one or two co-workers but which will not necessarily have high growth potential.

As noted in my chapter with Professor Colin Mason on “Private Equity & Venture Capital - riding the COVID-19 crisis” in A New World Post COVID-19: Lessons for Business, the Finance Industry and Policy Makers, it is likely that seed investing will suffer the most of all forms of entrepreneurial finance, making it difficult for start-up businesses to get off the ground. According to a report issued last week by the Scale Up Institute and Innovate UK (The Future of Growth Capital) UK start-ups are facing a cash shortage of up to £15 billion this year after funding from investors fell away during the pandemic, a doubling from the shortfall in 2019. The Plexal Start-Up Tracker reveals that there has been a 37% decrease in the value of start-up investment and a 28% decrease in deal numbers for seed stage companies from 23 March to 5 August compared to the same period last year.

All this means that finance for redundant employees looking to start their own businesses is going to be in short supply. This needs urgent government review along with a revitalisation of local government-supported training programmes to re-skill workers to enable them to start their own businesses with business planning and finance raising advice.

Some ex-employees may be fortunate enough to receive redundancy payments which they can use to kick-start their new businesses. Others may have personal or family savings that they can access. Banks may be reluctant to lend or even provide overdrafts without a track record of sales and profit or personal guarantees. Credit cards should be avoided to fund immediate requirements with their high APR, although over 35% of SMEs use credit cards as an external source of finance, compared with 25% using bank overdraft. Prospective customers may be encouraged to pay in advance or even be prepared to extend a customer loan to a new business, the manner in which companies like Dell Computers were financed in their very early days. For businesses with high growth prospects, equity crowdfunding, business angel finance or venture capital could be considered.

So what more can be done by the government to support newly redundant employees as they set up their own small businesses? Up to £30,000 of redundancy pay is already tax free. Unsecured personal start-up loans of between £500 and £25,000 are available. Over 200 government grants for small businesses are available across the UK. And there are plenty of schemes and support for high-growth potential businesses through the British Business Bank and its British Patient Capital subsidiary, Innovate UK, EIS/SEIS and R&D tax credits.

The government’s support to businesses during the pandemic and the second phase of its response with the newly announced “Plan for Jobs” is to be applauded. But it is those new small businesses created out of the pandemic by newly redundant employees that will likely remain small where additional support is urgently needed, particularly if they are to operate in the hard hit sectors of hospitality, travel, recreation and the arts. Through the efforts of Local Enterprise Partnerships and regional growth hubs, local Chambers of Commerce and other business organisations, currently furloughed employees and those already being made redundant could receive training, advice and support in planning their new business ideas and getting them off the ground.

Dr Arundale has co-written a chapter on “Private Equity & Venture Capital: Riding the COVID-19 Crisis” in a new book, A New World Post-COVID-19: Lessons for Business, the Finance Industry and Policy Makers. The book, co-edited by Henley Business School, explores the effect of the pandemic through a range of topics, including financial markets, travel and tourism, AI and big data, pensions, and entrepreneurship and can be downloaded here.

Dr Keith Arundale

Senior Visiting Fellow
Published 13th August 2020
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