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Holding Back: Money Is Available, So Why Are Many U.K. Startups Reluctant To Apply For Debt Finance?

“A lot of businesses don’t apply for funding because they don’t think they’ll get it,” says Richard Bearman. “We want to make people aware that support is there.”  

Bearman is Managing Director of Start Up Loans, a division of the British Business Bank. Backed by the Department of Business Energy and Industrial Strategy, the bank aims to support up to 33,000 businesses over the next three years with loans of between £500 and £25,000. It’s all part of the U.K. government’s plan to foster entrepreneurship. 

But there’s a problem of a sort. As Bearman sees it, businesses that could benefit from financial support are often reluctant to apply for debt finance. To encourage them to take the first step, Start Up Loans this week launched its latest Ambassador programme.

Exploring Options

The idea is a simple one. Start Up Loans has selected 12 companies – one from each of the UK regions –  to share their stories. All have enjoyed success having secured loans from the government-backed bank and its delivery partners. Their stories, Bearman hopes, will spur other startups to explore their funding options.   

Importantly, the ambassador companies are drawn from a diverse range of sectors and backgrounds. They include a camel milk company (Tribal Milk), a lingerie company for women who have had mastectomies (Valiant Lingerie) and climbing wall company, Tide Climbing Centre. 

Why So Shy?

So why is an ambassador program of this sort required? Are entrepreneurs really so shy when it comes to chasing funding?  

We’ve all grown accustomed to high profile startups – often but not exclusively in the tech sector – wearing their equity funding as a badge of honour. From the Seed stage to Series A and beyond, their growth is fuelled by angels and VC cash.  

But equity-funded startups represent only a small subset of business formations. They attract equity because their plan is to grow rapidly and provide an exit for their backers. The majority of newly created companies aren’t on that track. Yes, they want to thrive but they aren’t necessarily focused on the kind of growth that would attract angels and VCs. For them, debt finance is usually the best option. But often they are reluctant to subject their ideas to the scrutiny of lenders. 

Bearman says fear of rejection is an obvious deterrent. “Nobody likes to be told no,” he says. “Being declined is an emotional thing.”  

Arguably there is more than bruised pride at stake. While a “yes” might validate the business model, a “no” could shake the confidence of an inexperienced entrepreneur. “Applying for a loan can be intimidating,” says Bearman. “And that can put people off.” 

Support First

Start Up Loans takes a different approach from most banks. Working with partners it offers mentorship and support ahead of loan applications being made. In doing so, it helps businesses to hone their business plans. “We talk to them about things like cash flow and how to become creditworthy,” says Bearman.

As he acknowledges, not every applicant will be successful, even after mentoring. Some will decide themselves to go away and rethink their plans. But crucially Start Up Loans is prepared to go the extra mile to provide help. “We do say no – these are loans not grants – but we are also prepared to take more risks.

Another important message is that cultural differences can be catered for. For instance, the aforementioned Tidal Milk required a Sharia-compliant loan. “A lot of people might see the need for sharia-compliance is a barrier,” says Bearman. “But it isn’t. 

For their part, the Ambassadors benefit from the publicity of a national launch. “And they also have a chance to interact with each other,” says Bearman.  

Ultimately, the success of the program will be measured by the degree to which it has raised the profile of Start Up Loans and helped to  unlock what Bearman describes as “hidden demand” for funding.” But arguably, the wider point is that we shouldn’t always be judging the health of the start-up economy in terms of VCs, scaleups and unicorns. There are many businesses – often embedded in their communities – that will grow faster and create more jobs if they feel confident enough to raise even small amounts of capital.

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