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What do people need to begin and run a successful business? A decent idea for a start. No doubt some degree of confidence and a smidgen of luck. Perhaps a guiding hand and some innate business nous, too. But what about money?

Today’s announcement of an expansion to the Start-Up Loans scheme suggests the Government believes start-up capital to be integral to getting businesses off the ground. Previously limited to those under the age of 25, the changes mean that anyone below 30 will now be entitled to apply for the loans of up to £5,000. Like their younger counterparts, the newcomers will also be provided with a formal mentor who will guide them as they grow their operations.

For all the song and dance, this boost to start-up capital should be greeted with a note of caution. It has already been pointed out that only a few hundred loans – the equivalent of £1.5 million – have been channelled to people since the scheme’s inception. This is despite having a budget of some £110 million over 3 years and a target of delivering 2,500 support packages by March 2013.

Part of the reason for the low take-up may be a lack of awareness of the scheme among young people. Indeed, unless you’ve consciously set out to find support to start a business it’s unlikely you’ll stumble across funding sources of this kind (encouraging people to even consider becoming an entrepreneur is perhaps the greatest challenge for policymakers). Yet for all those who haven't heard of the opportunity, there must be thousands who have (and who fit the bill) but didn't decide it was right for them.

One explanation for this lies in the rise of the lean start-up culture witnessed among fledgling entrepreneurs. As part of a new RBS/RSA research project, we’ve been conducting a number of interviews with young entrepreneurs to identify whether there are any interesting trends emerging in the way their cohort are starting and running businesses. One of the most interesting findings we’ve come across so far is that bootstrapping is perceived as the easiest and most attractive means of getting an idea off the ground.

This is driven in part by young people's reluctance to be saddled with a relatively substantial loan (the low rate doesn't seem to have made much difference), and in part by developments in Web 2.0 which have reduced sunk costs and made it easier to take an idea and turn it into a marketable product in a relatively short space of time. In an age when young people can have an idea, build a website and market a product in the short space of an afternoon’s work, why would they go through the hassle of preparing a detailed business plan (based largely on guesstimates), which is normally guaranteed to be rejected by the first few funders they come across? As many of the people I spoke to said, better to build the business first and then go after the capital when you’ve proven yourself and are ready to scale.

The problem with the Start-Up Loan scheme is that it doesn’t accommodate this emerging kind of business model. The result is that not only does it fail to attract budding young entrepreneurs (and diverts valuable funding that could be used elsewhere e.g. for accelerators), it may also damage the prospects of some of those who actually take part. The danger, as pointed out to me a few times, is that these entrepreneurs build the business around the loan, when it should have been the other way round. Indeed, one of the practitioners I spoke to who’s supporting young entrepreneurs said he rarely mentions the Start-Up Loans scheme to those coming through his doors for fear it will distract them from the task at hand: turning a good idea into a profitable product.

Of course, it would be daft to say that loans don’t have a place in supporting young enterprise. Finance is nearly always at the top of the list of survey responses when it comes to what prevents young people from setting up a business, and there are some industries like manufacturing where sunk costs merit a sizeable initial investment. Yet even with these qualifications, it is obvious that ploughing lots of money into something increasingly shown to be out of kilter with the way young people approach entrepreneurialism is not, in Cameron’s words, the best way to back “all those young people who want to work hard and get on in life.”


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