In 2012, the UK government made the decision to offer loans to new entrepreneurs who were excluded from the credit market through the start-up loan (SUL) scheme. By 2021, loans totaling £759 million have been issued to 85,809 new start-ups. A disproportionate share of these SULs was issued to previously unemployed people to support their transition into self-employment. This paper questions whether those who started with the fewest resources achieved better or worse outcomes than those who started from a more beneficial position. Our findings show that previously unemployed start-ups had smaller loans and that they had a higher default hazard on their loans than entrants from waged employment, but more educated and older unemployed entrants survived longer. More generally, SULs to unemployed start-ups were cost-effective for the government in a loan portfolio sense, but once the benefits of supported entry into self-employment were fully accounted for, the overall contribution was very positive. This highlights the potential more comprehensive societal benefits of removing capital constraints by supporting the transition from unemployment to self-employment. Furthermore, we propose testing the effect of replacement start-up subsidies by soft loans in those countries, offering only direct grants, to increase the efficiency of public financial resources.
In the light of the impending global economic recession we set out to assess the potential value of the flagship UK Start-Up Loan (SUL) scheme as a means of supporting individuals to make the transition into self-employment through removing capital barriers. A particular point of focus was on outcomes for those entering the start-up process from unemployment. Since 2012 a total of 25,605 unemployed individuals have successfully transitioned into self-employment via an SUL-supported start-up. Of these individuals, 18.1 percent did not survive and typically exited within the first three years. However, during this period, they were likely to have gained valuable work skills and established networks relevant to future employment opportunities.
Further, they saved the UK government a non-trivial amount in welfare transfers. Our overall assessment is that on a narrow loan portfolio basis, the SUL scheme works. When we add in the net welfare savings and the ongoing contribution of the continuing businesses, the overall assessment of the scheme’s efficacy is even more positive. In short, the UK Start-Up Loan scheme has been successful in helping unemployed people to make a stable transition into self-employment.
But the SUL scheme is shown to be even more effective for older people who have built up useful life skills and competencies and this is important as for many over-50s there is a very low probability of finding waged employment.