Recent reports about poor access to start-up loans suggest that potential SME owners will struggle to get their businesses off the ground. However, despite this understandable focus on the lack of capital for SMEs, there are other issues which will strongly affect both SME growth and the wider economy.
One issue with potentially damaging consequences for SMEs is the level of personal debt which young people now carry. In the US, this has become a major concern, with a reported $1.2tn in outstanding student debt affecting both business start ups and home ownership. UK students may not have reached that level of personal debt – information about the total amount owing in over 4 million student loans is difficult to determine – but despite their lack of assets, students are able to carry increasing levels of personal debt. Currently students can access loans of £13,375- £16,675 annually for undergraduate degrees or up to £15,000 for postgraduate career development.
While student loans carry 1.5-6% compound interest (this varies with start dates), postgraduate career development loans carry an APR (annual percentage rate) of 9.9 %, with the total to be repaid within five years. The mantra for student loan repayment is that people need to take responsibility for their own development and shouldn't expect it for free. But those advocating this system argue that one should not worry about loan repayment condemning students to lifelong debt because actually 'most people won't pay it back'. In England and Wales, students starting university after 1st September 2012 will have any loan plus interest remaining after 30 years written off (those starting before will have 25 years).
But that is a long time to have the possibility of debt hanging over your head. Could worries about debt levels deter students from starting their own businesses? The relatively few loans made through the UK Start-Up loan scheme since 2011 would suggest so. Taking on more debt to start a business is unlikely to appeal to those who are what a recentZurichreport, written by the Economist Intelligence Unit, termed ‘capital-lite’ -- a generation of students without assets but with post-university debts.
Being capital-lite impacts on risk appetite - those wanting to start up their own business are likely to postpone their enterprise and borrow as little as possible to avoid increasing their debt. This in turn may damage the future prospects of their business as seen in Professor Sara Carter’s work with women-owned businesses showing that businesses that start with small capital investments are likely to stay small. This isn't the only potential result from increasing personal debt. Existing SMEs in the UK often use their homes as security for business loans to offset risks for lenders in supporting business growth. This is an option that the current generation of young people may not have and so it is time to widen our understanding of how early debts affect enterprise.
The views and opinions expressed in this article are those of the authors and do not necessarily reflect the views of The Economist Intelligence Unit Limited (EIU) or any other member of The Economist Group. The Economist Group (including the EIU) cannot accept any responsibility or liability for reliance by any person on this article or any of the information, opinions or conclusions set out in the article.
