'Student loans' for entrepreneurs: The case for and against
Posted by Adam Soliman and Claire Broadley in Finances, Business trends on Wed, 25/01/2012 - 10:31
The government is considering introducing a student-loan style system of funding for young entrepreneurs. Two business owners put the case for and against. Once you've read the arguments, please vote in our poll by clicking here.
Yes to 'student loans' for entrepreneurs
Adam Soliman, founder, Charbrew
With youth unemployment figures surpassing the one million mark, I strongly believe that the time has come for entrepreneurship to be pushed higher up the school curriculum and promoted as a viable and realistic career choice.
I firmly support the move to offer new student-loan style funding for young entrepreneurs; an opportunity that I wish was available when I first started out in business.
I have no regrets about setting up my own business, even though it wasn't what I originally planned to do at university. My degree was in accounting and finance and I had ambitions to become a commodities trader in the City. However, when I graduated in 2009, the investment banks were being ravaged by recession and no-one was hiring. I had to rethink my entire future which is how Charbrew came to be.
Securing the funding to establish the business was not been easy by any stretch. I invested £5,000 of personal savings to buy my first consignment of pre-blended tea bags from Germany and developed the Charbrew brand.
I also managed to secure some funding from my university as well as access several grants. Although I feel fortunate to secure this, accessing this finance was a very long-winded and complicated process.
The move to offer young people these student-style loans is definitely a step in the right direction. With the number of young people not in training or education reaching one in four in some towns and cities, this funding will provide the opportunity for young people who have their own business dream to make this a reality.
A lot has been said about this being a lost generation, but the opportunities to build and grow a business are there if the right support and encouragement are given at the right time; this is where this new initiative would work.
I do feel that this of course needs to be closely regulated and monitored as there are lots of grants and funding already available and there is a common issue that regularly occurs where new business owners will gain access to this funding only to close down their companies once it is secured.
When I was starting out, it was often a great struggle to access these grants with loopholes delaying every move but, when you're that committed to something, the struggle often makes the journey all the more worthwhile.
The funding for young enterprises needs to be accessed on a case-by-case basis. Currently students can access loans of up to £9,000 a year to cover tuition fees and £7,675 for maintenance. This is a large sum of money and I think it would need to be fed into new ventures on a regular basis rather than all at once to lower any potential risk.
I invested £5,000 of my own money into Charbrew to get it off the ground and most start-ups look for finance below the £10,000 mark making the student loan-style funding a realistic and supportive initiative to help young entrepreneurs become the 'wealth creators' of tomorrow.
David Cameron says that the UK economy will be saved by start-ups so why not establish a youth investment fund at the same rates as student loans that will support young people, create jobs and boost the prospects of the lost generation?
No to 'student loans' for entrepreneurs
Claire Broadley, founder, Red Robot Media
"We need more businesses, not more graduates", says one comment on the Virgin Media Pioneers Facebook page. The Virgin Media Pioneers team have Liked the post. Their website provides people with a form letter to send to their MP which includes the following paragraph:
“As a young entrepreneur, I don’t think it is right that a young person can get access to a loan to study... but not one on the same terms to fund starting a business”.
It doesn't mention the fact that many people with student loans took them because they had to, and as adults, they would do anything to get rid of them.
Student loans are often wheeled out as an example of 'good' debt. Cheap debt. Debt you can afford to have. In actual fact, student loan debt is debt that hangs around like a bad smell into your thirties, forties or fifties. We’re told there's no harm in it. Most of us are used to seeing a deducted amount for our student loans each month; an extra tax that gnaws away at each payslip, and has done some almost since we started earning money.
The interest rate on a student loan is low, yes. Money bloggers advise readers not to pay off a student loan if they have an overdraft, so the student loan has become a low-priority debt. Never repaid, merely chipped away in tiny splinters, month by month. The interest, albeit small, is still there, and it's there for up to 25 years; the same length of time as many people take to buy a property.
To be blunt, graduates from middle-class and working-class backgrounds are continually earning 9% less than wealthier colleagues who could afford not to take a student loan.
I am hardly the target market for this particular scheme, being 10 years beyond university leaving age. But having started my own business less than a year ago, I can certainly attest to the fact that funding is not easy to come by. My own business was started in my kitchen with £500 after my bank refused me any kind of credit. I understand that young people will hit the same funding problem that I did (minus the £500 in many cases).
But saddling more and more young people with so-called good, long-term debt is not the answer. The student loan is a burden. Long-term lending is a burden. Let's not forget that the Student Loans Company received a record number of complaints last May; surely this is not a system we should be trying to mimic.
Figures reported in the Telegraph suggest university applications are down by 8%. This drop in applications is primarily down to the cost of attending university. A graduate can expect to pay up to £27,000 over three years for higher education. If young people are sacrificing higher education to avoid being saddled with debt in adult life, it seems strange that the same model is touted as something we should be pushing on even more young people.
The press attention around the Youth Investment Fund comes in the same week that Sir Richard Branson cancelled plans for a £60 monthly fee for Virgin Money current accounts. The website feels like a cynical attempt to re-market the student loan as a desirable thing, a type of 'business mortgage': friendly, harmless long-term debt for young people, a way to get a business off the ground when no bank will lend to you. It doesn't mention the fact that you might be saddled with repayments for years or decades, and even if you repay your loan, a bank may still refuse to lend you anything more.
The supporters of the Youth Investment Fund are pushing the idea that long-term debt is something to aspire to, and it concerns me that they're encouraging young people to lobby MPs for a style of borrowing which almost all graduates resent.
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