Bridging the Finance Gap for Women Entrepreneurs

36. United Kingdom: Policy insights on loan schemes

Professor Tim Vorley
Oxford Brookes University

Professor Marc Cowling
Oxford Brookes University

Dr. Beldina Owalla
Oxford Brookes University

Background

On average over the period 2015 to 2021, women-led businesses accounted for 19.5% of the total SME population in the United Kingdom. However, women-led businesses are disproportionately concentrated in the youngest age classes of business and are, on average, younger and have a higher representation amongst unregistered zero-employer businesses. There are also some important industry sector differences in women-led businesses with relatively high concentrations in accommodation and food (28.5%), administrative services (22.5%), and wholesale and retail (20.9%). These were all industry sectors that were disproportionately impacted by the COVID-19 pandemic lockdowns in the United Kingdom (Calabrese, Cowling and Liu, 2022[1]). On average, women-led businesses are less likely to be profitable than men-led businesses and this, in part, relates to the industry sectors they are concentrated in that are often highly competitive with low profit margins and low barriers to entry.

In terms of their financing, they generally have a lower demand for capital but are also more likely to have a latent need for more finance. They are also more likely to be discouraged from making a formal application for finance. However, they are less likely to put forward hubristic applications for finance and, on average, are more realistic about their chances of success when they do (Liu and Cowling, 2024[2]). This gives rise to an interesting feature of capital markets, in particular the market for SME lending. Women-led businesses in the United Kingdom actually have equal access to bank loans in “business as usual” times and better access to bank loans in periods of crisis when lenders place particular value on cautious, well thought out, and modest loan applications (Cowling, Marlow and Liu, 2020[3]). But, this outcome manifests itself only if women-led businesses actually put forward funding applications and this is less likely to be the case despite clear evidence that they have a more than an even chance of receiving funding if they apply. In general, UK estimates of the probability of discouraged borrowers being approved had they applied for a bank loan suggest that more than 50% would have received a loan offer (Cowling et al., 2016[4]).

However, there are also some concerning aspects of women-led business’ interactions with the debt market that merit consideration. Firstly, while profit and the provision of loan security generally increase the willingness of banks to advance loans, the positive effects are somewhat less for women-led businesses. Not all profit and security are equal it seems when considered through a gender lens. However, it is also the case that if women-led businesses hold a large cash surplus on their balance sheets, then this acts in a disproportionately positive way when encouraging banks to advance loans. These two profit and security features are particularly important as women-led businesses, often located in low capital and asset intensive services, are less likely to have security per se and, on average, generate lower levels of free cash flow. The low capital requirements help explain the generally lower level of demand for capital. However, they also act against women-led businesses who do apply for bank loans as they are less likely to have physical assets to secure loans against. The lower levels of free cash flow generated also mitigate against women-led businesses being able to build up significant cash balances and this has two effects: First, it reduces women-led businesses ability to self-fund new investment. Secondly, it limits their ability to send a positive signal to lenders that they can service the loan capital and interest repayments.

In terms of the direction of UK policy, the main focus for decades has been to implement national policies and schemes that are focused on alleviating capital constraints for start-ups and businesses seeking to grow. In crisis periods, the focus has shifted towards supporting the liquidity of smaller firms to ensure survival. In these respects, policy has not explicitly focused on gender per se, rather on the types of firms who faced the greatest difficulties in accessing finance. In this respect, if any specific group of the business population faced particularly acute problems with accessing finance, then they would be disproportionately represented amongst firms who were able to access public support. For example, in the COVID-19 pandemic, firms in consumer facing industry sectors such as retail and hospitality faced the most severe impacts from lockdowns. As these industry sectors had the highest representation of women, then it naturally follows that women-led businesses would have a higher representation on the pandemic support schemes.

However, it could be argued that whilst these policy interventions, particularly in capital markets, went a long way to addressing genuine problems with access to finance for younger and smaller businesses who were unable to access market funding through conventional means, with a significant degree of success over many decades, there are other significant problems that manifest themselves much further back in the causal chain that may ultimately lead to making a successful bank loan application. The first appears to be a misguided perception that banks are less likely to offer a women-led business a loan and this is not the case. This leads to women-led businesses self-excluding from the loan market. The second issue relates to a relative deficit in terms of physical assets which is the banks preferred source of loan security. On average, this deficit is apparent for personal and firm assets. This is a significant constraint on the ability of women-led businesses to access external finance, and one which should be most evident at the start-up and early stage.

Policy issue: Access to start-up finance

The Start-up Loan scheme (SUL), supported by the British Business Bank since 2012, has been the main scheme that specifically seeks to help entrepreneurs overcome the constraints on access to capital at the start-up stage when businesses lack any track record and information-based problems are most severe. Considering the physical asset deficit that women-led businesses have compared to their male peers, then it follows that women-led business start-ups will face more severe access to finance problems at the start-up stage. No track record and limited personal or business security are not a good start when applying for a bank loan in the United Kingdom.

The SUL scheme, since September 2012, has followed a long tradition of UK public policy interventions to support individuals' entry into self-employment and new business start-ups (Meager, Bates and Cowling, 2003[5]). The British Business Bank formally administers and manages the SUL scheme with the objective to promote new business start-ups amongst individuals who were constrained from doing so by a lack of access to capital. Start-ups with the age up to 24 months can be supported by the scheme. Formally an individual applicant needs to fulfil the condition that all potential market borrowing options are exhausted. The SUL scheme includes the potential to access financial resources through subsidised loans. The maximum amount for the loan is GBP 25 000, with a fixed interest rate of 6%, which is set to be below the commercial bank lending rate to start-ups. Repayment is for a minimum term of one year and a maximum of five years, although repayment holidays are allowed. No arrangement or early repayment fees are charged (BBB, 2020[6]; BBB, 2023[7]). Alongside the SUL funding, participants can benefit from co-operation with a business mentor for the first 12 months through an assigned delivery partner.

In total, between 2012 and 2022, 39 161 women-led start-ups borrowed a total of GBP 364.8 million and 58 885 men-led start-ups borrowed a total of GBP 592.7 million under SUL. To assess the relative success of a public policy in addressing access to capital for new business start-ups, the most fundamental measure is whether by alleviating a constraint this resulted in superior outcomes for the most constrained (or disadvantaged) groups. It follows that if women-led new start-up businesses were the most constrained in the market, then the support provided by the SUL scheme should generate superior outcomes.

The key feature of SUL is that women’s representation is high at an average of 40%, which is twice their business population representation and one-third higher than in UK self-employment, and that the trend line shows increasing women’s representation over time. A very positive and unintended consequence of the scheme is that tens of thousands of women entrepreneurs were given the support that, in its absence, may have prevented or discouraged them from starting their new business. Further, there is clear evidence that women supported through the SUL scheme had significantly higher survival rates compared to their male peers (+17.3%). This is clear evidence of a policy that achieved positive outcomes per se, but more so for women.

Conclusions

Evidence for the SUL scheme is strong in that it clearly suggests that a carefully designed scheme that provides financial support as well as offers soft support to facilitate the transition into new business start-up has delivered for women entrepreneurs both in terms of the number of women that have accessed the scheme and in terms of their outcomes. Importantly, the SUL scheme is gender-neutral in its design and conception but not in its participation and impact. Thus, a well-focused scheme that aims to help new start-ups get up and run will naturally attract those who face the most significant barriers to starting their own business. A recommendation that might lead to an overall increase in women participating in the SUL scheme would be to share examples of women who successfully transitioned to an independent career pathway across women-based professional platforms and associations, such as UK Women Business Club or the British Association of Women Entrepreneurs (Terrell and Troilo, 2010[8]; Byrne, Fattoum and Diaz Garcia, 2019[9]; Dvouletý et al., 2022[10]). This would promote experience sharing and discussing challenging aspects of business start-ups among women. We have also highlighted a wider deficit facing women-led businesses in respect of physical assets that could be used to secure bank loans against.

Discussions with the British Business Bank and approved lenders to understand why SUL is able to engage so successfully with women start-up entrepreneurs uncovered that there is a residual distrust of commercial banks and that SUL approved lenders who tend to be local, not-for-profit, business support providers (largely Community Development Finance Institutions, CDFIs), which tend to be more attractive to women entrepreneurs. It is also the case that the online application platform and the fact that the majority of the business plan/application development is conducted in an online bilateral way rather than sitting in a bank branch office, which can be intimidating for novice entrepreneurs. In addition, a key feature of the SUL loan is that it is a personal, rather than a business loan, which support agencies stated was more attractive to women entrepreneurs. The British Business Bank also suggested that the SUL mentoring appears to play an important role in demand for the programme amongst women and building support networks, as evidenced by the fact that a significantly higher proportion of women entrepreneurs who took advantage of the mentoring offer, and that women were more likely to self-select into attending support webinars. Finally, the place based local delivery partners have a stronger local presence and widespread networks in communities which enables them to reach out to women entrepreneurs more easily.

Potential directions for future policy development include developing a common framework for sharing the experiences of women-led new business start-ups who accessed support to raise awareness and promote higher take-up among women into start-up schemes, increasing the use of loan guarantees, offering greater financial and softer advisory support, delivering schemes through local delivery partnerships, particularly not-for-profit partners, and building a strong online presence to encourage women entrepreneurs to engage in support.

References

[7] BBB (2023), Start Up Loans: Start or grow your own business, British Business Bank, https://www.startuploans.co.uk (accessed on 2 October 2024).

[6] BBB (2020), British Business Bank Start Up Loans Programme, British Business Bank, https://www.british-business-bank.co.uk/ourpartners/start-up-loans/ (accessed on 2 October 2024).

[9] Byrne, J., S. Fattoum and M. Diaz Garcia (2019), “Role Models and Women Entrepreneurs: Entrepreneurial Superwoman Has Her Say”, Journal of Small Business Management, Vol. 57/1, pp. 154-184, https://doi.org/10.1111/jsbm.12426.

[1] Calabrese, R., M. Cowling and W. Liu (2022), “Understanding the Dynamics of UK Covid‐19 SME Financing”, British Journal of Management, Vol. 33/2, pp. 657-677, https://doi.org/10.1111/1467-8551.12576.

[4] Cowling, M. et al. (2016), “UK credit and discouragement during the GFC”, Small Business Economics, Vol. 47/4, pp. 1049-1074, https://doi.org/10.1007/s11187-016-9745-6.

[3] Cowling, M., S. Marlow and W. Liu (2020), “Gender and bank lending after the global financial crisis: are women entrepreneurs safer bets?”, Small Business Economics, Vol. 55/4, pp. 853-880, https://doi.org/10.1007/s11187-019-00168-3.

[10] Dvouletý, O. et al. (2022), “Analysing Determinants Influencing Female Entrepreneurship Engagement in the Czech Republic: What is the Role of Caring Responsibilities?”, World Journal of Entrepreneurship, Management and Sustainable Development, Vol. 18/1, pp. 1-19, https://doi.org/10.47556/J.WJEMSD.18.1.2022.1.

[2] Liu, W. and M. Cowling (2024), “Conforming to Gender Stereotypes and Entrepreneurs’ Financing Outcomes”, British Journal of Management, Vol. 35/2, pp. 1059-1075, https://doi.org/10.1111/1467-8551.12753.

[5] Meager, N., P. Bates and M. Cowling (2003), “An Evaluation of Business Start-Up Support for Young People”, National Institute Economic Review, Vol. 186, pp. 59-72, https://doi.org/10.1177/002795010300100111.

[8] Terrell, K. and M. Troilo (2010), “Values and female entrepreneurship”, International Journal of Gender and Entrepreneurship, Vol. 2/3, pp. 260-286, https://doi.org/10.1108/17566261011079242.