Authors: Electa Yeung and Hanlin Li
Publication Date: 19 Mar 2021
Microfinance is a type of banking service provided to low-income individuals who have limited access to financial services (Kagan, 2020). Microloan providers offer loans ranging from $100 to $25,000 to allow impoverished individuals to start or expand a business and become self-sufficient. The concept of microfinance dates back to the 18th century, though the idea resurfaced in the 1980s due to the success of Muhammad Yunus’ microlending institution- Grameen Bank in Bangladesh, for which he was awarded the Nobel Peace Prize in 2006. Today, the World Bank estimates that microfinance-related institutions have helped improve the lives of over 500 million people (Helms, 2006).
While microfinance has been most notable in its implementation in less economically developed nations, it is important to highlight its presence and in fact abundance in more economically developed nations as well. In the British economy, microfinance has long been a dominant player. 95% of the over 5.7 million businesses in the UK are microbusinesses (Merchant Savvy, 2020), accounting for 21% of UK turnover (Rosling, 2021). Most microbusinesses in the country are linked to family relations that own and run them. This holds especially true for families in London and the South East: these areas account for over a third of the UK's microbusinesses alone. Families in these areas often use their hobbies to set up microenterprises as extra sources of income. The UK has the 4th highest global number of microbusinesses per capita (81 microbusinesses to every 1,000 people). However, UK microbusinesses contribute less to the UK’s Gross Value Added (GVA) than other countries, ranking only 6th in the EU in terms of microbusinesses’ GVA contribution.
Funding/ Loans Available for Entrepreneurs
In the UK, there are a variety of loans available to help individuals start their own microbusiness and to help microbusinesses expand. The government-backed Start Up Loans (Start Up Loans - Small Businesses Can Borrow up to £25,000, 2021) of £500 to £25,000 with a fixed interest rate of 6% per year is available nationwide to UK residents and also comes with free post-loan support and mentoring to support entrepreneurship.
For microbusinesses looking for working capital or loans to finance expansion, they can reach out to organisations such as Business Enterprise Fund (BEF), Coventry and Warwickshire Reinvestment Trust (CWRT), and South West Investment Group (SWIG) for business loans. Each organisation works with businesses and social enterprises local to the area. Revive Loan by BEF (Finance and Support for Small Businesses, 2021) supports businesses in the North while CWRT provides Business Loans (Business Loans, 2021) in the Coventry and Warwickshire area, and SWIG (Enterprise Loans, 2020) aids companies in the South West.
Additionally, CWRT delivers regional Warwickshire Small Business Loans (Warwickshire Small Business Loans, 2021) to small and medium sized enterprises (SMEs) in Warwickshire from £1,000 to £75,000. SWIG also provides Small Business Loan (CIOSIF, 2020) designed for microbusinesses and SMEs based in or looking to relocate to Cornwall and the Isles of Scilly.
Below is a table of the loans aforementioned for a quick view.
In the wake of COVID-19, the British Business Bank introduced The Bounce Back Loan Scheme (BBLS) (Bounce Back Loan Scheme (BBLS), 2021), a new scheme designed to help microbusinesses that are losing revenue or seeing their cash-flow disrupted as a result of the coronavirus outbreak. The BBLS renders financial assistance from £2,000 to £50,000 to microbusinesses across the UK. For small businesses with a turnover of less than £45m, the Coronavirus Business Interruption Loan Scheme (CBILS) (Coronavirus Business Interruption Loan Scheme (CBILS), 2020) provides up to £5 million in the form of term loans, overdrafts, invoice finance, and asset finance to help businesses tide over the difficult period. An important note is that both BBLS and CBILS will be extended until 31 March 2021 according to the latest government announcement.
Evaluation of Existing Financial Support for UK Microentrepreneurs
Lack of complete and clear information of the loans on the webpage and Inefficient application processes
The webpage of SWIG’s Small Business Loan for microbusinesses in Cornwall and the Isles of Scilly can be taken as a case in point. Having no specific terms and amounts presented on the webpage would give rise to confusion for potential applicants about the suitability of the loans and their eligibility, which necessitate an extra step of clarification and therefore breeds inefficiency in the application process. Besides, there is no application form available and applicants must get in touch with the organisation through submitting enquiry forms. These impediments might compromise the effectiveness of the loans by deterring those who need help from applying for the loans.
Glitches were also experienced when applications to specific lenders were made (Basquill, 2020), e.g. lenders were unable to access emergency finance applications on Barclays’ website, as the bank reported errors in processing bounce back loans for businesses.
Tedious application process
In regards to the BBLS, despite being a part of integrated government support, borrowers must approach a lender themselves independently via the lender’s website. In the face of a rejection, they need to restart all over again to approach another lender. The suggestion of setting up a relay system to streamline the application process can possibly be implemented.
Misallocation of loans for deserving microentrepreneurs
Although the less stringent Know Your Customer (KYC) checks for the CBILS and BBLS mean that the bar for obtaining loans are lower for microentrepreneurs, this has led to an increase in fraud and money laundering activities (Parsons & Kuntz, 2020). The UK National Audit Office has recently said that the Government faces a potential loss somewhere between £15 and £26 billion. This loss means that less funds are available for microentrepreneurs who actually require funding support.
Inadequate access to support microentrepreneurs unsatisfied with their lenders
Microentrepreneurs can talk to their lenders directly and use the lenders’ complaints procedure/ standard complaints procedure for financial services. However, this is a time-consuming process, meaning that businesses which encounter urgent needs will not be satisfied. Moreover, the BBB does not deal with complaints about their funding decisions. (Banfield, 2020)
Interview with Fiona Grayson - Founder of She Can She She Did
To learn more about the impact of Covid-19 on entrepreneurs, we conducted an interview with Fiona Grayson, the founder of She Can She She Did.
About She Can She Did
She Can She Did (SCSD) was launched by Fiona Grayson in September 2020 as the first and only Benefits Programme for female business owners in the United Kingdom. The platform provides young entrepreneurial women with access to health, financial and lifestyle benefits, such as free Vala Health cover for the women and their families. SCSD aims to support female entrepreneurs in their primitive years in business to combat the hostilities that budding entrepreneurs are known to face. This especially holds true for women, given how statistics such as ‘self-employed men earn an average of 49% more than self-employed women each week’ support the notion of gender imparity in the industry.
1. What do you think is the greatest impact Covid-19 has had on micro entrepreneurs in the UK?
Through a Female lens, home-schooling has disproportionately affected mothers and women who are running a business. Also, female business owners who show their ambition online are vulnerable to trolling in the forms such as Direct Message on social media and trolling websites. For business owners, the lack of human connection and digital fatigue are problems. Due to Covid-19, many businesses have not been able to work, such as those in the beauty industry. They had to switch business models or even industries. It is a huge challenge for them and some even take up different jobs to just pay the bills.
2. Have the effects of Covid-19 prompted She Can She Did to change how you support your members in any way?
Covid-19 shows the need to provide substance as anyone can claim anything online nowadays. We need things that actually matter. We had conversations with partners like Vala Health to provide all She Can She Did business owners with health cover to get them through the pandemic. We think in terms of the grand scheme of things and focus on what will make the difference right now.
As the director of a limited company, I haven’t been able to benefit from any grants because the options for a directors of a limited company were either furloughing yourself or working at the sums of base rate salary.
3. From your interactions with your members, have you observed any hindrances that micro entrepreneurs commonly face when seeking out and applying for loan schemes in the UK?
There are mixed reviews. Due to the uncertain climate, there is a lack of confidence discussing finances and doubts about whether they are safe to take on. Some loan schemes are very corporate in their tone of voice which might not appeal to people such as for example a creative who lives on her own in the countryside who needs 10 grand.
4. What suggestions would you give to microloan providers to improve their services provided to micro entrepreneurs?
Fixed interest rates and flexible payback that is proportionate to how much one is earning a month. Complete transparency from the outset also immediately takes away potential fear. We also need to get rid of the confusing bureaucracy and have a more human-centric, kind and fair approach to the loan schemes.
5. Apart from financing, in what other areas do you think micro entrepreneurs are currently in most need of support?
Microentrepreneurs need more support to find success on their own terms. The business landscape at the moment champions a very one-dimensional version of success. Success means more than just finance or titles. It is about well-being, happiness, creating a life that you actually want to be living. We need to champion more different versions of success. It will go a long way to support business owners who feel inadequate as they are not living up to the standard they see in the media.
Bibliography
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Finance and support for small businesses. (2021). Business Enterprise Fund. https://www.befund.org/loans/revive.
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Warwickshire Small Business Loans. (2021). CWRT. https://www.cwrt.uk.com/warwickshire-small-business-loans
CIOSIF. (2020, November 18). SWIG Finance: Business Loans for the South West. https://www.swigfinance.co.uk/ciosif/
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Coronavirus Business Interruption Loan Scheme (CBILS). (2020, December 17). British Business Bank. https://www.british-business-bank.co.uk/ourpartners/coronavirus-business-interruption-loan-scheme-cbils-2/.
Basquill, J. (2020, May 14). UK lender apologises as glitches and delays hit Covid-19 loans. Global Trade Review (GTR). https://www.gtreview.com/news/europe/uk-lender-apologises-as-glitches-and-delays-hit-covid-19-loans/
Parsons, R., & Kuntz, B. (2020, October 29). The COVID-19 loan scheme backlash. KPMG. https://home.kpmg/uk/en/blogs/home/posts/2020/10/the-covid-19-loan-scheme-backlash.html
Banfield, O. (2020, December 18). Coronavirus: Problems with Bounce Back Loans. House of Commons Library. https://commonslibrary.parliament.uk/coronavirus-problems-with-bounce-back-loans/