Richard Bearman, Managing Director of the British Business Bank
British Business Bank
It’s been both a good and bad week for the diversity cause here in the U.K.. On the debit side, the British Academy of Film and Television ran into some heavy weather when the list of nominations for its annual movie awards revealed a singular lack of female directors and actors of color. Even the organization’s CEO, Amanda Berry acknowledged that the list was disappointing.
Better news, however, from the British Business Bank – a body established in the wake of the great financial crisis to boost economic activity by increasing the flow of credit to small and medium-sized enterprises (SMEs). On Thursday of this week, the bank announced that out of 15,423 “Start Up Loans” advanced since 2012, 48 percent have gone to black, Asian or minority ethnic (BAME) entrepreneurs. Overall, the total sum provided to London-based BAME company owners under initiative amounts to £50 million.
Should we be surprised? Perhaps not. Official figures suggest that two in five Londoners identify as coming from ethnic minority backgrounds. In that respect, you could argue that the 7,366 loans granted to the capital’s BAME entrepreneurs simply reflect the diversity of the capital.
The British Business Bank sees the £50 million London figure as a milestone, but Managing Director, Richard Bearman, is keen to stress, the Start up Loan Scheme is doing more than matching the demographics of London.
“If you look at the situation across the UK, around 15 percent of the population identify as being part of an ethnic minority,” he says. “However, only 5 percent of startup owners are from ethnic minorities.” In other words, members of BAME communities are under-represented within the overall startup ecosystem. Thus, the pool of ethnic minority-owned businesses is smaller than the demographics would suggest.
That broad rule of thumb applies even in diverse London so the fact that 48 percent of Start Up Loans are being taken out by BAME businesses suggests the British Business Bank is lending disproportionately to entrepreneurs from minority communities.
Correcting A Market Failure
So why is this the case? Well, the purpose of the Start Up Loan Scheme is to provide credit to entrepreneurs who might otherwise struggle to secure debt funding. This, Bearman says, is the proper role of an initiative managed by a Government-owned organization. “For a government-backed scheme such as this to exist, there has to be evidence of market gaps or market failure,” he says. “What we can’t do is compete directly with banks.”
So in practice, the scheme specializes in lending to a range of under-served groups that also include women (there is still a gender imbalance when it comes to funding), former members of the armed forces and people who start companies after periods of unemployment.
The Gap Conundrum
Fair enough. But why are there gaps in the market? For instance, why would a black or Asian entrepreneur find it more difficult to secure a loan from a High Street bank than, say, a white middle-class male. Bearman doesn’t believe that Britain’s banks are guilty of any bias against minority groups. However, he believes there are structural and social obstacles. For instance, because there are proportionately fewer BAME entrepreneurs there may be a lack of peer or family support. “A smaller business community means that individuals don’t necessarily have the networks of family and friends that can help them,” he says. “And they won’t necessarily know how to go about accessing funding.”
The Start Up Loan scheme is designed to address that problem. The initiative is aimed at business that have been running for two years or less, with loans of £25,000 available to individuals at a fixed interest rate of 6 percent. Crucially, another key criterion is that applicants must be prepared to work with the British Business Bank to develop their business plans ahead of any money changing hands. The “Bank” will help them become ready to take on debt. In this respect, the aim is to provide support that isn’t on offer from traditional lending sources. This help is delivered through a network of delivery partners who know their communities.
Ultimately there may well be a snowball effect. A focus on lending to under-served groups should increase the pool of successful businesses within those communities and over time create new networks of experienced entrepreneurs who can advise and mentor upcoming generations.
In the meantime, Bearman believes that the high uptake of loans by BAME entrepreneurs indicates there is a clear demand for debt finance.